Ann Berry (00:00):
Welcome back to After Earnings. I'm your host Ann Berry, and today we spoke to Adam Ryer, Chief Financial Officer of Chipotle with its share price up 70% over the past two years. Chipotle is the third biggest restaurant group in the US by market cap at nearly $80 billion. It ranks just behind Global Giants. McDonald's and Starbucks. Chipotle recently posted 2024 results of total revenue up 14.6% to $11.3 billion and operating margins up to over one percentage point. Although investors were expecting a stronger 2025 outlook than the quote full year comparable restaurant sales growth in the low to mid single digit range stated by the company, we dug into how robotics are changing to Polo Kitchens, the outlook for global growth, the benefits of owning, not franchising locations and investing into food startups, plus when is peak burrito season and why. Let's get into it. So Adam, thank you very much for joining. Before we dig into earnings, which we will do, let's hit on some recent news that I found surprising and actually quite fascinating about Chipotle, and that's your investment in plant-based protein. Talk to us a little bit about Chipotle's Cultivate Next Fund. I don't think many listeners will have heard about it.
Adam Rymer (01:08):
Yeah, absolutely. So we have a Cultivate Next fund that has got about a hundred million dollars that we're looking to deploy in very like-minded businesses that in some form or fashion can help the Chipotle brand as well as our purpose of cultivated a better world. And so we've made investments that we believe could create efficiencies in our restaurants that will help us further the cultivated better world brand when it comes to our food, when it comes to our suppliers and the overall restaurant industry.
Ann Berry (01:36):
So while Plantable, it's a vertically integrated biology company, unlocking duckweed for plant-based protein, we've also got CH four Global, an example of a seaweed to reduce methane emissions. Have you seen any Cultivate investments actually make their way into dishes served in Chipotle stores yet?
Adam Rymer (01:54):
Not yet. The closest thing that we've come to is some investments we've made would be things like tractor beverages, which I believe happened before the Cultivate Fund, but that was a like-minded beverage program that really introduced our idea of having real whole ingredients in our food to have a beverage platform that followed that same ethos.
Ann Berry (02:13):
Let's talk about a different kind of area of innovation. Adam and I think it's one that really took off during covid, which was your drive-through format and your chipo lanes. Talk to us about how those new openings are going. How many of you got open right now?
Adam Rymer (02:27):
Absolutely. We just, I think, broke the 1000 mark not too long ago, so it's amazing. Out of our 37 or so hundred restaurants, about a thousand of them are Chipotle. What's amazing about this format is we feel like it is kind of that next revolution of a drive-through, and by that we mean that you have to place your order beforehand on the mobile app. So you've already selected what you would like and you've already paid for it. So it's a very efficient process to actually go up to the pickup window, pick up your order, and then move about. And so it's a very short amount of time that it actually takes, and these formats have really done a tremendous job not only driving our digital business, but also they open at higher volumes and they also return much higher returns as well because they rely less on the delivery business and push more of that business to that mobile order ahead and pick up. So we've been really happy with not only the format, but also the customer response to these formats leading to a much higher volume and a much better experience, a much more convenient experience for our customers.
Ann Berry (03:24):
And what's the profitability margin difference, Adam, between those restaurants that have Chipotle's and those that don't?
Adam Rymer (03:34):
Yeah, we haven't quantified that, but it is slightly higher sales, slightly higher margins, and therefore overall better returns. And so we've definitely been happier with that portfolio.
Ann Berry (03:43):
And just talking about the numbers too and how innovation actually drives margin uplift with a little bit of specificity. Let's talk about some of the automation that's been happening in Chipotle's kitchens. Talk to us about some of the produce slices, the scoopers. Talk to us about what the automated kitchen looks like in your locations.
Adam Rymer (04:01):
Yeah, so on the earnings call, we talked about some back of house initiatives. In particular the produce slicer, like you mentioned, the dual-sided planche as well as a dual VA fryer for frying chips as well as a three pan rice cooker. And so these items are really going to help us revolutionize the back of house in many, many different ways. One, it's going to create a much better crew experience. Crew are the employees in the back of house doing prep every single morning. And in an average restaurant for example, we have to dice about 20, 30, 40 pounds of onions on a daily basis in each of our restaurants. And you can imagine with training around proper knife usage, getting the cut sizes to the right sizes on onions as well as jalapenos can create a variation in our flavor profile depending on those cut sizes. So the idea of being able to use something like the produce slicer to automate that task as well as create a more consistent flavor profile, it's really a win-win for our crew as well as our guests.
