Quesadillas And Milkshakes Are Filled With Risk For Chipotle

Historically, Chipotle Mexican Grill (NYSE:CMG) has been slow to roll out new menu items. The Chipotle formula worked so well for so long that there was little reason to tinker. But the food safety crisis of 2015 led to massive sales declines, and the fallout continues to plague the fast-casual chain to this day. With customer traffic slumping more than 3% in the first quarter, Chipotle's strategy clearly needs to change.

This article originally appeared in the Motley Fool.

New Chipotle CEO Brian Niccol, formerly the president of Taco Bell, has some experience rolling out new menu items. He's now bringing that expertise to the struggling chain. The New York Times reported on June 21 that Chipotle was testing five new menu items at its test kitchen in New York City, including quesadillas, nachos, chocolate milkshakes, avocado tostadas, and a new salad. The plan is to eventually roll these products out to more Chipotle locations.

Launching new products may seem like a can't-lose proposition. But after Chipotle's disastrous queso launch last year, the company absolutely needs to get this right.

A logistical challenge

During Chipotle's heyday, before food-borne illnesses ravaged sales, the restaurant chain was truly in a league of its own. In 2014, the company managed an operating margin of 17.5%. For a restaurant chain that doesn't franchise, that's downright amazing.

The simplicity and efficiency of Chipotle's model allowed for those incredible margins. Burritos, tacos, salads, and bowls all go down the assembly line, with no extra equipment or steps slowing things down. Quick service and reasonable prices were all it took to keep customers coming back.

With Chipotle now struggling to attract diners, these new menu items might be just the ticket to reinvigorate interest. But as the NYT piece noted, there are some challenges. Quesadillas have long been an off-menu item at some locations, with the tortilla warmer used as a makeshift grill. But that process takes a few minutes, slowing things down and breaking the assembly line flow. Nichols, in an interview with the NYT, summed up the problem: "We're not built right now to make a great quesadilla. The worst-case scenario is the person in front of you orders a quesadilla."

So quesadillas will require new grills to speed things up, and they'll require the company to figure out a process that isn't disruptive. Nachos should be simpler, but if they involve the company's not-really queso, they'll be a tough sell. Adding milkshakes to the menu makes sense, but again, that means new equipment and new processes.

None of these problems are insurmountable, but it will take time for Chipotle to figure things out. And if it rolls out these products too soon before working out the kinks, they could hurt rather than help sales.

Don't make the same mistake twice

Chipotle's queso hasn't done much to boost sales, and I think, if anything, it hurt the brand. The negative social media reaction was deafening. It was a bad product that should have never been launched.

Chipotle can't afford an encore performance. Its new products don't need to be home runs, but they do need to be well-received. If Chipotle comes up with more duds, the brand will take yet another hit.

The good news is that these new menu items are pretty basic. Quesadillas and nachos are just new ways to combine the ingredients that Chipotle already sells. The tostado is just a tortilla and avocado. And it's hard to go wrong with a milkshake. So it seems like the risk of a queso-like disaster is low.

But that also means that these new items may not be compelling enough to draw in customers. Competition in the fast-casual restaurant business is fierce. Customers have a tremendous number of options, expanded by new competition and the proliferation of food delivery services. Chipotle needs to get people excited about Chipotle again. I'm not convinced quesadillas and milkshakes are going to do it.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.