Chipotle Mexican Grill Inc (NYSE:CMG) Q3 2020 Earnings Conference Call - Final Transcript
Oct 21, 2020 • 04:30 pm ET
[Operator Instructions] Our first question will come from David Palmer of Evercore ISI. Pease go ahead.
Thanks. Jack, you mentioned two things. One was how COVID-related costs were hurting margins. Could you lay that out how you expect those to taper off? How many basis points of margin is that? And then also just when it comes to the inevitable tapering off of mix on digital, how do you see that playing out in terms of your margins for next year? So for example, if the sales were flat to this in third quarter of '21 and the digital mix was, say, 25% versus roughly 50%, what impact would that have on your margins as well? Thank you.
John R. Hartung
Okay. Thanks, David. Let me take the first one first. When we look at the direct/indirect costs that we can identify related to COVID, there's about 100 basis points of margin drag. There's direct costs that we mentioned in the script, for example, that talk about this is COVID pay when people are excluded. They either have been exposed or they tell us that there's a family member that tested positive of may have been exposed. We pay those people to not work. And so that is a piece and that's the most direct piece. There's also things like during this process as new customers have come in and they've shifted to digital, there's a higher mix with steak. And steak is a lower margin than chicken. People are buying more burritos and this is something that 100% due to the digital channel. We're bringing a lot of new customers into this digital channel. They're starting their journey with Chipotle with burritos.
And also, the other thing that we know that our customers tell us is that the burrito travels better with a bowl so they're buying more burritos. They're also adding tortillas in digital as well. And until recently those were free. And we've had fewer beverages. We only, David, have about 5% of our customers. Even though 50% are coming in the restaurant to order, only 5% are staying in the restaurant and so they're buying a lot fewer beverages. So those are the direct and indirect impacts that we're seeing. And they have about a 100 basis-point impact. Hard to tell how these will cycle in and cycle out. Some of these things we can control like we can stop giving away free tortillas. And if somebody wants to buy the tortilla, they can pay a slight premium of $0.25. Other things like steak mix we're going to have to watch and see how that plays out.
In terms of looking forward a year from now, really hard to answer that question. I will tell you this: It all depends on delivery. Delivery is the channel that attracts a premium. And the way I would think about this is, our margins were hit and the other line item, other expense line item, was hit because we had about a 15%