×

Why it could be a big problem that some Chipotle diners consider the chain to be 'fast food'

  • Being labeled "fast food" by its customers could be damaging to Chipotle as it works to lure diners back.
  • Customers could be deterred from eating at the Mexican chain because its prices are so far above that of chains that are actually in the fast food category.
  • "I think Chipotle is much more fast food-like than casual dining, especially in urban locations where lots of people treat it as a grab-and-go option," Neil Saunders, managing director of GlobalData, told CNBC via email.

Chipotle Mexican Grill may have a perception problem — and it has nothing to do with bacteria or viruses.

The once-hot stock at its peak traded at more than $750 per share, but now changes hands at about $412, a drop of more than 54 percent from its high in 2015.

While Wall Street ties lackluster sales and dwindling customer visits to the chain's inability to come back from a string of food-safety incidents, the outbreaks may not be the only thing to blame.

In the eyes of its diners, Chipotle is often thought of as "fast food," a moniker that suggests quick service and low price. However, in the restaurant industry, Chipotle is considered a fast casual restaurant, meaning that it offers up a mashup of the convenience of a fast food chain and the quality and atmosphere of a casual, sit-down restaurant.

Chains like Chipotle promise customization, quick service and high food quality for a slightly steeper price than their fast food counterparts. But as diners walk in and order off a menu board like they would at a McDonald's or Taco Bell, they may miss the distinction. Most customers are grabbing their food and heading out the door, rather than sitting down and eating their meal leisurely as they would at the Cheesecake Factory or TGI Fridays.

If consumers continue to lump Chipotle in with fast food rivals, it will work against it as it tries to lure diners back.

Fast food restaurants are known for cheaper prices and value selections, with average checks ranging between $3 and $7. Because Chipotle has higher-quality ingredients and a fast casual business model, its average check is around $11, David Henkes, principal at Technomic, told CNBC via email.

For those who consider the chain a fast food joint, they could be deterred from eating at Chipotle because its prices are so far above that of other chains that are actually in that category, such as KFC, Subway or Burger King.

"I think Chipotle is much more fast food-like than casual dining, especially in urban locations where lots of people treat it as a grab-and-go option," Neil Saunders, managing director of GlobalData, told CNBC via email. "The dining-in experience in many branches of Chipotle is far from inspiring and, in some locations, the ambiance and layout actively discourages people from eating in."

And he's not the only one to think so. J.G. Collins, managing director of Stuyvesant Square Consultancy, wrote in a Seeking Alpha article that Chipotle is "not really fast casual."

"You order off of a steam table, carry a tray to your table and pay a high price, relatively, for doing so," he wrote. "That's not terribly different from what you do in McDonald's, when you think about it, although McDonald's is a bargain by comparison."

Where Chipotle beats its fast food counterparts is in food quality. In late March, the chain eliminated all additives from its tortillas, a step that made the restaurant preservative-free for all but its drinks.

"Although Chipotle has struggled with food safety and sales in the last 18 months, they continue to maintain high levels of food integrity and quality ingredients," Darren Tristano, a restaurant industry trend expert, told CNBC via email. "Although their format is fast, they are not in the same category as fast food giants like McDonalds, Subway, KFC or Taco Bell."

The beleaguered burrito chain has hit some hiccups in recent months, including a data breach that sent shares tumbling and a price hike that scared away diners.

In addition, the chain has invested heavily in marketing and promotions, warning shareholders that expenses for the quarter could rise as much as 0.3 percent. Despite this, the company said last month that it expects same-store sales to still be in the high single digits.

But analysts say there is still a risk for Chipotle stock because investors are looking for measurable progress when the company reports its second-quarter earnings on July 25.

"While we remain confident management has the right strategies in place to fuel a recovery in sales/profitability over time, we also believe the short-term risk profile on CMG is somewhat elevated," David Tarantino, an analyst at Baird, said in a research note Monday.

Technomic's Henkes said Chipotle needs to continue to "invest and stay relevant to the consumer."

"But I think it's a stretch to take some of their challenges and move them into a segment that is more value and convenience-oriented," he said.