Chipotle spoils customers with larger portions to keep their customers happy

Daniela Sirtori
| Bloomberg

Chipotle Mexican Grill Inc. is committed to providing customers with large portions — but it comes at a price.

The burrito chain will incur losses by providing employees with “correct and large portions,” Chief Financial Officer Jack Hartung told analysts on a conference call about the company’s financial results. Chipotle has found that about 10% to 15% of its restaurants receive a disproportionate number of comments about portion sizes, he said in a separate interview.

The company is “doubling down” on training at those stores to make sure workers get the right amount of food, including the required two large scoops of rice and four ounces of meat. Meeting those standards will cost the company an additional $50 million, he said.

Chipotle shares were down 1.4% as of 1:55 p.m. in New York. The stock had risen 13% this year through Wednesday’s close, though volatility related to the stock split and online criticism of its portion sizes have wiped out some gains in recent weeks. Last month, Wells Fargo analysts wrote in a note that Chipotle’s portions varied widely after ordering 75 identical burrito bowls at different New York locations.

“We tell our teams: Listen, we don’t want you to skimp on portions,” Hartung said. “If you’re not sure whether to give a little more or a little less, give a little more.”

In response to the change, TD Cowen analyst Andrew Charles wrote in a research note that his team was pleased that management “took the bull by the horns and addressed the negative public perception around portion size that was weighing on the investor narrative.”

Chipotle on Wednesday reported second-quarter sales that beat Wall Street expectations, thanks in part to limited-time offers and quick service. Trading rose 8.7% in the second quarter, helping to propel an 11% increase in comparable sales that beat the average estimate of analysts surveyed by Bloomberg. Earnings per share also beat expectations.

Investor enthusiasm waned, however, after Hartung told analysts he expected some “margin pressure” in coming quarters — partly because of efforts to increase portion sizes. The largest portion is seasonal due to higher protein costs as the company shifts from high-margin, limited-time chicken offerings to beef promotions, he said, also pointing to higher avocado and dairy prices.

Jake Bartlett, an analyst at Truist Securities, believes the margin outlook, while disappointing, “is not a long-term concern.”

Hartung said Chipotle has no plans to raise prices further this year, adding that he expects avocado prices to fall through the end of the year. The company’s cost of sales in the third quarter will be down about 31%, compared with 29.4% in the period through June 30, when the company used more oil to fry chips and more beef amid strong demand for braised barbecue.

Despite criticism of portion sizes, Chipotle has been one of the few major restaurant chains to consistently increase traffic in recent quarters. The results show that most diners still consider the chain’s burritos and bowls a good deal, and limited-time offers like chicken al pastor are drawing customers in. The company has also focused on improving training so staff can serve guests faster.

The chain maintained its full-year outlook, which calls for same-store sales growth of a high single-digit percentage.

With the help of Joel Leon