Chipotle Reaches Awkward Age

With almost 1,900 outlets, Chipotle is contending with the problems that weigh on many mature brands, including slower sales growth, difficulty attracting workers, problems securing ingredients, and attacks from critics. ENLARGE
With almost 1,900 outlets, Chipotle is contending with the problems that weigh on many mature brands, including slower sales growth, difficulty attracting workers, problems securing ingredients, and attacks from critics. Photo: Joe Raedle/Getty Images

Chipotle Mexican Grill Inc., CMG -0.56 % long the restaurant industry’s biggest renegade, is settling into middle age.

For more than two decades, the burrito chain has ridden its carefully honed message of freshly and ethically prepared food to growing success, pioneering the concept of fast-casual dining and winning the plaudits of foodies and investors alike.

With now almost 1,900 outlets, though, the company increasingly is contending with the problems that weigh on many big, mature brands, including slower sales growth, difficulty attracting workers, problems securing ingredients, and attacks from critics who target its self-proclaimed virtuousness.

Chipotle used to be one of the few alternatives to fast food for those eating on the go. But a throng of other chains seeking to emulate its success has arisen. In the past decade, the number of fast-casual restaurants—those that don’t have table service but are a step up in quality and price from fast food—has grown by more than 136% to nearly 27,000 in the U.S., according to Technomic Inc.

ENLARGE

Traditional fast-food companies also are emulating Chipotle. Chains including Yum Brands Inc. YUM -0.62 % ’s Taco Bell unit, Wendy’s Co. WEN 0.65 % , and McDonald’s Corp. MCD -0.31 % have pledged to remove artificial ingredients from their food or switch to antibiotic-free meat and cage-free eggs. Taco Bell is opening new restaurants that will serve alcohol and appetizers in urban markets—Chipotle’s primary territory.

“I used to eat at Chipotle once a week, but now I go maybe once a month,” said David Burrick, a 31-year-old who oversees digital media businesses for a major media company in New York. “I’m definitely a Chipotle fan, but there are a lot more choices now. I don’t necessarily have to have Mexican all the time.”

Chipotle has said it expects same-store sales growth in 2015 to slow to a single-digit percentage from nearly 17% last year. Same-store sales in the quarter that ended June 30 increased 4.3%, slower than the 6% at Taco Bell. Overall sales in the quarter rose 14%, to $ 1.2 billion, lagging behind analysts’ expectations for 16% growth. Earnings rose 27% to $ 140.2 million.

Chipotle has rebounded from slowing sales before, and some analysts expect an uptick when the company reports quarterly results on Tuesday. Still, investors have lost some of their enthusiasm. Its shares, which rose a total of 130% over 2013 and 2014, have gained just 5% this year, beating key indexes but less than the 11.5% rise at McDonald’s.

Chipotle spokesman Chris Arnold said the company isn’t worried about competitors. “Other companies are mimicking what we are doing—or pretending to, in some cases—because it is working for us,” he said.

Co-Chief Executive Steve Ells, a trained chef who founded Chipotle in 1993, has long lambasted traditional fast-food, and Chipotle lately has stepped up its offensive with new advertisements and public pronouncements.

In July it created an online game called “Friend or Faux” to highlight artificial ingredients in its competitors’ food. Similarly, Chipotle on Halloween is offering discounted food to patrons wearing a costume with an “unnecessary” addition. “Unnecessary ingredients in fast food are creepy,” says a promotion. Chipotle also recently produced a short film showing a customer entering a fictitious restaurant called “Cheapotle” where she discovers workers adding artificial ingredients to her food.

Opponents have fired back. The Center for Consumer Freedom, a nonprofit group backed by food and restaurant companies that it doesn’t identify, has run a series of ads in the New York Post disputing Chipotle’s product claims with the tagline, “Chipotle: Food With Hypocrisy,” a play on Chipotle’s “Food With Integrity” slogan. In addition, some health advocates, including the Center for Science in the Public Interest, have called out Chipotle for its high-calorie and high-sodium food.

Mr. Arnold says the Center for Consumer Freedom ads amount to a “smear campaign” on the part of “anonymous interests.”

Chipotle’s broadsides against rivals show that “they’re looking to defend the brand and establish their primacy,” as the leader in food quality, said Robert Passikoff, president of brand research consultancy Brand Keys Inc.

Chipotle still enjoys a high level of customer loyalty. The company moved up to No. 23 in Brand Keys’ annual ranking of retailers with the most brand loyalty, from No. 32 last year. The rankings are based on interviews with more than 40,000 consumers.

Younger consumers, especially, still find Chipotle compelling, according to Deutsche Bank, which recently interviewed about two dozen 20-somethings about their restaurant views. “There was an almost universal acceptance of everything Chipotle says, does and stands for,” the analysts found.

Still, Mr. Passikoff says Chipotle must find new ways to differentiate itself. And analysts are pressing for more guidance on its plans to extend growth—including outside the U.S., where it has just 22 restaurants.

“We think investors need a clearer road map on plans for second concept growth, international expansion and mobile strategy,” Morgan Stanley’s John Glass said in a recent note to investors, adding that “when a growth stock enters this midlife phase, it can be a frustrating time to own it.”

Chipotle has tried to diversify by opening two other concepts—a chain of 11 Asian restaurants called ShopHouse and three Pizzeria Locale units—but analysts want to know if those restaurants will ever contribute meaningfully to sales. Management has said little on that, “while growth at competing fast-casual brands, especially in pizza, [has] greatly accelerated,” Mr. Glass notes.

And while other companies are enhancing their mobile ordering and payment technology to speed service, Chipotle doesn’t widely promote digital ordering. Mobile and online orders at Chipotle represent just over 5% of sales, compared with 20% of U.S. sales at Starbucks Corp. SBUX 1.74 % Chipotle this month hired former Starbucks Chief Information Officer Curt Garner to be its first CIO.

Mr. Arnold said the company plans to address some of the questions about its growth strategies during its earnings call on Tuesday.

Write to Julie Jargon at [email protected]


WSJ.com: US Business

About The Author