(05:00)
And so that's one example. And then there's countless examples with the dual bath fryer at the dual set planche that kind of follow that similar pattern, which we believe it can make experience for our crew member much better. It can allow for us to get our tasks done in the morning more on time so that we can be fully deployed and serve our guests during our most peak hours, which is right around lunchtime and right around dinnertime. So we're really excited about the ability to utilize this technology to improve the crew experience, to improve our culinary, but also drive and efficiency in our back of house labor.
Ann Berry (05:30):
And what does that translate into numbers wise? You're the CFO, I'm sure you look at return on investment analysis for CapEx like this. When you are seeing this automation happen, what does that mean in terms of productivity and actually specific numbers for margin uplift?
Adam Rymer (05:44):
Yeah, so we believe we can drive really great returns in our new restaurant openings. Those returns are on par with our overall unit economic model of our new stores and what they return from what we've shown in the past that's in that 50, 60% range from year one, year two cash on cash return. And so these devices are right in line with that. What we're still going through, what we call the stage gate process to ensure that we get the right benefits from these is when we actually go into our existing restaurants and retrofit them to hold these new devices. There's a little bit of more of a cost associated with that. So we want to ensure that the benefits we're going to get that I detailed just a second ago are truly going to be there in those as well as what other benefits could happen because right now we're focused on the labor efficiency, but we believe there could actually be a top line benefit as well as a potential lower turnover, higher retention from the crew benefit as well. And so we're keeping a close eye on those, but I'm hoping that pretty soon here that we'll be rolling them out to more and more existing restaurants and to be able to get on a retrofit program in the future.
Ann Berry (06:47):
Let's talk about some of the things that you've been doing to get revenue uplift, Adam. One of those is focusing on your portion sizes. That's something that caught the headlines a lot. Talk to us about what's been going on with your portion sizes over the last 12 months.
Adam Rymer (07:00):
Yeah, so about a year ago, I guess it was about nine months ago at this point, there was some attention around, okay, are there certain locations within Chipotle that might not be giving the ample portion ation,
Ann Berry (07:11):
Right?
Adam Rymer (07:12):
Yeah, exactly. And so the way that we looked at it internally is Chipotle has always been known from a value standpoint, both from a whole ingredients, but also a ample amount of food. And it's funny, a lot of the people that I've worked with, I always ask them the question, where did you learn about Chipotle? How did you discover the brand? And it was usually at a young age in high school or in college, and it had to do with the amount of food you get for the money. And so it's something that we've always leaned into over time. And so when we got some comments on social media and a couple other areas that there might be some outlier restaurants that weren't quite giving these full portions, we really did a deep dive internally to understand this trend and found in maybe five or 10% of our restaurants there were some opportunities to increase the amount of portions that we were given.
(07:58)
So we made a huge investment internally to get these outlier locations more in line with where they should be. And as a result, this investment does is detailed on the last few earnings calls, about 50 or 60 basis points of additional cost to our cost of sales and something that we're going to look to offset not through price, but through efficiencies that we can drive in the back of house with some of these things that you've talked about in terms of equipment and things like that, as well as some supplier diversity and different things like that, some supplier diversification. So we're really leaning in heavily and trying to offset that expense, but we believe for the value proposition that Chipotle offers, it's definitely the right thing to do for our guests.
Ann Berry (08:38):
How does mobile ordering tie into some of the revenue uplift you've seen? I'm curious what percentage of orders now are placed on the app?
Adam Rymer (08:47):
Yeah, about 34, 30 5%. So somewhere in that mid thirties of our sales are coming through our digital channels, so this would be through our app or through marketplace apps like DoorDash and Uber as well as catering. And so what we've seen especially around, I mean that number really spiked during Covid since then, it's kind of settled in that mid 30% range. And it's really just offered in another amazing convenience for our guests, whether they're coming into our restaurants to pick it up themselves, going through a Chipotle in one of those locations or ordering our food through delivery. And I think that convenience has really just been another layer of growth that we've been able to add to Chipotle all these years.
Ann Berry (09:27):
And how much margin are you gaining or losing through that delivery model? If I think about the delivery fees, how are you handling that?
Adam Rymer (09:34):
Yeah, so we really manage the business so that we're getting a similar margin on a delivery order than we're an in-store order or an order edit order. So we price everything appropriately so that the channel and the expenses of that channel really are reflected in the price point of that channel. So we've done a good job of balancing that because we don't want to prefer one side of the business more so than another or run the cost of one channel into another. And it's similar ethos as to why steak for example, is priced at a higher price point than chicken. So we use that same type of format within our digital channels.
Ann Berry (10:08):
When I look at some of your peers Sweet Greens, an example that springs to mind, they made a strategic decision to try to automate almost completely the fulfillment of orders that were placed online. Is that something that Chipotle is considering as well?
