Chipotle’s $50 million search for the future of fast food

Chipotle is testing out an autonomous kitchen assistant, Chippy, which offers a robotic solution for making chips in restaurants.

Courtesy: Chipotle

The lengthy lunchtime lines at Chipotle Mexican Grill waiting to order could serve as a good metaphor for Chipotle’s approach to investing in innovation: though you may have to wait a bit for results, the taco and burrito brand is fostering technology from all over the world that’s going to change the way restaurants run and customers think about food.

It’s not exactly a new sentiment from the company. Chief technology officer Curt Garner notes that Chipotle, inspired by Uber, first went digital in 2016 with its app and then quickly built space at each of its restaurants so employees wouldn’t ever have to choose between serving customers standing in front of them versus those who ordered digitally. But investing in globe-altering innovation took on new meaning for Chipotle in April when it launched Cultivate Next, its $50 million venture fund intended to soothe the margin-squeezing pressures of the restaurant sector, tackling challenges from labor shortages to rising food costs and enticing customers to spend more time eating in their stores.

“We’re thinking about how to grow and scale the company through a lot of lenses,” said Garner, noting that the fund represents an opportunity for Chipotle to evolve from merely adapting to technological change to creating it. “There’s restaurant growth, there’s growing and scaling our digital business and there’s also continuing the mission of cultivating a better world and changing the way people think about where their food comes from.”

Chipotle’s new venture fund could be a beacon for investors as the restaurant sector continues to fight significant economic headwinds. Analysts will be looking for concrete examples of Garner’s first two points — new tech that promises to streamline and expand Chipotle’s operations — when Chipotle reports its second quarter results on July 26.

Chipotle has generally posted positive growth numbers since 2016 when the chain was dealing with food safety scares — it experienced near double-digit systemwide sales growth between 2017 and 2020, according to Morningstar. But it’s not immune to today’s broader market downswing. While consensus estimates are calling for Chipotle to post second quarter revenue of $2.24 billion, up nearly 19% year over year, and quarterly earnings of $9.04 per share, up 21%, its stock is down more than 20% year-to-date.

“The trouble is on the margins side,” said Sean Dunlop, equities analyst with Morningstar.

While Chipotle and the restaurant sector have seen a slight softening of comparable store sales growth, the rising costs of food, labor and utilities combined with a trend of consumers venturing out of their homes less “is pinching Chipotle’s P&L,” Dunlop said, noting that the squeeze will likely last into 2024. Owner-operated chains like Chipotle and Starbucks may also be faring worse than franchised businesses because “they bear all those below-the-line costs themselves,” he added.

Another potential hurdle for Chipotle’s stock: unionizing workers. In early June, a Chipotle Mexican Grill shop in Augusta, Maine, filed a petition for a union election, the first of the chain’s restaurants to join the recent organizing push across the U.S. that has swept across companies from Apple to Starbucks.

A self-driving delivery robot provided the spark

Domino’s tests Nuro, an autonomous car for pizza delivery in Houston.

Source: Domino’s

“We found a lot of traction there in terms of synergies of culture and ideas and innovation and we wondered if there was an opportunity to expand our influence and become an accelerator of those ideas,” Garner told the Silicon Valley-themed Sand Hill Road podcast in May. Chipotle’s executive team found itself being pitched all kinds of ideas but had no formal funnel to sift through opportunities either as a supplier or partner, said Garner.

Record venture investment in restaurant technology — including hardware and software for restaurant management, bookings, staffing, mobile payments and inventory management — reached more than $4 billion in 2021, and it is on track to beat that this year. Hundreds of companies have expressed interest in Chipotle’s first round, which targets seed funds to series B startups.

Garner said Chipotle will announce its first picks in the next few weeks. Industry watchers say to expect Chipotle’s money to follow industry pain points.

“After the pandemic a lot of folks are making investments to modernize and improve customer experiences and doing things to take labor costs down and out of the operation,” said Eric Symon, vice president of the Enterprise Process Innovation Center at Panasonic System Solutions Company of North America.

Symon is seeing demand for solutions like Panasonic’s temperature-controlled smart food lockers that deter take-away theft and mix-ups, which tie up employees who have to remake orders. He is also seeing demand for artificial intelligence apps to help restaurant managers forecast busy times of day so they can better staff their shops.

To that end, Chipotle has already invested in an AI-powered labor management tool that analyzes dozens of variables like weather and available promotions to determine more efficient restaurant staffing. It’s also rolling out an AI-based training program, which helps restaurant workers to move up the ladder to management.

The labor of an automated tortilla chip maker

When it comes to the type of innovation that Chipotle is looking to foster, Garner nods to Chippy, a robotic tortilla chip maker that saves time and labor costs by handling repetitive kitchen tasks.

“It started with, ‘how do we remove some of the dreariness of a worker standing at the fryer and frying chip basket after chip basket?'” Garner said, noting that Chippy will be piloted at one Chipotle location later this year once it becomes certified as food safe. “It allows our crew to spend more time doing culinary tests, serving guests.”

Chippy might help Chipotle deal with the industry’s labor shortage, but ultimately what the company is aiming for with its venture fund is changing the world’s food systems.

“When you think about the environmental opportunities for how food is sourced and how it’s served, those are huge areas for technology to be accelerated and enabled,” Garner said, specifically pointing to environmentally focused farming techniques coming out of Europe. “Guests want to understand the provenance of their food and feel good about what they’re shopping for.”

Buying into sustainable farming practices will allow quick service restaurants brands better affordability of ingredients, a guaranteed supply, and the opportunity to offer customers something unique vs. competitors, said Sanjeev Krishnan, chief investment officer at S2G Ventures, a 9-year-old venture fund dedicated to supporting sustainable and healthy food systems.

“More interesting is that these quick serve restaurants can bring an era of biodiversity into our food system — ours is boring,” Krishnan said. “Just 15 crop plants provide 90% of the world’s food energy intake, with three — rice, maize and wheat — making up two-thirds of this,” he added.

Investment in non-meat protein products has ballooned over the past few years, with Chipotle, McDonald’s, Burger King and Dunkin all recently trialing burger and sausage substitutes on their menus. Many brands are extending plant-based experimentation to other product categories, and PitchBook Data tracks venture funding in a newish category: 3D bioprinting, which involves printing living cells, growth factors and other biomaterials to produce whole cut cultivated meat, according to the firm’s Q1 Foodtech Report. 3D food-printer companies logged $185.7 million in VC funding last year, it said.

When it comes to investing in higher-risk emerging technology, it may help to think of Chipotle’s role as akin to other companies’ R&D costs, according to Dunlop.

“Nothing is off the table,” Garner said. “One of the things that [CEO Brian Niccol] has brought to our culture is this idea that we have a lot of pride in what we do and very little ego. We can be proud of what we’ve done — like plant-based chorizo — but if someone out there has a cool idea, we want to hear from them.”

Source: https://www.cnbc.com/2022/07/07/chipotles-50-million-search-for-the-future-of-fast-food.html