Case 7 Homework 4
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Case7.docx
Case 7 Chipotle Mexican Grill, Inc.: Conscious Capitalism by Serving “Food With Integrity”
Alan N. Hoffman
Bentley University
The author thanks Barbara Gottfried and Bentley University BMBA students Suman Akkinepally, Thomas Daly, Qing He, Donald Khoury, Mena Mahaniah, Craig Richey and Elisaveta Tsvetkova for their research and contributions to this case. Please address all correspondence to: Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 175 Forest Street, Waltham, MA 02452-4705, [email protected] , (781) 891-2287. Printed by permission of Dr. Alan N. Hoffman.
Background
Founded by Steve Ells in 1993, Chipotle Mexican Grill, Inc. (CMG or “Chipotle”) quickly became one of the fastest growing restaurant chains in history. A pioneer in the fast-casual segment of the restaurant market, Chipotle focused on changing the way food was processed and delivered to consumers by the restaurant industry. 1 Over the course of 21 years, Chipotle grew to over 1600 restaurants in the United States and 11 internationally. The first restaurant opened its doors in Denver in a renovated Dolly Madison ice cream shop. In 1995, the company added a second and third shop in Denver and eventually expanded to sixteen restaurants in 1998.
Through luck and hard work, Chipotle attracted the attention of MacDonald’s Corporation whose investment of $350 million plus expertise in processes, systems, and real estate allowed Chipotle to grow to over 500 restaurants by 2006. Chipotle filed its initial public offering (IPO) that same year. In 2007, McDonald’s divested itself of Chipotle, resulting in an impressive return of $1.5 billion on its original investment. However, McDonald’s then missed out on CMG’s huge growth in share price after the divestiture. 2
Beginning in 2000, Steve Ells made a concerted effort to serve consumers “food with integrity” utilizing a sustainable and responsible approach to ingredient sourcing, production, and service. For example, CMG began serving naturally raised pork in some of its stores, highlighting the company’s commitment to transparency. By 2010, all of the pork served in Chipotle restaurants was naturally raised. In 2002, CMG began serving naturally raised chicken. By 2014 the company sourced 100% of its chicken product from farms that met that standard. And as of 2007, 100% of its beef was naturally raised and 40% of its black beans were organically grown. In 2009, Steve Ells testified before Congress about ways to try to eliminate antibiotics completely from farming. 3
Chipotle’s brand power, customer engagement, and loyalty was evident in 2000 when CMG began to serve naturally raised pork in its burritos. The company was forced to raise the price of its carnitas filling by one dollar, but was rewarded for its efforts rather than punished: sales rose rather than fell, fueling Chipotle’s faith that customers would buy responsibly raised food and even pay a premium price for it. 4
Strategic Direction
According to the company’s website, “Chipotle’s mission is to change the way people think about and eat fast food.” 5 Its vision was to serve delicious food made with fresh ingredients from sustainable resources, and sell it for a reasonable price. All elements of Chipotle’s strategic direction were closely aligned and revolved around its flagship program, “Food with Integrity,” defined as finding the very best raw ingredients raised in a sustainable way with respect for the animals, the environment, and the farmers who produced the food. 6 Chipotle made a particular effort to use animals raised in a humane way, such that the animals had not been treated with antibiotics or hormones that cause rapid or unnatural growth. It was CMG’s firm belief that natural and high-quality ingredients, freshly prepared, resulted in better tasting food as well as better “politics.” 7
Conscious Capitalism: A Higher Purpose
The company’s “Food with Integrity” program meant that its supply chain and corporate culture were closely integrated from the time that raw materials (ingredients) were farmed, raised, harvested, and shipped to stores to the time a burrito (the final product) was placed on a customer’s serving tray. Chipotle believed that its appeal to its socially responsible customers only deepened as those customers became more aware of the sustainable way Chipotle sourced its ingredients. 8 Unlike its competitors, all of CMG’s restaurants were company-owned and supplied by Chipotle’s independently owned and operated distribution centers whose suppliers were evaluated on the quality of what they provided and their understanding and empathy with the company’s mission.
The Chipotle Business Model: Redefining “Fast Food”
As with any number of other fast-food restaurants, Chipotle’s business model was “a few things a thousand ways.” Its menu was designed to offer a relatively limited number of menu items (burritos, burrito bowls, tacos, and salads), but with a large variety of extras such as beans, salads, and guacamole such that through extensive recombination of ingredients, customers could create unique and exciting food selections each time they visited, enhancing their overall Chipotle experience.
