Chipotle CFO on charging for a tortilla side: ‘customers are getting two meals out of a bowl’

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down Chipotle’s earnings report with Chipotle CFO, Jack Hartung.

Video Transcript

BRIAN SOZZI: All right, people clearly want their big Chipotle burritos, the fast casual restaurant posting an 8.3% same store sales increase for the third quarter last night. Joining us now to discuss is Chipotle CFO Jack Hartung. Jack, always good to-- good to see you. Definitely gonna touch upon the quarter.

But we're seeing the stock under a little bit of pressure here in the early going, maybe some disappointment with sales in October. But they are up about 4% to 6%, you said on the call last night. Are you seeing any slowdown in those COVID-19 infection zones, where-- the ones that are rising?

JACK HARTUNG: No, we're not, Brian. What we're seeing, first of all, our stock ran up a lot since, you know, the middle of September, so not really surprised that there's some kind of a pullback going on right now. We're not really seeing a pullback. We're watching it very closely. We're worried, of course, you know, that wave two might continue to worsen, and it might have an impact on our sales.

But so far, so good. You know, the one thing we talked about on our quarter is just that we're going against a really tough comparison. You know, the 8.3% that we delivered in Q3 was against an 11% last year. And now we're going up against a better than 13 in the fourth quarter when we're going up against carne asada from last year.

So I think maybe there might have been some expectation that we would jump way above the 13. Certainly, I think a mid-single digit, which is what we talked about we're running in September and into October on top of our 13, we're pretty proud of.

ALEXIS CHRISTOFOROUS: We've got to talk about delivery, right? I mean, online order is absolutely exploding at Chipotle. But I guess the downside to that is costs for that delivery have been quite high. And it actually put some pressure on margins. What are you going to do to help offset? Are we going to see higher delivery fees, perhaps, from Chipotle?

JACK HARTUNG: Yeah, you know, our digital sales tripled during the quarter. So digital has been a big win for us. It was grow-- the faster growing part of our channel before COVID, and it really has accelerated since then. But delivery does come with more cost. What we're experimenting with is passing on some higher menu prices just in our delivery channel.

What we're trying to do with our customers is give them access the way they want to enjoy Chipotle, and so, of course, you can still come in the restaurant and get exactly what you want as you walk down the line. You can order ahead and pick up, which, you know, which is a great channel for us, and it's growing fast as well. But if you want delivery, there's a higher cost to it.

And so that's why we're experimenting with higher menu prices so that if customers choose that premium high-convenience channel, we just want to make sure that that channel is able to cover most, if not all, of those costs. And so so far, so good. We're charging higher prices, and our customers are still ordering the delivery in their channel.

BRIAN SOZZI: I sensed this last quarter, but it seems to only have gained steam this quarter, Jack. The what people are eating at Chipotle has changed because of the pandemic. More burritos and more steak. Walk us through that.

JACK HARTUNG: Yeah, you know, the burritos, you know, is really a function of the customers that are coming into the restaurant, Brian, which is about half of our customers. They're still eating, you know, the same number of burritos versus bowls as they did before. So they haven't shifted from bowls. And bowls, before the pandemic, was about 70% of what we sell, burritos was only 30%.

That still is the relationship in the restaurant. Digital has always been more burritos than bowls. And what's happening is, with more people in the digital channel, you know, the burrito mix overall is increasing. And I think it's a function of two things, Brian. We have a lot of new customers coming into our digital channel.

And when they first come in, we think they think of Chipotle stands for burritos, and that's what they start with. Secondly, because a lot of the food is carry-out, you know, or delivery, the burrito travels really well. Listen, I have to tell you, since the pandemic, I, myself, I've eaten a lot more burritos than I have bowls because I know, when that arrives, that package and that foil is going to be still piping hot.

And so I think that's what's driving that. In terms of steak, steak is actually-- we're seeing more people move to steak both in-store, you know, and through digital. So that's not just a digital only. We do think part of that is we do have a lot of new customers coming to Chipotle, especially in the digital channel.

But the other thing that's happening is customers recognize when they go to the grocery store that steak has gotten more expensive. This has happened, like, four or five years ago, when steak prices were rising in the grocery store, we saw our steak incidence increase because, I think, customers see that our steak is a great value. So we think that's what's driving steak.

