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The Real Reason Chipotle Stock is Soaring Today

Posted on Friday, December 6th, 2019 by Chris Markoch

The Real Reason Chipotle Stock is Soaring Today

Chipotle Mexican Grill (NYSE:CMG) stock is up nearly 0.75% in mid-day trading on December 6. This is just another leg up for a stock that is up over 85% in the year to date. Chipotle’s banner year has successfully moved the stock to levels it has not seen since 2015.

However in investing, as in life, it’s not about what happens to a company, it’s how a company responds to it that matters. To that end, the company was in the news for a couple of reasons on Dec. 5. One illustrates the company’s ongoing efforts to regain customer trust. The other one shows that those efforts seem to be working.

Restoring customer trust remains a top priority

It’s impossible to tell the story of Chipotle without mentioning the food safety scandal that made headlines in 2015. To be fair, CMG is not the first company to deal with issues regarding food safety. However, it was particularly devastating to a company that prides itself on producing “food with integrity”.

The stock dropped nearly 40%, but the company has taken clear and transparent steps to reassure customers. One initiative the company takes is requiring every employee to take a wellness check before they get to the back of the house.

Here’s how it works. Before starting their shift, every employee must answer a series of screening questions. If they report symptoms of illness, the employee is sent home to recover. However, the company takes this one step further. After all, the best way to keep harmful bacteria out of your restaurant is to make sure it doesn’t get there in the first place.

As part of its partnership with Zero Hour Health (a partnership that was in place before 2015), Chipotle provides on-call nurses who can consult with employees by phone. The nurse can then verify to the company that the employee is indeed sick and not missing work for other reasons.

Chipotle says this is not Big Brother

When first reported by some media outlets, this screening seemed oddly intrusive. In fact, some headlines (and social media responses) made it seem as if this was a “hangover check”. Articles even reported that the company would only pay for the employee’s sick day if the nurse confirmed an actual illness.

That may or may not be true. According to Chipotle, it is not. A company spokeswoman says the program has been ongoing and is completely voluntary. Furthermore, employees are paid regardless of the reason for their absence. “You don’t have to call a nurse if you’re taking a sick day,” she stressed. “All employees who call off sick for any reason receive paid time off.”

In this regard, it seems a bit more like the protocol that happens at most schools. If more employees self-report illnesses, it could be a way for individual chains to get in front of more serious outbreaks. Either way, Chipotle says that food safety is now part of their culture and this initiative is just another example of the company’s resolve to improve standards.

But is it working?

Consumers are voting with their phones

Just as home delivery has changed the face of retail, it is changing how consumers think about eating at home. There’s no question that food delivery has become the new normal. According to Technomic data, consumers spent $10 billion on delivery services in 2018. This was a 42% year-over-year increase. And Chipotle has responded to this trend in a way that is helping the company increase its gross margins.

Starting in 2018, the company has added a separate prep line that is exclusively used to fulfill out-of-store orders. This means that the company can minimize interruption to customers who are dining in.

In an interview with Jim Cramer, host of the CNBC show Mad Money, Chipotle CEO Brian Niccol said, “Delivery, digital ordering, the Chipotlelane where you can pick [orders] up now in your car — that all happens on a separate line,” said Niccol, “… the fact (is) that this front line … doesn’t get bottlenecked as a result of, you know, all those occasions.”

Chipotle contracts with multiple third-party services such as DoorDash to provide delivery services at 95% of its locations. And Chipotle is succeeding in one area where other establishments are failing. CMG is posting wider gross margins in the delivery and convenience categories.

What this suggests is that while Chipotle may still be a punch line for some consumers. Many consumers are still ordering their food. The numbers don’t lie.

 

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