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Chipotle’s New Menu Item Could Create a Worse Queso Scenario

Kirsten Korosec

Chipotle Mexican Grill has a queso problem that could have a spillover-effect on sales, analysts at RBC Capital said Friday in a research note.

RBC Capital lowered its price target for Chipotle 17.% to $330 due to higher labor costs, rising avocado prices, and slower same-store sales in the second half of 2017, in a research note entitled “Worst Queso Scenario.”

Chipotle stock was trading at $323.46 at 1 pm ET.

Avocado prices have been noted as a hurdle to Chipotle’s recovery before. Now the spicy cheese dip is threatening the quick-serve chain’s recovery. Chipotle has been working to repair its reputation after E. coli, salmonella, and norovirus outbreaks in 2015 drove consumers away.

Chipotle introduced queso to its menu in September after testing it in hundreds of stores in Colorado and California. Chipotle's version is a spicy cheese sauce meant to be used as a dip for chips or added to a burrito.

The restaurant chain’s new menu item prompted RBC Capital analysts to reduce same-store sales estimates for the third quarter from 2.5% to -1% after evaluating comments on social media platforms like Twitter. RBC expects positive trends in the fourth quarter, however.

“Our reduced estimates for Chipotle’s 3Q and 4Q SSS (same-store sales) growth are supported by our analysis of search engine trends and social media comments, which imply that user sentiment around queso, which launched nationally on September 12, weighed on Chipotle’s overall brand sentiment,” analyst David Palmer wrote in the note.

Queso might inconsequential to the company’s sales. But consider that, on average, adding the dip will set customers back $1.25, while a large side of the dip will cost around $5.25. If the queso was as popular as say, McDonald’s Szechuan sauce, it could have had a significant effect on Chipotle’s bottom line. Chipotle has 2,300 restaurants.

RBC Capital analysts haven’t abandoned the queso--and its ability to drive sales--altogether. Palmer noted that third-quarter results will hopefully reveal whether queso has the potential to drive incremental trial and frequency and if adjustments to the product or its execution are necessary.

RBC also expects Chipotle to raise prices by the end of the year in select markets. The company already raised prices 5% earlier this year in 440 of its 2,300 stores.

"We expect to see a similar level of pricing phased in beginning in late 2017 and through 2018, which could potentially result in an effective price increase of 2% to 3% next year. "

Read more about how the company developed its queso recipe from a story Fortune ran in July, when the dip first made its way into Chipotle's test kitchen.

See original article on Fortune.com

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