Even though Chipotle used classic cooking methods with stovetops for heating, knives for chopping, and vessels for mixing, its food was served to customers extremely fast. Its assembly line was seen as one of the most efficient in the business, and unlike competitors such as Starbucks, it didn’t take very long for customers to order food and be served. Chipotle saw this customer-oriented culture as key to its success.
Finally, the company made quality assurance and food safety integral to its supply chain. 9 To maintain quality, Chipotle invested heavily in its staff. In many cases, the company mentored future leaders internally, fostering continuity amongst its management team to sustain its explosive growth. 10 Assuring quality and food safety promoted customer loyalty and ongoing engagement.
Ultimately, Chipotle’s main objective was profitability achieved through staff and operational efficiencies designed to offset the higher than average cost of its organic ingredients.
Sustainability
CMG’s goal was to deliver delicious fast food in a way that was transparent, safe for the environment, and responsible to the animals slaughtered for meat 11 so as to build a reputation as an organization which did not simply pay lip service to the tenets of sustainability, but lived up to those tenets. As the demand for sustainable products grew and became more competitive, Chipotle worked to foster strong relationships with its supply chain to secure and expand its supply of high-quality, natural, organic, and local ingredients. Beginning in 2008, the company embarked on a program to increase local sourcing to 35%. “This seasonable produce program was meant to cut down on fossil fuels used to transport produce, give local family farms a boost and improve the taste of the food served to customers by using ingredients during their peak season.” 12 In addition, the company refined its cooking techniques to continually offer customers the very best food possible.
Chipotle followed a similarly innovative path in the way it designed and built its restaurants, looking for more environmentally friendly building materials and systems that made its restaurants more efficient 13 In 2009, the company announced that it had partnered with a renewable energy company to install solar energy systems in Chipotle restaurants across the country, making Chipotle the largest producer and user of solar energy in the restaurant industry. 14
Competitors
The National Restaurant Association projected total U.S. restaurant sales would hit a record high of $683.4 billion in 2014. Chipotle captured $3.3 billion of total sales revenue in 2013. 15 The industry was divided into three large segments:
· Full Service
· Quick Service
· Fast-Casual
Fast-casual restaurants were seen by consumers as offering a slightly higher quality food, service, and atmosphere than quick-service restaurants, and quickly became the fastest growing segment of the restaurant industry: expanding from 4% growth in sales in 2009 to 9% growth in sales in 2012 and 8% in 2013. 16 According to The NPD Group, fast-casual restaurants had the highest traffic growth in 2013 among all restaurant segments ( Exhibit 1 ), 17 evidence of the strength of this segment of the business. “The fast-casual segment always does better than the rest of the industry because it’s a hybrid—it combines the convenience of quick service with the food offerings of higher-check establishments.” 18
Exhibit 1
Change in Customer Traffic
Figure 1 Full Alternative Text
Chipotle’s business model and strategy were designed to fulfill the expectations of the fast-casual market segment, and its success “has been a market driver for the entire segment, spurring many new players into the fast-casual marketplace.” 19 CMG’s revenue grew 17.7% in 2013 and 20.3% in 2012. Its strategic philosophy challenged consumers’ preconceptions of the fast-food industry, providing high-quality natural products and encouraging multisegment positioning. Redefining fast food meant that Chipotle saw itself as an alternative to traditional fast food and its use of high-quality natural ingredients positioned it at the highest price points in its segment, which overlapped with the low-end price points of the full service segment. According to NPD, guest checks at fast-casual restaurants were, on average, $7.40 in 2013 while average checks for quick service were $5.30 and $13.66 for casual-dining. The higher quality natural products also attracted more health conscious upscale customers who did not traditionally frequent fast-casual or quick-service restaurants. 20
In addition to being the market leader in the fast-casual market segment, Chipotle also became the market leader in the Mexican fast-casual segment, and successfully competed with Mexican restaurants in all three segments. In the quick-service market segment (formerly known as the fast-food segment) Chipotle competed with YUM! Brands’ Taco Bell chain. In the fast-casual market Panera Bread Co, Qdoba Restaurant Corporation, and Panda Restaurant Group were its biggest competitors ( Exhibit 2 ). Fresh Enterprises’ more than 250 Baja Fresh Mexican Grill fast-casual restaurants were also players in the Mexican fast-casual segment, as were a plethora of single standing and regional chains such as El Pollo Loco Holdings, Inc., Panchero’s Franchise Corporation, and Moe’s Southwest Grill. By 2014, Mexican food was the third most popular cuisine after American and Italian according to an NPD survey ( Exhibits 3 & 4 ). In the full service segment, Chipotle competed with Darden Restaurant Inc.’s Olive Garden and Red Lobster, among others. Food trucks also became important competitors, the latest entrants into the fast-casual and quick-service market segments.
