DENVER — Executives of Chipotle Mexican Grill, Inc. hope adding queso, “the single most requested item our guests ask for,” to the menu will win back lapsed customers, but it may take more than cheese dip to stoke the appetite of investors. The burrito chain’s stock was down by as much as 44% from a mid-May high of $490.46 when the company released its second-quarter earnings on July 25, days after a norovirus outbreak in a Virginia restaurant and reports of rats spotted at a Dallas location.
Chipotle is still recovering from a foodborne illness outbreak in 2015 that included 55 cases of E. coli O26 across 11 states followed by a norovirus outbreak at a Boston-based restaurant that reportedly sickened 80 individuals. The company has overhauled its food safety procedures, but “no matter how advanced our systems are, it is not possible to completely eliminate all risk,” said M. Steven Ells, founder, chairman and chief executive officer, during a July 25 conference call with investment analysts.
|Steve Ells, founder, chairman and c.e.o. of Chipotle|
“It was a failure in one restaurant to comply with our procedures used to prevent norovirus,” Mr. Ells added. “We know that our procedures work when executed properly, but compliance in each restaurant is essential. In order to reduce the risk of this happening again, we are undertaking an additional comprehensive communication and training effort to ensure that every manager and every field leader understands and execute these norovirus prevention procedures and that they understand that compliance with our procedures is nonnegotiable and a condition of their employment.”
Net income in the second quarter ended June 30 was $66,730,000, equal to $2.33 per share on the common stock, up from $25,596,000, or 88c, in the prior-year period. Revenue of $1,169,409,000 was up 17% from $998,383,000 the year before. Comparable restaurant sales increased 8.1%.
During the quarter, Chipotle took additional steps to improve operations with the hiring of Scott Boatwright, a former Arby’s executive, as its first-ever chief restaurant officer. The company also recently opened the Chipotle Next Kitchen in New York City, where it will test new menu items that may eventually launch in Chipotle restaurants.
“The Next Kitchen is primarily intended to test the operational impact of potential new menu items,” Mr. Ells said. “This includes how they’ll be prepped, cooked, presented and served, in addition to the operational implications of the training required for proper execution. While the restaurant is not intended to definitively determine customer acceptance of new menu items, it’s open to the public, so that we can interact with the customers while they order and enjoy the new menu items.
“Once the new items have been evaluated in the Next Kitchen, they may be put into wider consumer testing in various markets to determine customer acceptance. The Next Kitchen is currently serving queso, frozen margaritas, new salad greens served with an avocado citrus dressing, and bunuelos, our crispy cinnamon dessert with a chipotle-infused chocolate dipping sauce.”
Mr. Ells works with the menu development team to create the recipes, he said, adding, “I believe they all have the potential to earn a place on our menu.”
“As you know, one of the hallmarks of Chipotle’s success over the years has been our focused menu and our commitment to doing just a few things so that we can do them exceptionally well,” Mr. Ells said. “As part of our larger customer experience strategy work, we’re exploring innovations that will appeal to our guests while being mindful to avoid adding unnecessary complexity to our restaurant operations.”
Based on early success of the queso test, the company plans to expand it to 350 restaurants in two markets in August to evaluate customer acceptance. A national roll-out may happen as early as mid-September, said Mark Crumpacker, chief marketing and development officer.
“In anticipation of successful consumer testing of queso and a subsequent national roll-out, we have developed advertising both for television and elsewhere that features queso,” he said. “The inclusion of a new menu offering has the potential to significantly improve the impact and traffic-driving potential of the campaign, especially with the television advertising.”Other tests under way include new ordering formats and restaurant features, including “the first-ever Chipotle vehicular pick-up window,” which will be opening at an Ohio restaurant this fall, Mr. Crumpacker said.