Chipotle battles escalating delivery costs
Many local restaurants have openly griped about the exorbitant fees charged by third-party delivery providers such as Grubhub, Uber Eats or DoorDash. Even a national chain like Chipotle isn’t immune to the problem of rising costs.
Chipotle’s same-store sales climbed 8.3 percent in the third quarter as digital growth catapulted 202.5 percent to represent 48.8 percent of sales, as online orders offset indoor-dining restrictions. Operating margins, however, eroded 130 basis points to 19.5 percent due to higher delivery costs. Online orders were split between delivery and take-out.
Restaurants that use the “Big Four” delivery apps — Postmates, Grubhub, UberEats and Doordash — pay commissions of 15 – 30 percent per order, and those services represent an estimated 95 percent of third-party delivery volume, according to The Texarkana Gazette.
Margins were also depressed to lesser degrees by fewer sales of high-margin beverages — because fewer drinks tend to be ordered for delivery — as well as by increased beef prices.
Margins are expected to remain depressed in coming quarters.
“It all depends on delivery,” CFO Jack Hartung said on last week’s quarterly call. “If delivery shifts into in-store and shifts into order-ahead and pick-up, then I would say our margins, for sure, are headed on the way up. If delivery stays the same or increases, we’ll have some challenges.”
Chipotle is using a few strategies to manage margins:
- Eliminating freebies: Chipotle began eliminating free tortillas, leading to some customer complaints on social media.
- Encouraging take-out: The majority of new stores are featuring its new order-ahead Chipotlanes that are generating about 10 percent higher sales than locations without pickup lanes and also seeing fewer low-margin delivery orders.
- Higher prices for delivery orders: Chipotle is testing seven percent, 13 percent and 17 percent price increases for delivery menu items. The chain reduced the service it charges customers to $1 from $3 at the pandemic’s outset, offsetting some of the jump in menu prices.
At Raymond James North American Equities Conference in September, CEO Brian Niccol said Chipotle has to weigh three factors — the meal’s price, the delivery fee from third-party delivery providers and Chipolte’s service fee — in making pricing adjustments for delivery. Charging a higher delivery meal price upfront was seen as a better option than surprising the customer with a higher service fee at the end of an order.
Mr. Niccol admitted, “We’re in the early stages. We’re still learning what the customer response is going to be over a longer period of time.”
- Chipotle Announces Third Quarter 2020 Results Q3 Digital Sales Tripled Year-Over-Year And Accounted For Nearly Half Of Sales – Chipotle
- Chipotle Mexican Grill Inc (CMG) Q3 2020 Earnings Call Transcript – The Motley Fool
- Chipotle Mexican Grill, Inc. (CMG) CEO Brian Niccol Presents at Raymond James North American Equities Conference – Seeking Alpha
- Chipotle’s Delivery Margins Aren’t Delivering – Restaurant Business
- Chipotle price target raised based on long-term growth potential but shares fall as delivery becomes a headwind – MarketWatch
- Chipotle shares fall despite earnings beat, as robust delivery growth weighs on profits – CNBC
- Chipotle reveals it killed the free tortilla side because people were ordering too many during the pandemic – Business Insider
DISCUSSION QUESTIONS: Does increasing menu prices for delivery seem like the best path for Chipotle and other restaurants to offset higher expenses tied to delivery? What short or long-term solutions might be more appropriate?