Exhibit 2
Fast-Casual Industry Segment Perception Map
Figure 2 Full Alternative Text
Exhibit 3
Survey U.S. Participants ldentified Their Favorite Cuisine As Follows:
http://www.rkma.com/bentley/rfb14/
|
Survey U.S. Participants Identified Their Favorite Cuisine As Follows: |
|
|
American |
31% |
|
Italian |
23% |
|
Mexican |
16% |
|
Chinese |
14% |
|
Japanese |
5% |
|
Middle-Eastern |
3% |
|
Indian |
2% |
Exhibit 4
Fast-Food Restaurant Market Leaders
http://www.rkma.com/bentley/rfb14/
|
Market Leaders (July 2013) |
||
|
Annual Sales Market Leader (USD) |
||
|
Bakery Cafe |
3.7 billion |
Panera Bread |
|
Mexican |
2.7 billion |
Chipotle Mexican Grill |
|
Asian/noodle |
1.8 billion |
Panda Express |
|
Sandwich |
1.3 billion |
Jimmy John’s Gourmet Sandwich |
|
Better burger |
1.1 billion |
Five Guys Burgers and Fries |
|
Chicken |
979 million |
Zaxby’s |
|
Pizza |
157 million |
Donatos Pizza |
YUM! BRANDS: Taco Bell
As of 2014, Yum! Brands, Inc. operated the Taco Bell, Pizza Hut, KFC, Long John Silver’s, and A&W chains. The Yum! Brands corporation was seen by the industry as a major, aggressively expanding international player, operating the largest portfolio of quick-service restaurants in the world with approximately 37,000 locations in more than 100 countries. 21 By 2015, China and India were projected to contribute around $1 billion in annual sales to Yum! Brands. To further its expansion, Taco Bell began testing breakfast meals offerings in 2014, which were expected to contribute $7 billion to its domestic sales over the next decade. 22 Though the trend toward healthier food was seen to have made significant inroads in the restaurant industry, there was also a cultural backlash. Taco Bell understood its mission as serving this health-resistant rebel consumer. Taco Bell’s introduction of MTN Dew Kickstart soda, a blend of Mountain Dew and orange juice could be construed as an example of its refusal to “go healthy.”
Jack in the Box, Inc.’s Qdoba Mexican Grill
Qdoba Mexican Grill, a wholly owned subsidiary of Jack in the Box, opened in Denver in 1995 under the name Zuma. Qdoba used Zuma, then Z-TECA Mexican Grill to avoid confusion with other Zuma Mexican restaurants. Qdoba was best known for its San Francisco Mission-style burritos customized with options such as roasted chile corn, shredded beef, fajita vegetables, rancho-chile barbecue sauce, and a three-cheese queso. 23 In 2013, the company reported $1.5 billion in sales at more than 600 locations. 24
Panera Bread Co.
Originally named the St. Louis Bread Company, Panera was purchased in 1993 by the Au Bon Pain Company, a franchiser of fast-casual bakery-cafes. Panera’s key menu items were daily baked goods, made-to-order sandwiches, and unique soups. The company reported $2.13 billion in revenue for 2013. Panera’s strategy was to straddle the line between affordability and high quality, serving antibiotic-free chicken and turkey, whole grain bread, and some organic and all-natural ingredients, while keeping the cost of an average meal to less than $10.00. Panera also fostered growth by acquiring retail locations from its franchise operators. 25
Food Trucks
Recently the convenience and variety offered by food trucks began to threaten the stability of the fast-casual segment. 26 In 2013, estimated annual food truck sales were $5 billion, an increase from virtually zero only five years earlier. Several restaurant chains including Qdoba Mexican Grill and Taco Bell decided to compete by outfitting their own food trucks as catering operations and test kitchens on wheels, and taking them to local events to build brand awareness.
In 2013, the food dollar market share of the restaurant industry was 40%; the balance of 60% went to supermarkets. 27 Thus, the biggest substitution threat to restaurants was not so much other restaurants as it was supermarkets that offered a wide breadth of food such as prepared meals and frozen food at lower than restaurant prices.
