#109 - Of Bytes and Burritos

Chipotle's Pandemic Playbook

Jan 30, 2022

Hi👋 - Today a topic near and dear to my heart, burritos. Leveraging investments in tech and loyalty, Chipotle exits the pandemic in a position of strength. The company offers a case study in how to successfully competing with food delivery marketplaces like DoorDash and Uber Eats. Thanks for reading.

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Liftoff

Covid-19 shook the economic center of gravity. Growth at companies like Peloton, Wayfair, and Zoom skyrocketed, but is now coming back down to earth. While not thought of as a work from home darling, burrito chain Chipotle is exiting the pandemic in a strong position thanks to a foresighted strategy and investments in technology and loyalty.

Chipotle’s digital sales grew from 18% of revenue in 2019 to 46% in 2020, when many restaurants were shuttered, to 48% through the first three quarters of 2021. During the peak of lockdowns in 2020, digital sales accounted for 80% of revenue1. While other pandemic winners have sputtered as the economy reopens, Chipotle has consolidated its gains. Through Q3 2021, its digital sales are over $2.7 billion, in the same zip code as GMV for the luxury fashion marketplace Farfetch. That’s a lot of burritos.

Source: Chipotle quarterly earnings. Note: 2021 year-to-date through September 30, 2021.

In addition to in-restaurant orders, Chipotle sells through three digital channels: online ordering for in-store pickup, white-label delivery through its app and website, and third-party delivery marketplaces like Grubhub and Uber Eats. Digital revenue is split evenly between delivery and in-store pickup. Within the delivery channel, about 60% of orders are from third-party aggregators and 40% are from white-label2, where Chipotle partners with DoorDash to fulfill delivery orders placed through its app. Food delivery marketplaces provide restaurants with two services: lead generation (i.e., customers) and delivery. Because Chipotle can drive organic demand itself, it pays a lower commission to DoorDash for white-label delivery orders versus orders from Grubhub or Uber Eats.

Like Etsy’s pandemic success with face masks, years of continuous investment allowed Chipotle to get lucky when the pandemic shut down dining rooms, shifting demand online. For the past several years, two of Chipotle’s five strategic priorities focus on digital: leveraging digital capabilities to improve productivity and expand access, convenience, and engagement and building a loyalty program to drive transactions and higher purchase frequency (delivering exceptional in-restaurant and digital experiences is another, so maybe it’s two-and-a-half digital priorities)3. The meta theme is improving convenience and providing customers with multiple ways to order.

Skating to where the puck was going, Chipotle started rolling out digital make lines in 2016. These are separate back-of-house lines focused on processing digital orders. It launched an app in November 2017, a loyalty program, Chipotle Rewards, in March 2019, and added drive-through capabilities (Chipotlanes, cringe) later that year. Additionally, Chipotle uses menu exclusivity to spur digital orders. For example, quesadillas can only be ordered online. Past investments in operations, loyalty, and tech meant that when the pandemic struck, Chipotle had the primitives in place to react quickly.

Source: Chipotle via Fast Company. Note: Chipotle digital make line.

Tactically, Chipotle responded to Covid-19 like many other restaurant chains by adding contactless pickup and encouraging online orders as well as signing new partnerships with Grubhub and Uber Eats. It also shifted marketing dollars to digital customer acquisition and app downloads.

Chipotle’s pandemic success is sticking. When in-person dining resumed in Q2 2020, the company retained 70-80% of online sales4. It reiterated this point in Q3 20215. As the company’s Chief Restaurant Officer Scott Boatwright notes, digital orders are creating a healthier business6:

Digital is the stickiest channel and we’re super happy with that. We know when we get consumers into those digital channels, the likelihood of creating a relationship that is enduring for us is better.

Free Guac, the Price of Loyalty

Inertia is powerful and behavioral change is hard. Covid-19 shook up the snow globe, forcing experimentation and creating an opportunity to form new habits. As the pandemic shut down dining rooms, customers discovered Chipotle’s digital channels and loyalty program.

Chipotle Rewards launched in March 2019; by the end of the year it had eight million members. In 2020, it added 10 million new members, comparable to the population of Michigan. By Q3 2021, membership swelled to 24 million, similar to the number of accounts on Robinhood or the size of Starbucks’ loyalty program, despite Starbucks having an order of magnitude more stores. Chipotle’s loyalty program enrollment rate doubled during the pandemic in 20207.

While customers earn points towards free guac and entrees, Chipotle comes out ahead. Loyalty members have higher purchase frequency versus nonmembers. Repeat purchases are critical for sustaining growth and improving profitability. Additionally, over 70% of digital orders come from rewards members8. Most importantly, Chipotle Rewards provides a direct relationship with customers, an increasingly valuable trait amid a landscape of outsized aggregators like DoorDash, Facebook, Google, and Uber Eats. Whoever controls a customer’s email address controls the ability to communicate with them. Chipotle is building muscle at personalizing promotions to drive specific behaviors and re-engaging lapsed customers. Chipotle’s CEO Brian Niccol is bullish on the program’s potential9:

What we're seeing is it [Chipotle Rewards] does have a powerful impact on people's frequency. And the good news is we believe we're learning more every day. But what we've learned to date, I think, is going to have a powerful tailwind for us going forward. And if you think about 2020, we started the year with, I think it was less than 10 million in our system. So you've got twice the amount of people that we can influence behavior with on a pretty one-to-one basis. So that's why you hear me talking about why I see this being a driver going forward.

Battling Aggregators

By offering rewards, the loyalty program incentivizes customers to order directly through Chipotle’s higher-margin owned digital channels. Because value accrues to whoever owns the demand, Chipotle Rewards is a strategy to reduce reliance on profit-draining intermediaries.

If rewards are Chipotle’s carrot, pricing is its stick. To cover the cost of delivery, the company raised delivery menu prices by 13% in Q4 2020. While management billed this as charging for convenience, differential pricing gives consumers another incentive to order directly from Chipotle.

Source: The Wall Street Journal, Why DoorDash and Uber Eats Delivery Is Costing You More, May 8, 2021.

At the onset of the pandemic, partnering with DoorDash, Grubhub, and Uber Eats increased orders, reduced delivery times, and improved the customer experience10. However, this caused a hit to margins. Delivery marketplaces charge restaurants commissions between 15% and 30%. Chains like Chipotle, Shake Shack, and Sweetgreen use their scale to negotiate lower commissions, but these fees still sting11. Like many other businesses, Chipotle’s strategy is to drive direct orders. Unlike many other businesses, their strategy is working.

For digital orders, 2021 was an inflection point between delivery and pick-up. Throughout 2020, delivery accounted for “about half” of Chipotle’s digital orders. In 2021, this disclosure shifted to “a little more than half” coming from pick-up orders. Chipotle is having some success moving digital demand to higher-margin organic channels and reducing reliance on aggregators.

It’s best for a company to have multiple vectors of customer acquisition and growth (of course, this is easier said than done). Heavy reliance on any one channel is dangerous. This is particularly true for a fragmented industry like restaurants that’s served by a few large delivery marketplaces capable of siphoning off profitability. If 80% of your orders come from DoorDash, they own your customer and you need to pay a toll for each order. Chipotle had the foresight and scale to avoid this trap and is using food delivery as one of many tools.

Food delivery is a low margin, cost-intensive business reliant on scale. Chipotle’s digital strategy is to outsource the grunt work of delivery while growing direct customer relationships (and better economics) through its loyalty program and tech investments. That’s a tasty combination.