Group audit

I. Current Situation

A.   Chipotle’s Current Performance

1. From 2004 until 2013 Chipotle has managed to show steady growth rates in terms of revenue and operating margin. According to the data found in the case, Chipotle has significantly outperformed the industry average (fast-casual restaurant), as well as the S&P 500 average in the past years. Furthermore, the company’s cash reserves grew steadily from 2003–2013. In 2013 the free cash flow increased by 48%, and by the end of the first quarter in 2014 Chipotle’s free cash flow was already at 49% (132.55 million). Additionally, net income has rapidly grown from $126,845,000 in 2009, to $327,438,000 by the end of 2013. In comparison to other fast-food restaurant market leaders, Chipotle fell in second place behind Panera Bread with annual sales of 2.7 billion. Overall, Chipotle seems to be very profitable and is continuing to acquire market share without inquiring overwhelming amounts of debt which is resulting in great return on investment. Chipotle’s biggest obstacle moving forward is in finding new markets to serve in order to continue to grow its revenues. 

B. Chipotle’s Strategic Posture

0. Chipotle’s mission is to change the way people think about and eat fast food. The company has developed a strategic initiative to eat “Food with Integrity”, which revolves around the idea of consuming healthier, sustainable food which respects the animals, the environment, and the farmers who produce the food. One of the company’s programs was geared towards increasing the local sourcing of their ingredients to 35%. This initiative goes to show how Chipotle is committed to their vision, which is to serve delicious food with fresh, natural food for a reasonable price. Chipotle has been able to market their mission in a way that appeals to new customers and in the process allows customers to become more aware of Chipotle’s sustainable methods of operating. However, as expected higher quality food comes with a higher price, but as their success demonstrates, most customers have no issue paying slightly more for better quality food that is grown in a sustainable manner. In order to offset the higher cost of naturally grown produce and meat, Chipotle has achieved staff and operational efficiencies in order to offset the higher cost of its organic ingredients. In addition to these efficiencies the company has offset the higher cost of produce and meats by reducing costs in other areas such as operating and labor costs.

Furthermore, Chipotle took their sustainability a step further and in 2009 the company announced that it would partner with a renewable energy company to install solar energy systems in Chipotle restaurants across the country. This decision separated Chipotle from their competitors allowing the company to be the largest producer and user of solar energy in the restaurant industry. Furthermore, Chipotle has expanded to markets outside of the U.S and has even been able to compete in the Mexican market and has successfully become the market leader in Mexico’s fast-casual segment. Overall, it appears that Chipotle is truly committed to their mission of changing the way people think about fast food. Chipotle’s “Food with Integrity” mission continues to allow the company to lead the industry as the healthier, sustainable option. 

II. Corporate Governance

A.   Chipotle’s Board of Directors.

1.     Steven Ells founded Chipotle in 1993 as Chipotle Mexican Grille Inc. (CMG or “Chipotle”). Chipotle has a Nominating and Corporate Governance Committee to identify qualified members for the Board of Directors. The Board of Directors selects the Chief Executive Officer (CEO) who is in charge of managing the company. The Company’s Certificate of Incorporation states that the Board of Directors is composed of no less than three and no more than 20 members. Steve Ells is the Founder and Executive Chairman, and Brian Niccol is the CEO. The Board of Directors includes these two employees and eight external members (Chipotle Mexican Grill, 2019).

2.     Information on the company’s shareholders shows that Co-CEO & Chairman owns 31,000 shares, the Co-CEO CFO 7,000 shares and Other Officers 3,000 shares. Individual stakeholders own 69.4% of CMG’s shares, 54.65% are mutual fund holders and 40.14% are other institutional shareholders (Chipotle Mexican Grill, 2019).

3.     CMG own their restaurants and independent owners operate their supply and distribution centers. Their stock price was offered publicly in 2006 at $22 per share and rose to $500 per share. Earnings Per Share (EPS) grew from $9.6 to $11.02, which is higher than the rest of the food industry average. By 2013 the total shareholder’s equity amounted to 1,538,288.

4.     The eight external Board members have expertise in marketing, accounting, finance, global business, external investment, risk management, investor relations, and legal counseling. These Board members also form part of the Audit Committee, Nominating and Corporate Governance Committee, and the Compensation Committee. In terms of connections, one of the Board members served as law clerk in the U.S Supreme Court and the U.S Court of Appeals for the Ninth Circuit in Pasadena, California. A member with global business expertise served in executive positions at Comcast, NBCUniversal, and ABC Television Network. In addition, Board members have held executive positions in the food industry, including Del Monte, Pizza Hut, Taco Bell, McDonald’s, and financial institutions, such as JP Morgan. McDonald’s invested $350 million in CMG and provided their food industry expertise until 2006 when CMG filed its initial public offering (IPO).   

5.     The Board does not provide term limits or mandatory retirement age for their members. Instead, the Board follows its own self-evaluation recommendations shareholders’ voting, and current CMG needs.

