The size of Chipotles (NYSE: CMG) Portions have recently come under scrutiny thanks to a viral trend on the social media app TikTok: Customers have filmed workers preparing their burrito bowls to make sure they fill them properly.
The beginning of this trend can be traced to influencer Keith Lee, who has more than 16 million followers, and who criticized the company for its shrinking stock. This prompted some Chipotle customers to film the chain’s employees to encourage them to give more food. More and more customers followed suit.
This trend can have short-term consequences for the company’s results and shares, but it can also have longer-term consequences.
My recent Chipotle orders
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 hoopla, I placed an order for a steak bowl to pick up through a “Chipotlane” drive-thru and received the fullest bowl I’ve ever received. No video was needed (or possible) and the portion size was great.
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 bowl I had gotten two days earlier and the other was maybe a third that size. The fries were also stale.
After I contacted customer service, they gave me two BOGO (buy one, get one free) offers to use for the next 30 days and a free chip and guacamole reward. They also said they would contact the store’s manager.
Over the past year, I’ve consistently had issues with both food quality and portions at my local Chipotle, which is one of the reasons I’ve avoided the broth. However, given the strong sales momentum the company has seen during this period, I believe these were likely isolated issues related to that one location. This is also an example of how anecdotal evidence is sometimes just that – anecdotal – and may not reflect the big picture.
For the company’s part, Chipotle has said it did not change portion sizes or instruct employees to give fuller bowls to customers who took them. The company did say it had tightened portion sizes for its employees, but did not specify whether “good” means portions should be kept moderate or bowls should be filled.
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 spend category is food, beverage and packaging; costs on that front represented 28.8% of sales in the first quarter. The company has continuously fought food inflation by raising prices. Another way food companies can maintain profits as their costs rise is by reducing portion sizes. This is commonly called shrinkflation. President Biden even declared contraction inflation in his State of the Union address earlier this year.
If Chipotle were indeed to increase its portion sizes to appease its customers, it would increase food costs in the short term and hurt margins at the restaurant level. A 10% increase in spending in the food, beverage and packaging category due to larger portions would add approximately $330 million per year in additional costs (nearly $260 million after taxes), or approximately $9.40 in annual earnings per share (EPS) , based on expected revenue of $11.35 billion this year. That’s not a small amount, even for a company that’s on track to earn more than $55 per share this year.
If Chipotle keeps its larger portion sizes, it would have a lasting impact on margins in the long run, while smaller sizes could impact demand. Right now, there seems to be a bit of a battle between Chipotle and its customers over this issue.
This is a bit of a vulnerable time for the company. Many other quick-service chains have felt the pressure from consumers struggling with higher menu prices. Chipotle has avoided this thus far, as evidenced by its strong same-store sales, pricing power and traffic.
Cutting back on portions and quality may improve results in the short term, but it can ultimately catch up with the company. Chipotle has a good reputation and has recovered from worse, including a number of food poisoning incidents related to E. coli and norovirus, but now it must maintain that good reputation.
I think the company missed an opportunity when Lee’s complaint and other TikTokers’ response to it went viral. It could have performed a marketing function that would have driven more customers to its restaurants, perhaps for a limited time, by promoting the size of its bowls. The company’s ambiguous response regarding portion sizes didn’t help either.
Time to buy, sell or hold?
Chipotle shares now trade at a 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 expansion options it has had in the past, so same-store sales and restaurant-level margins will play a bigger role in its long-term prospects.
Not so long ago, an event like the Chipotle portion saga would probably have been forgotten pretty quickly. Historically, consumers have short memories when it comes to these kinds of things. However, in the age of social media, consumers have become increasingly powerful. So I wouldn’t write it off 100% like I would have done a few years ago. I never thought Bud Light sales would still have an impact a year after calls from some to boycott the brand, so you never know.
At this point, given Chipotle’s valuation, I would look at the restaurant stock as more of a foothold while we wait to see if this blows over as expected. I think so, but I wouldn’t rush into buying the stock at this level.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Chipotle’s portion sizes have gone viral. What could that mean for the stock? was originally published by The Motley Fool
