Are the lunch lines still insane at your local Chipotle? So what gives with its disappointing third-quarter earnings? The company announced Tuesday that same-store sales were still down 21.9% last quarter. Even comparable restaurant transactions, which include zero-dollar "sales" (that is, food Chipotle is essentially giving away) resulting from its marketing promotions, were down 15.2%. This produced a stomach-churning stock drop Wednesday of more 9%. How could this be?
Before the report, some investors including Jim Cramer wanted to know if reports that crowds had returned to Chipotle’s restaurants in recent months signaled a turning point in Chipotle's recovery efforts, one year after E. coli outbreaks shook up the one-time high-flier. During my reporting on the company the last seven months, many supporters also stressed to me that lines are once again out the door!
So why do long lines not equate to improved sales? Let’s start with the obvious: Judging the fluctuations in Chipotle’s sales based on the lines you see at your nearby Chipotle (or on Twitter) is a dubious test—and not simply because that evidence is anecdotal. The key issue here boils down to Chipotle’s "Labor Matrix." Every restaurant chain has some version of the Labor Matrix, which is a term Chipotle uses to describe the labor hours the company allocates per store based on its projected sales volume. In other words, as one former operations executive cites as an example, "If you’re doing $5,000 in sales per day, you might be allowed, say, 100 hours to schedule [split among your crew workers]." The company relies on this system to refine its margins, and constantly pressures its restaurants to improve these metrics. "If you’re still doing $5,000 in daily sales a year later, you might get 97 hours of labor, and so on and so on," the former operations executive explains.
In the aftermath of Chipotle’s food-safety crisis, as customers abandoned the brand, how did the company adjust for its business decline and recovery? On the one hand, as Chipotle CFO Jack Hartung told me this summer, "With the Labor Matrix, when your sales drop, your labor hours drop." On the other hand, how can you spark a recovery if your restaurants aren’t ready to handle any increases in customers?
This has been a big challenge for Chipotle over the last year. According to a number of sources, in response to the outbreaks, Chipotle reduced its restaurant worker hours; one former general manager estimated his store region cut four hours or more of labor per crew shift. Thus, if you saw longer lines returning to your local Chipotle in recent months, this could be a result of improving foot traffic—or it could be a result of that particular location not having enough workers on the line, leading to slower throughput (chain-restaurant speak for how quickly it serves customers), and the impression that Chipotle is as or more crowded than it was before the E. coli outbreaks. From a marketing perspective, longer lines and slower service can be good news: Overflowing stores can remind passersby to give Chipotle another chance.
To prepare for the possibility of a faster recovery, Hartung says the company did relax its Labor Matrix requirements—he actually says the company was intentionally "sloppy" about them, so they could have more staff on hand than sales justified, to account for projected traffic upswings from Chipotle’s endless burrito giveaways. While this might’ve helped in areas where Chipotle’s lines did indeed recover, in locations where sales were more sluggish, Chipotle’s margins were especially battered.
It's important to remember amid the chatter of Chipotle's lines, its stock price, and the state of its recovery that we're not talking about a company in danger of shuttering anytime soon. Chipotle isn’t going bankrupt. Its average sales per store unit, after all, were roughly $2.6 million before the outbreaks and dropped to $1.9 million in the aftermath of its food-safety incidents, a figure still substantially higher than comparable figures from Taco Bell, Jack in the Box, and a slew of its fast-casual competitors.
In other words, what investors are worried about is whether this is the "new normal." They fear the rocket ship that Chipotle once was is no more, at least in the near term—even if the lines tomorrow at your nearby Chipotle are zigzagging to the sidewalk during the lunch rush.
Simply put, those lines have to be a lot longer—and moving a lot faster—in order for Chipotle to inch closer to a full recovery.