Tuesday, October 18, 2016

So Is Chipotle “Buzz-worthy” or “Meh”? The Texas Alcoholic Beverage Commission Says “Meh.”

 Chipotle reports next week and we’ll finally get to see how the company’s “buzz-worthy” (their word, not ours) marketing efforts (like the online game “Friend or Faux,” the “Chiptopia” rewards program, and the online animated movie “A Love Story”) have been working to bring customers back after last year’s food-borne illness outbreaks linked to various Chipotle restaurants caused comp-store sales to tank, spurred a CDC investigation and forced the self-styled “Food with Integrity” chain to spend a lot of money upgrading the integrity of its food-handling procedures.
 Wall Street, for the most part, seems convinced the storm will blow over—if a 100-times next-year EPS multiple is any indication.
 Large shareholders have commissioned reports on the company’s turnaround efforts, interviewing food safety experts and “industry veterans” on the “timeline for Chipotle’s recovery,” as one wrote, and the consensus seems to be management will eventually convince the American public that Chipotle really does serve “Food with Integrity,” but safely—and then it’ll be onward and upward, like Jack-in-the-Box after its deadly e-coli outbreak in 1993. 
 But actually talking to Chipotle customers, past and present, about how much they went before the outbreaks, when they returned, and how frequently they go now, yields a very different notion of what’s ailing Chipotle than strictly “food safety fears.”
 What we hear is that lapsed customers aren’t so much afraid of getting sick—they just found other places to go while they were away.
 But don’t take our word for it.  According to the recent semi-annual Piper Jaffray survey of 6,500 red-blooded American teens and their food and clothing habits, Chipotle ranked as their second-most favored restaurant chain—even after all that “buzz-worthy” marketing—at 11%, behind Starbucks at 14% and ahead of Chik-fil-A at 10%, a pretty big shift from the early 2015 survey, when Chipotle nearly tied Starbucks for first-place at 14% and was almost twice as popular as Chik-fil-A at 7.5%.
 And while your editor hasn’t interviewed anywhere near 6,500 teenagers, we have talked to quite a range of Chipotle customers, past and present, around the country.   Though far from being a scientific sample, we found two “buckets,” as Wall Street’s Finest like to say: the first includes former customers (generally women) who were offended that the “Food with Integrity” folks had apparently made customers ill and seemingly wasted time griping about the CDC and/or the press coverage instead of immediately, contritely and completely dealing with the issue.   They either refuse to go back, or, almost certainly go less than before the outbreaks.  
 The second “bucket” is the heavy users (generally young men) who still go—but generally not as often as before, for whatever reason—some claim the food doesn’t taste as good as they remembered it; others simply say they just found other places to go.  On the flip side, they say, the lines tend to be shorter.
 In general, the attitude from both buckets—major fans and occasional partakers—might best be summed up as “meh.”
 Understand, these are impressions from talking to real people, not a scientific survey.  But we haven’t found a single non-interested (i.e. Wall Street-type) who has said in no uncertain terms, “It’s still great, I go back, and I spend as much as I used to.”  
 Maybe Chipotle customers are like those Trump voters you hear about who don’t want to admit they’re voting for him, and maybe most of them are in fact eating as much or more than they used to, even if we don’t hear it, and maybe Piper Jaffray interviewed the wrong 6,500 teens.
 But there’s one other way to get a sense of how Chipotle’s “buzz-worthy” marketing is doing getting customers back to its 2,000+ stores, which for some reason the company keeps growing like a 20% comp company even though comp-store sales are down double-digits (just ask Boston Chicken how that math works out in the long-run).
 Turns out the Texas Alcohol Beverage Commission reports monthly numbers from every establishment that reports to it, from the lowliest bar to the biggest chain.
 And while beer sales are a tiny part of Chipotle’s business—never even mentioned on any earnings call—they are a piece of the business and they depend on customers walking in the door and buying food to go along with their beer.   So while the TABC numbers may not be as good an indicator of overall sales trends as, say, sales of Coke at McDonald’s would be, they’re something to look at.
 Here’s what we came up with, on the left, with the company’s actual reported total sales on the right:

 Granted, these are not “comp-store” sales, nor have we been able to adjust for the collapse in oil prices, which certainly dinged beer sales in Texas well before Chipotle as a whole got whacked on the food-borne illness outbreaks.   But they’re numbers, and we’ll take them.
 Moreover, Pizza Hut, which likewise sells small amounts of alcohol relative to its food volume and has a fair number of stores in Texas, showed a slowdown in 2014 in the TABC data, although not the dramatic collapse like Chipotle:

 The point is, the data make some sense.   Which makes it interesting to try to see how things are progressing more recently.  
 Thus far in 2016 the monthly data only runs through July, so we don’t have a full third quarter to see how far off the bottom sales have leaped following the “Love Story” video and “Chiptopia.”  
 But we do have June and July TABC figures, and comparing the first two months of each quarter of the year (just for some sort of consistency’s sake) yields the following as an indication of trends thus far: 

 In other words, “meh.”
 But we’ll get the real numbers next week, along with word of whatever “buzz-worthy” marketing gimmicks come next.
 Meantime, we’re going to hit the Dos Toros at 54th and Lex.   Or the one at 52nd and 6th.   Or 45th and Lex.  Or…

Jeff Matthews
I Am Not Making This Up

© 2016 NotMakingThisUp, LLC                      

The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.


sjgmoney said...

But.....but.....but....Ackman. Lol. The one I frequent is still a ghost town, went there on Columbus day, no school for the kids in our area, mall was busy as you might expect on a "day off". No line at high noon, two people sitting at a table. Two other people came in while I was there. Not good.

Colin P said...

Texas has those numbers? That's an awesome data set.