Chipotle Warns of New Competition From Ghost Kitchens
Restaurant may close locations due to stringent legislation and could violate a federal deferred prosecution agreement.
February 12, 2021
With 2,724 stores in the U.S., Chipotle (CMG) is warning investors about a new threat to the restaurant industry that has no physical locations. In its 2019 annual report, Chipotle identified a growing list of competitors:

“We also compete with a number of non-traditional market participants, such as convenience stores, grocery stores, coffee shops and meal kit delivery services.”

In its 2020 10-K, Chipotle adds a new competitor with the potential to disrupt:

“We also compete with a number of non-traditional market participants, such as convenience stores, grocery stores, coffee shops, meal kit delivery services, and “ghost” or dark kitchens, where meals are prepared at separate takeaway premises rather than a restaurant.”

The global pandemic, according to industry trade publications, pulled five years of ghost kitchen growth forward. Forecasts suggest ghost kitchens could be a $1 trillion global market by 2030. Hyperbole surrounding the industry is thick— some predict ghost kitchens are the future of the restaurant industry— but ghost kitchens are attracting significant investment capital. Uber founder Travis Kalanick has reportedly invested $130 million in 40 ghost kitchen locations.

Powered by marketing that promises anyone can launch a restaurant in one month, ghost kitchens lower the barrier to entry. They’ve gotten Chipotle’s attention which means investors would be wise to pay attention as well.

Separately, Fair workweek legislation, which requires some employers to provide workers with predictable work schedules as well as compensate them for last minute changes, is spreading quickly in the U.S. In its 2019 annual, Chipotle cited fair workweek legislation as a risk but one that was contained mostly to New York:

“...several jurisdictions including New York City have implemented Fair Workweek (or Secure Scheduling) legislation, which impose complex requirements related to scheduling for certain restaurant and retail employee…”

In its 2020 annual, Chipotle indicates the legislation has gained momentum and has spread to major cities throughout the U.S.:

“In addition, several jurisdictions, including New York City, Philadelphia, Chicago, Seattle, Oregon, San Francisco and San Jose, have implemented fair workweek legislation, which impose complex requirements related to scheduling for certain restaurant and retail employees.”

Though Chipotle does not quantify the costs, it says new legislation— including fair workweek— could cause it to close restaurants in jurisdictions where such requirements are imposed.

Lastly, In April 2020, Chipotle signed a Deferred Prosecution Agreement (DPA) to settle a criminal investigation into company-wide food safety matters that occurred dating back to January 1, 2013. Chipotle paid a $25 million fine and is required to maintain a comprehensive compliance program designed to ensure it abides by food safety laws. If Chipotle complies for three years, the federal charges will be dismissed.

Until then, Chipotle says complying at all 2,700+ locations will be difficult and warns it may violate the DPA which could cause the Department of Justice (DOJ) to levy penalties that harm shareholders:

“If Chipotle is found to have breached the terms of the DPA, the DOJ may elect to prosecute, or bring a civil action against the company for conduct alleged in the DPA’s Statement of Facts, which could result in additional fines, penalties, and have material adverse impacts on our results of operations. In addition, further action by the DOJ may significantly and adversely affect our brand and reputation, especially in light of our highly publicized food safety incidents in 2015 – 2017.”
Related: MCD, DRI, SHAK, WEN, CBRL, BLMN
Become a DuDil Insider

Get our due diligence alerts before they're published & be first to know.