Chipotle is on the verge of making huge changes

Hollis Johnson

• Chipotle is entering a new era with the departure of Steve Ells from the role of chief executive.
• Under new leadership, the chain could add a breakfast menu and drive-thru lanes, which Chipotle has long eschewed.
• The chain could also alter food-sourcing standards to cut costs.

Chipotle as we know it is about to change.

The burrito chain said this week that it's searching for a new CEO to replace Steve Ells, who is stepping down amid the company's ongoing battle to recover from an E. coli outbreak that affected its restaurants two years ago.

AP

Steve Ells' departure from the role of chief executive signals a new era for Chipotle.

Ells has been the face of Chipotle since he founded the restaurant chain 25 years ago.

His departure from the role of chief executive signals the start of a new era for Chipotle that could include a menu overhaul, changes to food-sourcing standards, and the addition of breakfast items and even drive-thru lanes, according to several analysts.

The CEO search "follows a notable cultural shift at Chipotle in recent quarters covering: strategic priorities, leadership, and operational execution," UBS analyst Dennis Geiger wrote in a recent note.

"We expect the next CEO will further push the company's maturation, with a fresh approach, new ideas (i.e. innovation, breakfast, drive thrus, etc.) and potentially additional new talent from outside of the organization."

Chipotle has already started adding new menu items after more than two decades of leaving the menu virtually unchanged. But the pace of change has been slow, with the chain adding just four new items in the last three years.

The chain also revealed this summer that it was testing its first drive-thru, but no further tests have been announced since. Drive-thru lanes accounts for as much as 70% of sales for fast-food chains like McDonald's.

A new CEO will likely ramp up the level of innovation at the company, said Neil Saunders, CEO of GlobalData Retail.

"While a new CEO is not a silver bullet, the move gives Chipotle a chance to look again at its strategy and its approach," Saunders wrote in a note to clients. "This is desperately needed, for along with the various health scares consumers are increasingly bored with an offer that has never really evolved."

New leadership will also likely come with broad-based cost cuts. The company is expected to select a CEO with a background in finance and operations. By comparison, Ells came from a background in culinary arts.

"We are guardedly optimistic that a solid operator could improve Chipotle's margins meaningfully even at current sales levels," Wedbush analyst Nick Setyan wrote in a research note.

To cut costs, a new CEO could bring about changes to Chipotle's food-sourcing standards - something that Ells has been deeply committed to.

The new CEO faces a 'daunting task'

But it remains uncertain whether new leadership will be able to restore Chipotle's sales growth to pre-crisis levels.

"We expect a new CEO could drive meaningful changes throughout the organization," Geiger wrote. "But we remain cautious on the company's turnaround potential."

Setyan also said a recovery could be out of reach for Chipotle due to industry-wide pressures.

"Near and medium-term challenges remain a daunting task for any CEO," he wrote.