If I Were a Chipotle Investor, I'd Hate This
Let's set the record straight: I eat at Chipotle every day. I love the fast-casual Mexican chain's fresh, healthful, sustainable, guacamole-licious burrito bowls.
I'm no Chipotle investor, though. I've noticed a problem in Chipotle's operations that doesn't bother me as a customer, but would give me major heartburn if I were an investor.
Guacamole costs extra. Is that OK?
That's the question I get asked every time I pass through Chipotle's fast-service burrito assembly line. I always answer yes, because I can't pass up Chipotle's guac.
There's a reason Chipotle charges $1.80 for guacamole, which ups one burrito's price by a whopping 30%—it's because guac is irresistible for customers and investors.
Customers love guacamole because it's delicious; investors love its high profit margins.
But what if customers are eating Chipotle's guacamole while keeping investors from profits?
93% of lunches are not free
Here's what I've noticed as a daily Chipotle customer: the cashiers, whether new or experienced hires, often forget to charge me for guacamole. I always correct the cashiers, but that hinges on my honesty and my knowledge of Chipotle's menu prices.
How many Chipotle customers will even notice when they're not charged for guacamole? If they do notice, are 100% of those customers honest enough to correct the cashier?
Based on my experience, I'm not charged for guac at Chipotle every 1.5 to 2 weeks. That's once every 10 to 14 days, or 7%-10% of transactions where I have to correct the cashier.
Of course I'm only a sample size of one. At the very least, though, my experience shows that Chipotle does undercharge customers. Whether it's 1% or 12% of the time, it does happen.
Economists love to say there's no such thing as a free lunch—how about at Chipotle?
Henry Ford would shake his head
The reason for Chipotle's under-charging errors, in my opinion, is related to the restaurant's assembly line service. Thanks to the miracle of economic specialization, Chipotle customers can hardly blink as several workers scurry to assemble their burrito.
Problems occur because the workers who assemble customers' burritos are not the cashier. They must relay the orders vocally to the cashier, who then rings up customers. It's easy to see how during a lunch or dinner rush, order details would be lost in translation.
Chipotle's cashiers are only human and shouldn't be blamed for guacamole pricing faux pas, but management should be. As an investor, I'd want this loophole closed ASAP. I'd want to know how often customers are undercharged, and what Chipotle's doing to fix it.
Foolish bottom line
With Chipotle's premium stock price (now trading at 157 times 2012 revenues), investors should expect the company to be operating at maximum efficiency. Chipotle may not be doing so, and may be leaving easy money on the table by undercharging its customers.
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The article If I Were a Chipotle Investor, I'd Hate This originally appeared on Fool.com.Glenn Singewald has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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