Financial Operations
Chipotle’s financial objectives were simple:
· No long-term debt
· Grow organically, growth funded by retained earnings
· Maintain an operating margin of at least 10%
· Exceed organic growth of occupant safety market
CMG showed a steady growth in terms of both revenue and operating margins from 2004 to 2013. According to the most recent data ( Exhibits 5 & 6 ), CMG significantly outperformed the industry average as well as the S&P 500. For instance, CMG’s revenue growth rate was approximately 24.41%, nearly 6 times higher than the industry rate (4.3%) and 12 times higher than the S&P 500 index ( Exhibit 7 ). While the industry and
Exhibit 5
Revenue and Operating Market
Source: Analysis from Chipotle Annual Report
Exhibit 6
Historical Stock Performance for CMG
Source: Yahoo Finance
Exhibit 7
CMG Growth Comparison
Source: CSI Market
Figure 7 Full Alternative Text
the economy as a whole were still struggling to recover from the negative net income as the result of the 2008 recession, CMG’s net income reached 8.47%. The fact that revenue and operating margin grew in line was partly attributable to CMG’s ability to maintain low operating costs throughout both economic recession and boom.
While CMG strove to provide customers with fresh and high-quality food, it continually faced the risk of fluctuations in the commodities market that could potentially cut profits. Price fluctuations of agricultural products were often significantly higher than the Consumer Price Index for Urban Consumers, which was at 1.6% in 2013, 28 while the index for meat and eggs was at 5.8%, the biggest price change in the food industry.
According to the Common Size statement of CMG and industry average ( Exhibit 8 ), Chipotle’s operating margin was less than half of the industry average. The high variable cost was in line with CMG’s “Food with Integrity” mission, which focused on high-cost, high-quality ingredients. However, with such a strategy, CMG needed to cut costs in other areas such as operating and labor costs.
Exhibit 8
Common Size Financial Data
http://financials.morningstar.com/ratios/r.html?t=CMG®ion=usa&culture=en-US
|
Income Statement (Common Size) |
Industry (Large Cap) |
Chipotle |
|
Net Sales |
100.00% |
100.00% |
|
Gross Margin |
63.70% |
26.59% |
|
Operating Income |
3.40% |
16.63% |
|
Net Income |
1.50% |
10.19% |
|
Balance Sheet (Common Size) |
|
|
|
Cash |
10.20% |
28.78% |
|
Accounts Receivable |
5.40% |
1.38% |
|
Inventory |
2.50% |
0.65% |
|
Total Current Assets |
23.70% |
33.16% |
|
Property, Plant & Equipment |
50.40% |
47.94% |
|
Other Non-Current Assets |
25.90% |
17.81% |
|
Total Assets |
100.00% |
100.00% |
|
Accounts Payable |
4.80% |
2.94% |
|
Total Current Liabilities |
15.40% |
9.92% |
|
Total Long Term Liabilities |
34.40% |
13.53% |
|
Financial Ratios |
|
|
|
Quick Ratio |
1.05 |
3.04 |
|
Current Ratio |
1.54 |
3.34 |
|
Inventory Turnover |
x26.65 |
x195.51 |
As of 2014, CMG had no long-term debt ( Exhibit 9 ). Its strong balance sheet allowed the company both to deal favorably with the economic cycle and focus fully on expansion, which pleased investors.
The company’s cash reserves grew steadily from 2003–2013. The free cash flow increased by 48% in 2013 and was already at 49% (132.55 million) in the first quarter of 2014. This made it possible for CMG to open 40 new restaurants each quarter without adding any debt to its balance sheet. 29 The target cash holding as a percentage of total assets was approximately 30%. Sufficient cash in hand essentially prevented CMG from losing money as a result of the inflation of food prices.