Adam Rymer (10:21):
I think we'll only do that on the digital line. And the reason for that is because we really love the experience that you have when you come through the line at Chipotle speaking to an actual employee, having that conversation as you work through the line, seeing the food in front of you that's ready to be served, as well as the food behind that line being cooked on our planche and everything kind of happening live in an open kitchen type of format. So I don't believe from an in-store experience, you'll see any of that automation come through in terms of a serving of the actual food. However, for that 35 or so percent of our business that comes through digital, there are a lot of opportunities there where we can automate that line that we're working on right now.
Ann Berry (11:01):
Let's talk about the same store sales guidance that you provided in the earnings. Adam, it was a little bit weaker than was expected by analysts, and we saw the Chipotle share price drop off a bit as a result of that. And you've had a great run. You have had a great run in your share price and they have a strong earnings, but that outlook seemed to make the analyst community, at least the investor base, a little bit nervous. What's your response to that? What do you think of that reaction?
Adam Rymer (11:27):
Yeah, it's been an interesting start to the year for the industry. And I say that because there was a few things going on. First was the calendar shift, and so New Year's Day and Christmas Day fell in the middle of the week versus in the year before. It fell earlier in the week. So with New Year's Day fall in the middle of the week, that kind of pushed the back to work, back to school several days to even a week depending on where it is that you work or what college or university or even high school that you attend. All of those got pushed a little bit. So that kind of created a tough start to the year. And then we had weather event after weather event after weather event that affected Chipotle as well as affected the entire industry. And so you probably heard in the earnings call, I called out about a 400 basis point headwind, so 4% detriment to our sales in January just related to weather as well as a little bit related to the calendar shift, and then an even smaller amount related to the wildfires that we had here where I'm in California.
(12:22)
And so those items created just a really tough start to the year. And then as we started to push kind of our underlying trend forward, we'd also recognize that Easter, for example, is pushed a little bit later this year. Last year it was in March this year it's going to be in April. There's something about Chipotle and the burrito season as we call it, where our sales step up every single week throughout February, March and April. One of the big triggers for that spring seasonality is in fact Easter. And it is crazy. The busiest Monday that we'll have in the entire year is the day after Easter. And so there's just something funny that happens with Easter and really pushing the seasonality up. And so when Easter gets pushed a little bit later in the year, that causes that delay to happen as well. And so the way we looked at it is we had a couple of these headwinds, really tough start as it relates to weather as well as some of the things outside of our control as well, like Easter being pushed a little bit later, that caused us to want to bring that expectation down just because it's going to be a slow start to the year.
(13:19)
But on the flip side, couldn't be more confident in our marketing plan that we have this year as well as our limited time offer plan. So we're really excited about once these factors outside of our control subside that we've got a really strong plan for the year we can drive positive transactions for yet another year here at Chipotle. Do
Ann Berry (13:35):
You have any idea why? Look, with all the data that you collect, right, with your sophistication around mobile, why is Easter peak burrito season?
Adam Rymer (13:43):
Yeah, it is something, I've been with Chipotle for a really long time, 16 years now at this point. And it's something that we talk about a lot internally, especially when others join the brand from wherever they were before. And it's always top of their mind. And the way that we kind of look at it is as daylight starts to stretch a little bit longer, patios are starting to open up. People want to get out and about more. There's something about Chipotle that makes them want to eat at Chipotle more and more. And so we do peak from a seasonal standpoint somewhere in that April early May timeframe and then settle in slightly lower than that in the summer. But there's just this pent up demand for getting out and about and actually join daylight and warmth. I think that just makes everyone want to come to Chipotle during that time. And it's something that we followed not only the 16 years I've been here, but the 30 plus years that we've been in business.
Ann Berry (14:32):
It's interesting actually because it sort of speaks to the weather, and that makes me think a little bit about your international growth strategy and the climates of the kinds of countries that Chipotle is growing into. You are in Canada, you are in the uk, you are in France, Germany, and Kuwait currently. Are there any other international markets that Chipotle is targeting for expansion into?
Adam Rymer (14:52):
No, no. I think you nailed it at this point. We've been in Europe for over 10 years or so. We've been in Canada about that same amount of time, and so we've really grown that presence. And then more recently over the last few years, we've entered the Middle East through a partnership with the chea group, which has gone really, really well. I think we're up to about four restaurants at that point at this point, and is looking to grow that even further this year.
Ann Berry (15:12):
No plans for Asia?
Adam Rymer (15:14):
Not at this point. It's definitely what I would consider one of those top tier markets in terms of what would potentially be next, I think we mentioned that on the call as well as potentially Latin America. So we're looking at it certain areas where we know the Chipotle brand will resonate well, as well as areas where if we don't want to enter from a company owned perspective like we have in Canada as well as Western Europe, if we were to enter with a partner who are the best partners and where are they operate, that's what we saw with the chea group, partnering them let's a really great match. And so we're looking for that top tier market as well as those top tier partners that we can enter either with a joint venture or a more licensed approach like we did in the Middle East.
