The size of Chipotle (NYSE:CMG) Portions have recently come under scrutiny thanks to a viral trend on the social media app TikTok: Customers filmed employees preparing their burrito bowls to make sure they filled them correctly.
The start of this trend can be attributed to influencer Keith Lee, who has over 16 million followers and who criticized the company for dwindling shares. This prompted some Chipotle customers to start filming the chain’s employees to encourage them to give them more food. More and more customers followed suit.
This trend could have an impact on the company’s results and actions in the short term, but also in the longer term.
My recent orders from Chipotle
Since these complaints about Chipotle’s portions went viral, I’ve ordered bowls from Chipotle twice at two different locations in two different states. Immediately after the hype, I placed an order for a steak bowl to pick up at a “Chipotlane” drive-thru and received the fullest bowl I have ever received. No video was necessary (or possible) and the portion size was excellent.
Two days later, I ordered two more bowls from my local Chipotle and the results were completely different. One bowl was about half the size of the one I had received two days earlier and the other was maybe a third of that size. The chips were also stale.
After contacting customer service, they offered me two BOGO (buy one, get one free) deals to use in the next 30 days as well as a reward of free chips and guacamole. They also said they would contact the store manager.
Over the past year, I’ve constantly had issues with food quality and portions at my local Chipotle, which is one of the reasons I’ve avoided stocking up. However, given the strong sales momentum the company experienced during this period, I believe these were likely isolated issues related to this one location. It’s also an example of how anecdotal evidence is sometimes just anecdotal and doesn’t always reflect the whole picture.
For its part, Chipotle said it has neither changed its portion sizes nor asked its employees to give fuller bowls to customers who check them in. The company said it had “reinforced appropriate sharing” with its employees, but did not say whether “correct” meant keeping those portions moderate or filling the bowls.
Based on my recent experiences, there are big differences in portion sizes from one Chipotle location to another.
How this could impact the company’s results
Chipotle’s largest spending category is food, beverage and packaging: costs in this area accounted for 28.8% of its revenue in the first quarter. The company is constantly fighting food inflation by raising prices. However, another way food companies can maintain profits when their costs rise is to reduce portion sizes. This is commonly called contraction and inflation. President Biden even decried contracting inflation in his State of the Union address earlier this year.
In the short term, if Chipotle does increase its portion sizes to appease its customers, it would increase its food spending and hurt its restaurants’ margins. A 10% increase in spending in the food, beverage and packaging category from larger portions would add about $330 million per year in additional spending (nearly $260 million after taxes), or about 9. $40 in annual earnings per share (EPS), based on expected sales of $11.35 billion this year. That’s not a small amount, even for a company on pace to earn more than $55 per share this year.
In the long term, if Chipotle keeps its larger portions, it would have a lasting impact on margins, while smaller portions could impact demand. Right now, there appears to be a bit of a battle going on between Chipotle and its customers on this issue.
It’s a bit of a vulnerable time for the company. Many other fast-food chains have felt pressure from consumers facing higher menu prices. Chipotle has so far avoided this, as evidenced by its strong same-store sales, pricing power and traffic.
Skimping on portions and quality may improve short-term results, but it could eventually catch up with the business. Chipotle has a good reputation and has recovered from worse times, including a number of food poisoning incidents related to E. coli and norovirus, but now it needs to maintain that good reputation.
I think the company missed an opportunity when Lee’s complaint and other TikTokers’ response went viral. She could have played a marketing role that would have attracted more customers to her restaurants, perhaps for a limited time, by promoting the size of her bowls. The company’s ambiguous response regarding its portion sizes was also not helpful.
Is it time to buy, sell or hold?
Chipotle stock now trades at a forward price-to-earnings (P/E) ratio of 55.5 – a premium valuation relative to its growth and margin profile. It doesn’t really have the long-term expansion opportunity it has had in the past, so same-store sales and restaurant margins will play a bigger role in its long-term prospects.
Not so long ago, an event like the Chipotle portion saga would likely have been forgotten pretty quickly. Historically, consumers have short memories when it comes to things like this. However, in the age of social media, consumers have gained more power. So I wouldn’t rule it out 100% like I would have done several years ago. I never thought Bud Light sales would still be impacted a year after calls from some to boycott the brand, so you never know.
At this point, given Chipotle’s valuation, I would view the Restaurants stock as a hold while waiting to see if it plays out as planned. I think it will, but I wouldn’t rush to buy stocks at these levels.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool posts and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Chipotle’s portion sizes have gone viral. What could this mean for the title? was originally published by The Motley Fool
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