Exhibit 9
Financial Data
|
|
For the years ended December 31 |
||||
|
|
2013 |
2012 |
2011 |
2010 |
2009 |
|
Statement of Income: |
|
|
|
|
|
|
Revenue ................ |
$ 3,214,591 |
$ 2,731,224 |
$ 2,269,548 |
$ 1,835,922 |
$ 1,518,417 |
|
Food, beverage and packaging costs........ |
1,073,514 |
891,003 |
738,720 |
561,107 |
466,027 |
|
Labor costs ............. |
739,800 |
641,836 |
543,119 |
453,573 |
385,072 |
|
Occupancy costs ............. |
199,107 |
171,435 |
147,274 |
128,933 |
114,218 |
|
Other operating costs...... |
347,401 |
286,610 |
251,208 |
202,904 |
174,581 |
|
General and administrative expenses ............. |
203,733 |
183,409 |
149,426 |
118,590 |
99,149 |
|
Depreciation and amortization........... |
96,054 |
84,130 |
74,938 |
68,921 |
61,308 |
|
Pre-opening costs ........ |
15,511 |
11,909 |
8,495 |
7,767 |
8,401 |
|
Loss on disposal of assets ...................... |
6,751 |
5,027 |
5,806 |
6,296 |
5,956 |
|
Total operating expenses ................... |
2,681,871 |
2,275,359 |
1,918,986 |
1,548,091 |
1,314,712 |
|
Income from operations ... |
532,720 |
455,865 |
350,562 |
287,831 |
203,705 |
|
Interest and other income (expense), net ......... |
1,751 |
1,820 |
(857) |
1,230 |
520 |
|
Income before income taxes................. |
534,471 |
457,685 |
349,705 |
289,061 |
204,225 |
|
Provision for income taxes .................. |
(207,033) |
(179,685) |
(134,760) |
(110,080) |
(77,380) |
|
Net income ............. |
$ 327,438 |
$ 278,000) |
$ 214,945 |
$ 178,981 |
$ 126,845 |
|
Earnings per share Basic .............. |
$ 10,58 |
$ 8.82 |
$ 6.89 |
$ 5.73 |
$ 3.99 |
|
Diluted.............. |
$ 10.47 |
$ 8.75 |
$ 6.76 |
$ 5.64 |
$ 3.95 |
|
Weighted average common shares outstanding Basic ............... |
30,957 |
31,513 |
31,217 |
31,234 |
31,766 |
|
Diluted.............. |
31,281 |
31,783 |
31,775 |
31,735 |
32,102 |
|
|
As of December 31 |
||||
|
|
2013 |
2012 |
2011 |
2010 |
2009 |
|
Balance Sheet Data: |
|
|
|
|
|
|
Total current assets....... |
$ 666,307 |
$ 546,607 |
$ 501,192 |
$ 406,221 |
$ 297,454 |
|
Total assets ............. |
$ 2,009,280 |
$ 1,668,667 |
$ 1.425,308 |
$ 1,121,605 |
$ 961,505 |
|
Total current liabilities |
$ 199,228 |
$ 186,852 |
$ 157,453 |
$ 123,054 |
102,153 |
|
Total liabilities .......... |
$ 470,992 |
$ 422,741 |
$ 381,082 |
$ 310,732 |
$ 258.044 |
|
Total shareholders’ equity................ |
$ 1,538,288 |
$ 1,245,926 |
$ 1,044,226 |
$ 810,873 |
$ 703,461 |
CMG Stock
CMG’s stock price accelerated consistently, climbing to $500 per share from $22 per share at its initial public offering in 2006.30 The strong growth underscored CMG’s short-term price performance and became a strong indicator of long-performance. From June 2013 to June 2014, CMG’s earnings per share (EPS) showed moderate growth from $9.6 to $11.02. Although the growth rate was slightly lower than what outside analysts had expected, it was still higher than the industry average.
Marketing
From the first CMG saw marketing as essential to building its brand recognition.
Though the price point of Chipotle’s products was higher than most fast-food competitors and comparable or slightly higher than other fast-casual competitors, the food was of much higher quality than fast food, and more sustainable and slightly higher quality than that of most fast-casual alternatives. This pricing strategy was both a strength and a weakness for CMG. The company was banking on the notion that customers would consider the increase in food quality and sustainability a good value that more than justified the small price premium, which in turn allowed CMG to enjoy a kind of premium brand image and supported above average profit margins. Additionally, as the price was still close to other fast-casual alternatives, younger, value-oriented customers could still be targeted. The weakness of this pricing strategy was the potential exposure to competition entering the fast-casual segment and competing on price. Chipotle feared it would not be able to respond competitively, thereby losing market share.
Location and size were other facets of Chipotle’s successful marketing strategy. Typically Chipotle restaurants were smaller than those of its competitors, especially in high traffic areas. This allowed Chipotle to open restaurants in good locations, at somewhat lower rents than its competitors. Building on this strength, Chipotle retained whole ownership of all locations, giving the chain complete control over the look, feel, and design of its restaurants. However, a weakness of Chipotle’s typical in-line retail outlet locations and smaller freestanding buildings was that the company generally didn’t have exclusive rights over the locations so competitors could, and often did, set up next door.
