Chipotle's portion sizes have gone viral. What could this mean for the stock?

Customers are pushing the chain to be more generous when it comes to filling their burritos and bowls, and whichever response it chooses will impact the bottom line.

The size of Chipotle's (CMG 0.76%) Portion sizes have recently come under scrutiny due to a viral trend on the social media app TikTok – customers filmed employees preparing their burrito bowls to make sure they filled them correctly.

The trend started with influencer Keith Lee, who has over 16 million followers and criticized the company for its shrinking portion sizes. This prompted some Chipotle customers to film the chain's employees in an attempt to get them to give them more food. More and more customers followed suit.

This trend could impact the company's results and stock in the short term, but could also have longer-term consequences.

My last Chipotle orders

Since these complaints about Chipotle's portions went viral, I've ordered bowls from Chipotle twice from two different locations in two different states. Immediately after the hype, I ordered a steak bowl for pickup at a “Chipotlane” drive-thru and received the fullest bowl I've ever received. No video was necessary (or possible) and the portion size was great.

Two days later, I ordered two more bowls from my local Chipotle and the results were completely different. One bowl was about half the size of the one I ordered two days earlier and the other was maybe a third the size. The chips were also stale.

After contacting customer service, they gave me two BOGO (Buy One, Get One Free) deals to use over the next 30 days, as well as free chips and guacamole as a reward. They also said they would contact the store manager.

Over the last year, I've had recurring issues with food quality and portion sizes at my local Chipotle, which is one of the reasons I've avoided the stock. However, given the strong sales momentum the company has experienced during that time, I believe these were likely isolated issues related to that one location. This is also an example of how anecdotal evidence is sometimes just that — anecdotal — and may not reflect the bigger picture.

Chipotle itself has stated that it has neither changed portion sizes nor instructed employees to give larger bowls to customers who were recording portions. While the company said it has “taught” its employees about appropriate portion sizes, it did not specify whether “appropriate” means keeping portions moderate or filling bowls to capacity.

From my recent experience, there is a huge difference in portion sizes from one Chipotle location to the next.

Image source: Getty Images.

What impact could this have on the company’s results?

Chipotle's biggest expenses are food, beverages, and packaging—costs in this area accounted for 28.8% of revenue in the first quarter. The company constantly combats food inflation by raising prices. However, another way food companies keep profits high when costs rise is by reducing portion sizes. This is commonly referred to as shrinkflation. President Biden even addressed shrinkflation in his State of the Union address earlier this year.

If Chipotle does increase its portion sizes to satisfy its customers, it would increase food spending in the short term and hurt restaurant-level margins. A 10 percent increase in costs in the food, beverage and packaging category due to larger portion sizes would mean additional costs of about $330 million per year (nearly $260 million after taxes), or annual earnings per share of about $9.40, based on expected revenue of $11.35 billion this year. That's no small amount, even for a company that's expected to earn more than $55 per share this year.

If Chipotle maintains its larger portion sizes, it would have a long-term sustainable impact on margins, while smaller portion sizes could have an impact on demand. Right now, there seems to be a bit of a dispute between Chipotle and its customers on this issue.

This is a somewhat tricky time for the company. Many other quick-service restaurant chains have felt the pressure from consumers struggling with higher menu prices. Chipotle has so far escaped that pressure, as evidenced by its strong in-store sales, pricing power and customer traffic.

Skimping on portions and quality may improve results in the short term, but it could be the company's downfall down the road. Chipotle has a good reputation and has recovered from worse situations, including a number of cases of food poisoning caused by E. coli and norovirus, but now the company needs to maintain that reputation.

I think the company missed an opportunity when Lee's complaint and other TikTokers' response to it went viral. It could have done marketing that perhaps attracted more customers to its restaurants for a limited time by touting the size of its bowls. The company's ambiguous response regarding its portion sizes didn't help either.

Time to buy, sell or hold?

Chipotle stock currently trades at a price-to-earnings (P/E) ratio of 55.5 — a premium valuation relative to its growth and margin profile. The company doesn't have quite the long-term expansion opportunities it did in the past, so store sales and restaurant-level margins will play a bigger role in its long-term prospects.

CMG P/E (Forward) Chart

CMG P/E data (forward) from YCharts.

Not so long ago, an event like the Chipotle portion saga would probably have been forgotten pretty quickly. In the past, consumers have had short memories when it comes to such things. However, in the age of social media, consumers have gained more power, so I wouldn't write it off 100% like I would have several years ago. I never thought that Bud Light sales would still be affected a year after some called for a boycott of the brand, so you never know.

Given Chipotle's valuation, I would view the restaurant stock as a hold at this point while we wait to see if things ease as expected. I think they will, but I wouldn't rush into buying the stock at this level.