ALEXIS CHRISTOFOROUS: And I know, you know, it used to be that the tortillas were for free. I believe that you've made the decision now that people will have to pay extra for that. How difficult was that for you to make that decision?

JACK HARTUNG: Pretty easy, Alexis. You know, the reason being is it used to be a separate, you know, basically, section in our app, where we ask if you want a burrito, you push the button, you got a free burrito, or a free tortilla, rather. When we give away that many free tortillas, it puts pressure on the rest of our ability to invest in higher quality food.

We want to make sure we charge a fair price for our food so we can continue to buy high-quality, wholesome, sustainably-raised food. And that was, frankly, you know, making a bit of a challenge. What's happening with customers is we think what they're doing is they're getting a bowl and a tortilla, and they're getting two meals out of it. We're only charging $0.25 additional.

So if you can get two meals instead of paying $8, you're paying 8 and a quarter, you're getting two meals out of it, we still think that's a great value.

BRIAN SOZZI: Taking away my menu hacks, Jack. I really appreciate that. But I do want to ask you about the-- on the labor front. I talked to so many retail executives, and they're making giant hiring pushes right now and at higher wages. You look at Target, Walmart, they're now paying $15 an hour starting entry point for their workers.

What are you doing to keep your employees inside of Chipotle? Are you looking at any holiday season bonuses, are you lifting wages? What are you doing?

JACK HARTUNG: Yeah, you know, Brian, we've done a number of things, we continue to do a number of things. First of all, our average wages are in the 13.5% range. And so we're not paying anywhere near a minimum wage. We're above minimum wage in every market that we're in.

Secondly, we're doing things-- listen, the wages are important. But the other things our customers really value is like debt-free degrees, for example, which we've been expanding. We just added another college, a historically, you know, Black college, you know, to the portfolio. And what we found is, you know, most of our employees that tap into the debt-free degrees are our crew.

When they do that, they're, like, many, many, many times over more likely to stay with Chipotle. And they're more likely to move into management roles. And so those are things that not only lead to better retention of our folks, they lead to them having a career path, which is good for them. And they lead to them being, you know, important future leaders for us, which is good for us.

You know, as minimum wages increase, of course, we're going to have to follow that. And we always want to stay ahead of that. But we know it's more than just the wage that they're getting, we need to add other things as well. And the debt-free degrees, I think, is a great example, making sure that our employees have access to health insurance, including access to mental health insurance, making sure their families have access to some of these benefits as well.

Those are the things that we've been investing in and we'll continue to invest in in the future.

ALEXIS CHRISTOFOROUS: And it is huge, for sure. And Jack, at a time when a lot of restaurants are closing down, Chipotle, actually, added, I think it was over 40 stores, and some of them, more than half of that, was those drive-throughs, the Chipotlanes. How are they doing, and what are plans for expansion in 2021? Because I understand you didn't give guidance for same-store sales, so I'm wondering, in terms of opening up new locations, what does that look like in the new year?

JACK HARTUNG: Yeah, so first of all, you know Chipotlane, we think that Chipotlane is the digital drive-through of the future, OK? And so we're very, very excited about that. What we mean by that is the traditional drive-through, when you pull onto the a lot, especially in today's world, where so many people are going through the drive-through, you have to wait in a line of cars before you place your order.

You have to wait once you place your order behind those same cars before you pay. You have to wait again before your food is delivered to you. With Chipotlane, you've already paid-- or you've already ordered, you've already paid. So you've skipped those two wait lines altogether. And we agree on what time your food is going to be ready.

So if we tell you 12:15, you pull up at 12:15 to one window. You pick up your food, and you go. We think that is the digital drive-through of the future. So in terms of going forward, yes, more than half of the openings in Q3 were Chipotlane. Next year, it's going to be more than 70%. And we did, Alexis, increase the number of openings we potentially could open.

And here's what I mean by that. Our pipeline could support 200 openings next year. It's been over five years since we've had more than 200 openings. The caveat is we don't know how the permitting and how the contractors are going to be able to support the ground break. So first, the permitting from the local cities because of COVID, and then the ground breaks.

But if those go well, which so far, so good, we had interruptions back in April, we can open up as many as 200 restaurants next year. So we're very excited about the growth plans, we're very excited about Chipotlane. And if we get a little break from COVID, if this eases, we'll fully get the 200 restaurants next year.