Analysts (and customers) agreed that Chipotle’s major strength was its product. The company’s use of high-quality ingredients that tasted better, and custom made-to-order burritos set it a notch above typical fast-food eateries. The simple but customizable menu meant less inventory was required and orders could be processed very quickly. In addition, the healthiness and sustainability of Chipotle’s products was consistent with trends in regulation and consumer preferences. The company’s main weakness, however, was that nothing was proprietary and its product was very easy to imitate.
Much of Chipotle’s success was attributable to its excellent promotional efforts. First, advertising was done in-house which allowed greater flexibility and nimbleness, and insured consistency with company values. Second, in keeping with its reputation for sustainability, Chipotle did not use traditional media, which differentiated CMG from other major players in the market such as McDonalds and Wendy’s. However, a weakness of this strategy was that it was hard to scale; thus, recently Chipotle did move into more traditional media promotion with a Super Bowl ad and some radio ads. Chipotle also expanded its use of a highly successful direct mail campaign, but as with traditional media, these promotional practices were not quite consistent with its reputation for sustainability. Finally, a major strength for Chipotle was its focus on brand experience and its drive to create a loyal customer base that didn’t just eat at Chipotle but loved the brand and spread Chipotle’s mission. A potential weakness with this strategy was that if anyone had a negative experience with the brand, Chipotle would be held responsible for breaking the bond of customer trust. Similarly, critical publicity with regard to CMG business practices could deeply tarnish Chipotle’s relationship with its customers.
Human Resources
Chipotle’s higher food costs meant smaller margins for operational costs. Chipotle successfully offset those higher food costs by controlling labor costs. The company made the strategic decision to pay above minimum wage, and leverage its positive brand image to attract, motivate, and retain quality employees, who, in turn, produced greater value for the company despite the small price premium. Importantly, Chipotle also promoted 80% of store managers from within, encouraging front line staff, cultivating company loyalty, and insuring that managers had an insider’s strong understanding of restaurant operations.
Operational Efficiency
Throughout the industry, Chipotle was renowned for its operational efficiencies of scale. From the beginning, the business was organized from the ground up for efficiency, yielding record-high restaurant throughput rates with data analytics that correlated throughput and repeat purchases, indicating that faster throughput increased customers’ willingness to wait in line and to return. In addition, the company fostered operational capabilities to scale up experimental menu items. Chipotle’s operational efficiencies were expected to yield mid-single digit growth in 2014.
Chipotle’s unique “people culture” also strikingly differentiated it from its competitors, as evidenced by the success stories included on the company’s highly dynamic website. Chipotle prides itself on having a strong people culture built on hiring top performing employees, developing and empowering them to deliver an exceptional dining experience for its customers.
The success of many companies, as Chipotle understood quite well, depended not just on innovative products but on the people involved at every level. Analysts concurred, noting that Chipotle’s people and its human resource policies were key to its success; and the company’s employee retention figures and impressive revenues and efficiencies further validated the key role that employees throughout the company played.
Mobile Payments Coming
In 2014, Chipotle spent $10 million on network upgrades for its restaurants to enable future improvements, especially mobile payments via a barcode. Such payment devices would cost each restaurant hundreds of dollars, however the company expected that the initial outlay would increase its customer base and foster greater efficiency, as the company’s own research made clear that in the fast service and fast-casual markets speed of delivery was vital to customer retention.
However, critics pointed out that if cashiers were not the bottleneck for the restaurant’s service, mobile payments wouldn’t necessarily increase throughput. Regardless, it was felt that the initiative could help Chipotle with marketing efforts as it would also help the company understand its customers better, as mobile payments would allow Chipotle to maintain records of orders, analyze the data, and customize promotions to encourage repeat purchases.
Socially Responsible Strategy
Chipotle always believed that addressing societal concerns could foster innovation and increase productivity. Over the years, the company implemented the following socially responsible initiatives.
· A 10-year project with Good Shepherd Poultry Range to resurrect heritage breeds of chicken that could survive on pastures 31
· The use of organically grown beans (40%), with another 5% grown using conservation tillage methods, thereby reducing soil erosion
· Refusing to use genetically modified corn even though 65% of American corn came from GM crops as of 2014
· Sourcing lettuce from local farms during the growing season
· Using only organically grown cilantro and working toward the goal of using 10% organic avocados
· Only using dairy products from cows that were never treated with the synthetic hormone rBGH. However, only 30% were pasture-raised, as supply was limited supply. To get to 100%, the chain planned to build its own dairy cooperative.
