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Chipotle's strong showing demonstrates fast food 'out of touch' with consumers, says Ells

The 20-something brand has demonstrated it can spend more on ingredients, charge a fair price and generate outstanding business results, the co-CEO says.

The 20-something brand has demonstrated it can spend more on ingredients, charge a fair price and generate outstanding business results, asserts Steve Ells, Chipotle founder, chairman and CEO.

October 21, 2014

Chipotle reported a 19.8-percent increase in comparable store sales for Q3.

It's the company's strongest quarter since it went public in 2006, and Chipotle's AUV now sits at $2.4 million.

Company leaders credit the jump to increased traffic and an 8.5-percent increase in average check. The average check increase was driven by a nationwide 6.3-percent menu price increase completed in Q2, said CFO Jack Hartung in an investor call on Oct. 20. Resistance to the higher pricing is under 1 percent, with few customers trading down from pricier menu items to less expensive items.

Traditional fast food 'out of touch'

Steve Ells, founder, chairman and co-CEO, contrasted Chipotle's performance with that of its traditional fast food counterparts. Recent poor performances by fast food stalwarts – McDonald's today posted a decrease in US same-store sales of 3.3 percent for Q3 – validates Chipotle's direction, said Ells.

"The fast food sector has traded food quality and taste for low cost and ease of preparation. It has aggressively marketed low prices to entice customers to visit more often which has result in the need to reduce costs by cheapening ingredients and by compromising the overall dining experience," Ells said in a conference call with investors Monday. "We have shown that we can spend more on ingredients, not less, and charge a fair price, and at the same time, generate outstanding business results."

Traditional fast food purveyors are "out of touch" with what customers want, said Ells, and efforts by some to change customers perceptions of their brands are "short sighted."

"Customers want delicious food, served quickly in an interactive format and they are increasingly unwilling to compromise," said Ells, pointing to the ascendancy of the fast casual segment andrecent surveys indicating diners' preferences for higher quality, sustainably produced food.

Other Q3 results

Along with an increase in average check, Chipotle also saw an increase in the number of customers moving through its lines. Throughput increased by six transactions each during lunch and dinner dayparts compared to the same period last year.

Chipotle also opened 43 new restaurants this quarter, bringing their total so far this year to 132. It expects to end the year with around 180 new units.

Chipotle's new concepts, ShopHouse Southeast Asian Kitchen and Pizzeria Locale, now have a total of eight and two locations open, respectively.

Slowdown ahead

After this quarter's strong growth, Chipotle leaders are forecasting slower growth in 2015.

Chipotle is anticipating low- to mid-single digit comparable restaurant sales in 2015, and expects to open between 190 and 205 new units, including a small number of grocery units. It is looking at smaller footprints in underserved markets, according to Monty Moran, co-CEO at Chipotle.

Photo courtesy of Wikimedia.