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The second food-prep line gives Chipotle a 'huge advantage' in deliveries, CEO says

Key Points
  • Chipotle's additional prep lines have helped the restaurant chain handle increasing demands for online and delivery orders, CEO Brian Niccol tells CNBC's Jim Cramer.
  • "We have a second line [where] we do all of our digital and off premise orders. So the fact [is] that this front line ... doesn't get bottlenecked as a result of, you know, all those occasions," he says in a "Mad Money" interview.
  • "It comes from the same kitchen, it's made fresh to order, and it doesn't have to interfere with that in-store experience. And I think that is a huge advantage that we have, and that's really what we've built from," he says.
VIDEO1:2401:24
Chipotle execs talk deliveries, supporting farmers, bounce back from food issues

Updated operations in Chipotle Mexican Grill restaurants have allowed the eatery to turn a profit on its delivery initiatives, CEO Brian Niccol told CNBC's Jim Cramer on Thursday.

The food franchise beginning last year bolstered its operations by adding secondary prep lines dedicated to fulfilling out-of-store orders, which effectively allowed the business to divide and conquer service for in-store and remote orders.

"We have a second line [where] we do all of our digital and off-premise orders," Niccol said in a "Mad Money" interview. "So the fact [is] that this front line ... doesn't get bottlenecked as a result of, you know, all those occasions."

Like many establishments, Chipotle partners with third-party delivery services including DoorDash and Postmates to provide delivery to customers at 95% of its locations. While food delivery is far from a new phenomenon, consumer appetite for convenient food service has made both the digital and delivery business more important to restaurants. About $10 billion was reportedly spent on delivery services in 2018, a 42% increase from the year prior, according to Technomic data.

Unlike other establishments, as Cramer noted in the interview, Chipotle has been able to expand its gross margins in the delivery and convenience categories as the gross margins at other restaurants face pressure. Gross margin is net revenue minus the cost of goods sold.

"Delivery, digital ordering, the Chipotlelane where you can pick [orders] up now in your car — that all happens on a separate line," said Niccol, the former Taco Bell chief who took over as Chipotle head from founder Steve Ells in 2018. He is credited with steering the chain out of years of food-borne illness controversies.

"It comes from the same kitchen, it's made fresh to order and it doesn't have to interfere with that in-store experience. And I think that is a huge advantage that we have, and that's really what we've built from."

Research firms such as Angus Research and Wedbush have praised Chipotle for its use of separate prep lines and third-party delivery platforms to handle online ordering. Chipotle posted 11% same-store sales growth in its quarter ending September along with almost 88% growth in digital sales, which made up almost one-fifth of its quarterly sales.

Chipotle brought in $1.4 billion of revenue and produced $3.82 in profit per share in the third quarter.

Chipotle's second make-line strategy resembles what's referred to as ghost or virtual kitchens. In order to address their margin challenges, some restaurants are implementing ghost kitchens into their business models to handle rapidly increasing delivery demands sparked by the rise of delivery apps such as UberEats and GrubHub.

Domino's Pizza is one company that has stayed away from partnering with the third-party aggregators in favor of making its own deliveries to its customers. CEO Ritch Allison has said the pizza chain has a "very strong and profitable delivery business," but he has admitted that the businesses have put pressure on Domino's domestic same-store sales growth as it forces more competition from restaurants outside the pizza category.

Chipotle shares are up about 90% to $819.73 year to date.

VIDEO12:1412:14
Chipotle execs talk deliveries, supporting farmers, bounce back from food issues

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