· Every time two Chipotle restaurants opened, another farmer whose pigs were naturally raised was allowed to join the Niman Ranch network and become a supplier to the chain. When Chipotle began this initiative, there were 50 to 60 such farmers. By 2014 there were between 600 and 700.
· Involvement in community events and charities, and with local farmers and business owners through marketing outreach
· Signing an agreement with the Coalition of Immokalee Workers (CIW) to improve wages and working conditions for tomato pickers in Florida. The company agreed to pay an extra penny per pound of tomatoes purchased for its 1,300 restaurants nationwide, with the money appearing as a bonus in workers’ paychecks.
A “Cool” Brand
As noted above, Chipotle’s greatest strength and competitive advantage was its brand: edgy, trendy, and cool. People loved Chipotle not just because of the tasty and healthy food but because of the values the brand conveyed. Creative viral marketing techniques such as the scarecrow video 32 that was viewed over 12 million times showcased Chipotle’s sustainable sourcing, quality, and integrity as well as distancing the company from the heartless profit-focused giants in the food industry. Chipotle’s successful branding showcased its competitive advantage in corporate culture by highlighting its focus on social responsibility. The sense that they were helping make the world a better place together with a preferential internal promotion system enhanced employee satisfaction and attracted high quality employees with low turnover.
Efficient supply chain management, which allowed CMG to use sustainable sourcing and maintain low inventory and accurate forecasting, also contributed to Chipotle’s competitive advantage, in turn allowing Chipotle to use more local suppliers than its competitors and offer a higher-quality product at a comparable price. Chipotle’s branding, efficient supply chain with sustainable sourcing, and socially responsible corporate culture were consistent and, taken together, supported the company’s mission as well as sustained a competitive advantage.
Another important core competence was its restaurant operations expertise in the fast-casual segment. Chipotle could potentially use this expertise as a platform to expand into other fast-casual alternatives. Recently Chipotle tested a pizza as well as an Asian cuisine fast-casual restaurant. Finally, Chipotle declined to franchise its restaurants, thus wholly owns all locations, giving it complete control over the look, feel, design, and management of every location, and allowing it to leverage its restaurant operations expertise.
Key Challenges Facing Chipotle
By 2014, the fast-casual domestic U.S. market was growing, but also becoming increasingly competitive and crowded with many new entrants, especially traditional fast-food players who were attracted by the double-digit revenue growth. Jack in the Box entered the fast-casual market with Qdoba, directly challenging Chipotle. Many new regional fast-casual chains were growing and starting to go national such as Slim Chicken and Q Barbeque. In addition, Chipotle faced increased competition from imitators such as Boloco and Moe’s Southwest Grill.
At the same time, Wall Street had extremely high growth and earnings expectations for the company. Speculation on Chipotle’s future growth and earnings pushed the share price to 47 times earnings.33 Chipotle’s P/E ratio was the highest of the major companies in its segment, compared to a P/E ratio of thirty for YUM! Brands and twenty-three for Panera. As the fast-casual segment began to reach saturation in the U.S. market and the industry life cycle moved from a high growth phase toward maturity, living up to analysts’ expectations was predicted to become increasingly difficult.
Future Growth Opportunities
Despite the challenges within the fast-food industry, analysts saw room for further growth if Chipotle focused on customers and markets previously untapped or underserved. For instance, in 2014, 54% of fast-casual customers were female, yet Chipotle’s advertising and large portions were skewed towards males. Females and weight conscious fast-casual customers might be enticed by offering calorie conscious portions and more health and lifestyle advertising that highlighted how wholesome and healthy the food at Chipotle could be.
Chipotle also offered the potential to develop a breakfast menu. In 2014, Taco Bell launched its new breakfast menu that included items such as the “a.m. crunch wrap” and the “waffle taco.” At Dulles International Airport, Chipotle was required to be open during breakfast hours. It tested breakfast items but found that early morning customers tended to order regular lunch and dinner menu items so it dropped its experimental breakfast options.34
Finally, Chipotle already had a very healthy kids menu that was not very effectively promoted. Additional marketing to health conscious parents could support the expansion into this potential new customer segment.
