CMG
We are hosting a CMG call on Tuesday, November 22nd, @ 12:30 PM EST.
I recently learned about this term called 'quiet quitting" from an article in Forbes where the CFO of CMG said it is his biggest economic concern. Quiet quitting is where you're not outright quitting your job but quitting the idea of going above and beyond. You're still performing your duties, but you're no longer subscribing to the hustle culture mentality that work has to be your life. Quiet quitting, in other words, is not really about quitting. It's more like a philosophy for doing the bare minimum at your job because your work environment can be unrewarding. The post-pandemic life for many workers in the restaurant industry has been so toxic it has become a productivity issue. For a fast-paced, high-achieving company like CMG, a slump in productivity can slow throughput, which is critical to the company's future success. To be clear, this is a cultural issue and not an employee problem.
CHIPOTLE (CMG) SHORT THESIS:
- THROUGH THE LENS OF INCENTIVE COMP: In September 2018, we did a LONG Black Book where we praised management for the incentive comp structure as the best way to drive shareholder value - growing same-store sales and margins. Since 2018 same-store sales have grown 9.1% annually; restaurant-level margins have improved 530bps, and earnings have increased from $8.00 to $29.00. In 2022, the company raised prices aggressively, reaching 15% in 4Q22 to protect its incentive comp. Is management pushing the envelope too far on food and labor? Labor unrest is starting to build with the pressure to stop unionization and the economic reality of "Quiet Quitting." Concerns about food quality are also on the rise.
- CMG LABOR PROBLEMS: CMG has improved labor costs by 240bps since 2018, despite significant labor inflation; strong SSS growth (and price) over the same period has helped to leverage the fixed costs. While the company has seen significant labor leverage, investing in labor may be needed, as the CFO's most significant economic concern is "Quiet Quitting." Experts believe "Quiet Quitting" is about "bad bosses and not bad employees," therefore, it appears the CMG c-suite is to blame as they have not invested in its labor force. As the CFO said, "The labor market has been a challenge, as we all know, there's historically low unemployment, you've got this thing called quiet quitting. It's harder to keep young folks in a restaurant engaged in the current business." This issue is just one of many signals that CMG's excessive focus on growing margins by cutting and not investing in labor costs is hurting the business. The fix could be hundreds of BPS of labor margin pressure over the next few years.
- THE LTO TREADMILL: CMG's LTO's success can be attributed to the company's thoughtful "stage gate" process. That said, after five years and ten+ new products, that strategy is getting increasingly ineffective. The recent failure of the BOORITO LTO is the second example in a month of how CMG is now on the LTO treadmill. The price of the BOORITO LTO has gone up over the years; from Free in 2016 to $3 in 2017, $4 in 2019, and $5 for the online-only promotion in 2021, and now in 2022, it was $6. In the early days od\f the turnaround, the company led with what consumers were asking for; I don't believe consumers are telling the company they wanted Garlic Guajillo Steak on the menu. Or is it that food costs have declined 240bps since 2018, and the food quality is not as good?
GIG Labor Inflation
NYC's Department of Consumer and Worker Protection proposes a $17.87 minimum wage for delivery bikers starting January '23, increasing to $23.82, adjusted for inflation, by April '25. The pay scale is mandated by the local law that was enacted last October and will be the subject of a public hearing on December 16. This won't go down without a big fight.
Key findings from the report include:
- More than 60,000 New Yorkers perform deliveries for a restaurant app on any given week.
- 58% are between the ages of 18-34, 75% are male, and 91% are non-white or Hispanic.
- Workers typically perform deliveries using e-bikes, mopeds, cars, and, to a lesser extent, by walking.
- Restaurant app delivery workers’ pay is low.
- Workers earn an average of $14.18 per hour before expenses, split equally between payments from apps and tips.
- After expenses, workers earn $11.12 per hour with tips, and $4.03 per hour without tips.
- Delivery workers experience the highest injury rates of any industry in New York City.
- DCWP gathered reports of 33 delivery worker fatalities since 2020, including both app delivery workers and restaurant employees.
- 33% of app delivery workers who use e-bikes or mopeds have been physically assaulted while working for a delivery app and 15% have been injured in an assault.
- 29% of app delivery workers who use e-bikes or mopeds and 10% of app delivery workers who use cars have been seriously injured while working for delivery apps.
DPZ
DPZ is on Hedgeye's list of top "signal strength" managed by the CEO - Sales@hedgeye.com for more information
According to The Wall Street Journal, Domino’s Pizza (DPZ) has agreed with General Motors (GM) to purchase hundreds of EVs. The Journal indicated that the pilot program includes purchasing 800 Domino’s-branded Chevrolet Bolt electric vehicles for 37 locations owned by the chain and hundreds more franchisees. The new purchase aims to attract new drivers for the chain, as labor shortages limit the pizza delivery industry. In the second quarter, the labor shortage had reached the extent that Weiner said the chain was “utilizing call centers to ease constraints” for deliveries. According to Weiner, the measure allowed workers to answer phones and step away from stores to deliver pizzas. “Staffing remains a constraint, but my confidence in our ability to solve many of our delivery labor challenges ourselves has grown over the past few quarters,” CEO Russell Weiner told analysts during an October earnings call.