Ann Berry (15:55):
You just said something that caught my attention too, which is that you are owned and operated in Canada, north America, in Europe. You're actually the only restaurant company of your size that operates on that model. Others are using a franchise model. Why have you stuck to the owned and operated model in North America?
Adam Rymer (16:12):
Yeah, it's really such a position of strength for us. I mean, first and foremost, it comes down to our food and us being able to control our supply chain, really ensuring that we over that time, made so many significant investments in our food to be able to get to 53 real ingredients in our food. Took a lot of investment even at times where it felt like, okay, this is going to increase the cost of our sales, but we're going to play the long game on this because we believe it's the right thing to do for our customers. We believe it's the right thing to do for the flavor profile of the food and the franchise system. That's a much tougher argument to make. That was one of the early strengths as we're looking to it now. One of the things that we'd love to talk about is our opportunity within each of our restaurants.
(16:53)
So when you own your own restaurants, you have the ability to create an amazing career path. We called this out on the last earnings call and we talked about, we now have five of our regional vice presidents, and this is a position that oversees five, six, or 700 restaurants that started as crew members. And so the most entry level position at Chipotle moved their way up. To be able to oversee that many restaurants is truly remarkable and can only be accomplished when you own and operate your own restaurants. So that's just a couple of examples where it really shows the power of being able to create those internal drives that it would be really difficult in a franchise system. So I could go on and on, but we believe it's a very, very big position of strength to be able to own and operate our restaurants and make those decisions for our restaurants as well as provide those opportunities for our crew.
Ann Berry (17:43):
And then just a really big picture question for you, Adam, which is around the overall company strategy. Well, we see a day where Chipotle acquires or launches completely new brands. And the reason I ask that question is we have seen new formats come at least to the US market, whether it's Sweet Green, that's been very successful, whether you've got Carver, which is bringing Mediterranean food to the market, could we see you guys buying brands like that or launching non-core Chipotle formats?
Adam Rymer (18:10):
It's possible, but it is not the primary focus. I mean, right now we've got about 3,700 restaurants just in North America. We believe we can get to over 7,000 restaurants, so we're only about halfway to our runway in terms of North America. And then when you look at Europe and elsewhere, we're just getting started because we have dozens of restaurants and we could potentially have thousands, so we have a ton of runway ahead of us. But with that said, it is possible we always keep an eye on what is out there in the market. You may have read, we've recently invested in a concept called Brassica out of Ohio. Really interesting take on Mediterranean, really delicious. I've been there a couple of times because we have an office in Columbus, Ohio where they're based. And so we took a minority investment and we're really excited to see where they take their concept from here, because I believe they only have six restaurants or so. So I won't rule it out. But our 100% main focus right now is to continue to grow the Chipotle brand.
Ann Berry (19:05):
We're going to wrap with three rapid fire questions for you, Adam. So tell me if you're ready.
Adam Rymer (19:12):
Sure.
Ann Berry (19:13):
Question number one, avocado tariffs. Are they really going to happen at the end of the day, yes or no?
Adam Rymer (19:20):
I'm going to say no.
Ann Berry (19:22):
Is that a no? Or hope though? Let's give for a second one. Which company that is not Chipotle do you most admire?
Adam Rymer (19:33):
I have to go with Apple.
Ann Berry (19:34):
Okay, why?
Adam Rymer (19:37):
Just the more I think about it, the more integrated my life, my kids' life at work, all of these devices, how they work together and how much I rely on them is truly amazing. But they create products that are just so intuitive, so simple, and so you have to respect what they've created in that form. So yeah, it's just such an amazing company.
Ann Berry (19:59):
And final question. If you had to eat one Chipotle dish for the rest of your life, what would it be?
Adam Rymer (20:05):
That's an easy question, and not a lot of people get it, but carnitas, it's one of our lower protein mix, but it's delicious. So if you haven't tried carnitas, take it from me. You have to try Carnita. It's absolutely been my favorite, my go-to all these years.
Ann Berry (20:18):
There we go. I know what I'm having for dinner tonight. Adam Ryer, chief and Agile officer of Chipotle. Thank you so much for joining. Come back. You want to hear how these new innovations are going, and particularly seeing that automated kitchen, we'll have to come and roam around one of your locations.
Adam Rymer (20:33):
Sounds great. Thanks for having me.
Ann Berry (20:35):
I'm Ann Berry. Thanks for tuning into After Earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, and share with your friends. Upcoming episodes will feature CEOs and CFOs from Visa at t and many more. Come back and we'll see you soon.