Chipotle established itself as a successful company practicing “conscious capitalism” by serving “food with integrity.” However, by 2014 it had become clear that Chipotle needed to find new markets in order to continue to grow its revenues and keep Wall Street happy.
Notes
1. 1. Chipotle Mexican Grill, Inc. 2013 Annual Report and Proxy Statement.
2. 2. http://www.businessweek.com/articles/2013-10-03/chipotle-the-one-that-got-away-from-mcdonalds
3. 3. Ibid #1
4. 4. The Chipotle Story. Web: http://www.chipotle.com/en-us/chipotle_story/where_did_we_come_from/where_did_we_come_from.aspx
5. 5. Ibid #1.
6. 6. Chipotle: Food with Integrity. http://www.chipotle.com/en-us/fwi/fwi.aspx
7. 7. Chipotle Mexican Grill, Inc. Announces First Quarter 2014 Results. http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-newsArticle_print&ID=1919590&highlight=
8. 8. Ibid #1.
9. 9. Ibid #1.
10. 10. Ibid #5.
11. 11. Subramanian, Ram (2013) Chipotle: Mexican Grill, Inc.: Food with Integrity. Ivey Publishing, https://www.iveycases.com/ProductView.aspx?id=58576
12. 12. Ibid.
13. 13. Ibid.
14. 14. Chips, Salsa, and a Side of Solar Power: http://www.getsolar.com/blog/chips-salsa-and-a-side-of-solar-power/5176/
15. 15. Restaurant, Food and Beverage Research Handbook 2014–2015. Atlanta: Richard K. Miller, 2014. http://www.rkma.com/bentley/rfb14/. Web. May 8, 2014.
16. 16. Ibid.
17. 17. Blackstone Equity Research. Chipotle Mexican Grill: Explosive Growth Is Expected To Continue. http://seekingalpha.com/article/2031641-chipotle-mexican-grill-explosive-growth-is-expected-to-continue. Web. February 19, 2014. Retrieved May 8, 2014
18. 18. Restaurant, Food and Beverage Research Handbook 2014 –2015. Atlanta: Richard K. Miller, 2014. http://www.rkma.com/bentley/rfb14/. Web. May 8, 2014.
19. 19. Ibid.
20. 20. Blackstone Equity Research. Chipotle Mexican Grill: Explosive Growth Is Expected To Continue. http://seekingalpha.com/article/2031641-chipotle-mexican-grill-explosive-growth-is-expected-to-continue. Web. 19 Feb. 2014. Retrieved 8 May 2014
21. 21. Business Insights: Essentials http://bi.galegroup.com/essentials/company/888510?u=mlin_m_bent. Web. Retrieved May 8, 2014.
22. 22. S & P CAPITAL IQ. Industry Surveys: Restaurants. New York: McGraw Hill Financial January 2014. Web. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?task=showIndustrySurvey&type=pdf&code=rst
23. 23. Neurdorf, Samantha. America’s 15 best Tex-Mex chain restaurants. USA Today. Web. http://www.usatoday.com/story/travel/destinations/2014/01/04/best-tex-mex-mexican-restaurants-food/4308625/. January 4, 2014. Retrieved May 8, 2014.
24. 24. Business Insights: Essentials http://bi.galegroup.com/essentials/company/888510?u=mlin_m_bent. Web. Retrieved May 8, 2014.
25. 25. Ibis World. http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=4319#MP9334. Web. Retrieved May 8, 2014.
26. 26. Restaurant, Food and Beverage Research Handbook 2014-2015. Atlanta: Richard K. Miller, 2014. http://www.rkma.com/bentley/rfb14/. Web. May 8, 2014.
27. 27. S & P CAPITAL IQ. Industry Surveys: Restaurants. New York: McGraw Hill Financial , January 2014.
28. 28. http://www.bls.gov/news.release/archives/cpi_02202014.pdf
29. 29. http://www.fool.com/investing/general/2014/04/23/chipotle-mexican-grills-long-term-prospects-remain.aspx
30. 30. http://finance.yahoo.com/q/hp?s=CMG
31. 31. Porter, Michael, Creating Shared Value, Harvard Business Review, January 2011.
32. 32. “The Scarecrow by Chipotle.” Web: http://youtu.be/lUtnas5ScSE
33. 33. https://finance.yahoo.com/q?s=CMG
34. 34. http://consumerist.com/2014/03/14/no-chipotle-will-not-be-adding-a-breakfast-burrito-to-the-menu/
