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Chipotle CFO: Supply chain will always be a challenge for us

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman speak with Chipotle CFO Jack Hartung about the launch of the company's first digital-only location, future outlook, and much more.

Video Transcript

BRIAN SOZZI: Chipotle had just cooked up its restaurant of the future, and it's very digital friendly. Chipotle CFO Jack Hartung joins us now with the details. Jack, I'm so used to talking to you on earnings day. It good to see a not on an earnings day. Take us through this digital restaurant. No indoor seating. Where is it? Is this a look into the future of what you might roll out across Chipotle.

JACK HARTUNG: Yeah, so it's in Highland, New York. It's very close to the military base out there, West Point, and we're very excited about it. And you know, actually, this was in the works well before the pandemic, so that gives you an idea of how we are thinking ahead in terms of what digital could be for us in the future. But you need trade area, and the trade area calls for a lot of meals that are going to be, you know, brought either through delivery or carry out to the base. And so we found this site, and it was the perfect site for us to offer a digital only, you know, format like this.

And the cool thing is we also expect there will be a lot of large catering orders, and we have a separate entrance. So if you're a delivery driver or if you're a customer that wants to get a big delivery, you know, of the catering, there's a separate access point for that. So it'll be an easy in, easy out, it's right adjacent to the parking, so. And we're excited about this, because it just gives us another option in what we think is a growing option up different restaurant formats to open up to serve our customers in the best way possible.

MYLES UDLAND: And, you know, Jack, we were just chatting before the break, you mentioned this was kind of in the works before the pandemic. It feels like it's a pandemic response, but this is--

JACK HARTUNG: I know.

MYLES UDLAND: Something you've been thinking about, and you know, the business has really emphasized the digital ordering channel and the app over the last couple of years. Is this a natural outgrowth of that, or does it kind of work in reverse, where you saw this concept coming, and you said, hey, we've got to improve our digital channel before this is going to work.

JACK HARTUNG: You know, I think it's a combination of the two, and the way I would describe it is what digital has done, and remember, digital was growing at about 100% rate even before the pandemic. With the pandemic, digital grew 3x, so it's tripled. But we saw how customers were responding to digital, whether it was order ahead and pickup or delivery. Certainly, the Chipotlanes, big response to the Chipotlanes. And so what this is it's the, I call it the beginning of us stretching our restaurant formats.

And so I wouldn't say this is going to be now where we're going to build everywhere, but what it does, it gives us another option in this whole kind of inventory of new sites that we can build. I would expect to see us build other digital only sites that also have a Chipotlane, for example. This one doesn't. We weren't able to find one in this area with a Chipotlane, but that's another option for us. I think there's another option where we could maybe expand and have a small dining room. But I think what it allows us to do is go into unique trade areas, understand what the customer is looking for, and then based on the real estate availability, find exactly the right site and the right offering, and I think it's going to be a wide range of things that we can offer to our customers.

JULIE HYMAN: Hey, Jack, it's Julie here. I want to turn to your numbers and costs in particular. I'm always interested in talking to you guys about the supply chain in particular, because you all have different requirements for your ingredients than some other restaurant chains. I, for example, visited a Niman Ranch pig farm years ago that was supplying you guys with meat. What are you seeing on that front right now? Because of the way the dynamics have been affected by the pandemic with home cooks buying a lot more and by and large food service ordering less, what's that done to your costs?

JACK HARTUNG: So Julie, listen, I am told that you were at a Niman Ranch, you know, farm years ago, so you kind of what we really do. We spend time on the farms. We cultivate relationships with, you know, a lot of small farmers. Our supply chains always been a challenge, and you know, you might remember a few years ago, we actually ran out of pork. Well, we didn't run out of pork, we found it harder and harder to find farmers that would raise the pork the way that would follow our protocols. And so we've always had this challenge of as we grow to have this very unique and very special supply chain keep up with us.

The pandemic has made it more challenging, obviously, because it's put pressure on the farmers, it's put pressure on suppliers. I have to tell you though, our supply chain team, led by Carlos Londono, has done a fantastic job that with our normal challenges of having our supply chain keep up with our growth and then the pandemic thrown into it, we've had very little outages. It's been spot outages here or there in a restaurant here or a patch there, but no widespread, you know, challenges.

Now going forward, we're constantly, with the pandemic or not, we're constantly working with trying to work with our suppliers and farmers to grow with us. We're looking for additional farmers and suppliers to bring on board. And so that's always going to be a challenge, because as a growing company, we've got to make sure that supply chain grows with us. And so, so far so good, but it's not anything we're going to ever sit back and think, OK, we've conquered it now. It's always going to be something we'll focus on.

BRIAN SOZZI: Jack, it's been a, to put it mildly, it's been a crazy year for the restaurant industry with COVID-19. Now, there's talk of a potential nationwide lockdown for four to six weeks. In your view, what would that do to the restaurant industry, and what would it do to the Chipotle?

JACK HARTUNG: Well, listen, first of all, it's sad, because there's a lot of restaurant companies out there, and in fact, what I worry about most is the independent restaurants, OK? The entrepreneur who's a chef and a passion was to open a restaurant, and they're going to be the hardest hit. They already had been the hardest hit. They're going to continue to be the hardest hit. They just don't have access to the capital. In most cases, most of their business is dine in, so they don't necessarily add the digital experience that we have. They certainly will offer delivery, but those are going to be a very high fees, and so that's sad to me. For somebody in this industry and has spend spent this much time, I don't like to see that happen.

From a Chipotle standpoint, I think we're well positioned, Brian. You know, we saw when the pandemic first started back in March and April, our digital business grew 70%. So overnight, it went from 20% to 70%. So and our customers now have learned about all the access points from order ahead and pick up, the Chipotlane, the delivery channels, and we've got relationships with all the major delivery aggregators. So Chipotle will be fine, and plus, you know, we've got the financial wherewithal on the balance sheets, you know, to get through this.

But I worry about the small guys. I really don't want to see, while it's a competitive industry and we want to win, we want continue to grow, everybody needs to eat, and there's room for all restaurants, the independents, the small, the up and coming, and Chipotle as well. So I think it's going to be tough on the restaurant industry. Hopefully this news that we got earlier this week on the vaccine will come sooner rather than later later, and we can look beyond this pandemic.

BRIAN SOZZI: You know, Jack, in the 30 seconds we have left, how has the business been trending since we spoke a couple weeks ago? Since we spoke, look, now we're seeing more lockdowns in many states.

JACK HARTUNG: Yeah, listen, it's too early, Brian, for us to tell you. We're still in the middle of the quarter, but people do tend to be a little bit more cautious. You know, they'll channel shift, so for example, if they had been coming to the restaurant before, maybe don't switch to an order ahead or a delivery. You know, generally, our business, because we've got these different channels, you know, is going to hold up OK. But generally, yeah, people are not, they don't like to go out and about when the government is talking about shutdowns and shutting down dining rooms and the pandemic is, you know, growing. That's when people are, you know, that they listen, they hunker at home more than ever before, so.

BRIAN SOZZI: All right, let's leave it there. Chipotle CFO Jack Hartung, always good to see you. Stay safe, and I'll talk to you soon.

JACK HARTUNG: Thank you, guys.