6. The Board meets at least four times a year, and addresses CMG’s strategic plan goals and objectives, and monitors CMG’s immediate and distal risk exposure. 

B.    Top Management.

1. CMG’s top management include ten officers: Chief Executive Officer (CEO), Founder and Executive Chairman, Chief Marketing Officer, Chief Technology Officer, Chief Financial Officer, Chief Corporate Reputation Officer, Chief People Officer, Chief Restaurant Officer, Chief Legal Officer, and Chief Development Officer (Chipotle Mexican Grill, 2019).

2. CMG’s CEO has extensive food industry experience and also held executive positions at Proctor and Gamble; he serves on the board of directors of Harley-Davidson, Inc. The Founder and Executive Chairman was a visionary that immersed himself in the idea of Chipotle as a healthy food alternative; he had background in the culinary industry. The rest of the officers have related food industry experience to include Arby’s, Taco Bell, Starbucks, McDonald’s, KFC and Pizza Hut. Other officers had human resource experience from Kate Spade, legal background at WhiteWave Food Company, development and construction knowledge from the Panda group, and global experience from Yum! Brands.

3. Top management follows CMG’s mission “to change the way people think about and eat fast food.”  In 2000, Steve Ells, CMG’s founder, had the vision to serve “food with integrity” with fresh and sustainable food products to sell at affordable prices. This is the strategy that top management adopted, partnering with a renewable solar energy company that extends their mission of respect to the environment.

4. Chipotle’s strategic follows its core program, “Food with Integrity,” pursuing primer raw products, respecting the animals, the environment, and the farmers.

5. CMG promotes from within, from hourly employees to salaried employees, with the ultimate goal of becoming team director, overseeing 50 restaurants. The sequence starts as hourly employees at crew, kitchen manager and service manager levels. After promotion into salaried employees, the sequence continues into apprentice (average $50,000 yearly salary), to general manager ($63,000 to $99,000), restauranteur ($100,000 salary, $10,800 stock options, company car, and $10,000 bonus if promoted from crew members to general manager), apprentice team leader, team leader and team director (overseeing more than 50 restaurants). By 2013, CMG reported the internal promotions of close to 86% of their salaried managers and 96% of their hourly managers (Nisen, 2014).

6. This structured internal promotion system is mandated by top management and improves the lives and possibilities of lower level management, contributing to CMG’s organizational climate and morale.

7. Strategic decisions follow CMG’s mission that is strong on respect, sustainability, and social responsibility.

8. As indicated CMG teamed with a renewal solar energy company to provide clean energy to their restaurants and distribution centers.

9. Top executives and managers at the restauranteur level and above own sufficient amounts of stock in the corporation to keep them invested in the company and happy within the institution’s organization.

10.  CMG’s top management is carefully selected from experienced executives that come from a broad array of the food industry sector.  Their knowledge and insight have helped the Founder to implement his vision of food with integrity, to change the way people think about and eat fast food.

Note: It was necessary to use other references to obtain some of the information required for the Governance section that did not appear in the case study.

III. External Environment: Opportunities and Threats (SWOT)

A.     Natural Physical Environment: Sustainability Issues

Climate changes impact Chipotle operations yearly and that is why it has become an important aspect of the company. Most of these environmental factors are out of the company’s control, such as weather conditions. The main environmental issues that Chipotle faces are extreme weather conditions since they affect important crops. Avocados are an important ingredient in Chipotle’s menu and it the fruit can be really impacted by weather conditions. Climate change could impact the producers of their meat as well. Freezes or droughts can cause price volatility which also affects the product demand.

Like any other restaurants, Chipotle is vulnerable to price changes in food, shortage of certain crops or even food safety concerns. Climate changes such as floods, droughts or freezes could affect any restaurant in the long term. Due to these events, food is more scarce which increases its price and restaurants get affected. Most of the company’s food is exported from different places and even if the climate changes may be far from the US it still can impact everyone. A significant increase in price could affect the cost of operations for Chipotle and at the end of the day the consumer gets affected as well. Chipotle has a policy that states that if cost increases in one or more ingredients, they will suspend temporarily the service of those items. Any changes like these could really affect Chipotle’s brand. Chipotle is investing a large amount of their revenue to create more sustainable approaches that will help them plan for future climate changes.

B.     Societal Environment

In 2015, Chipotle faced their biggest crisis since they opened. The restaurant experienced an E. coli outbreak that affected nearly 700 hundred people in one of the locations in Ohio. The bacteria is formed when food is left out in unsafe temperatures. The outbreak was not in all locations; however, people realized the danger and related it to other outbreaks that had happened in the past in other parts of the world and took precautions. The company took a big hit, the shares plunged and people stopped going to the restaurant. It took years for Chipotle to convince the people and investors that they had improved their food safety.

Chipotle hired a new CEO, Brian Niccol, and started coming up with new business strategies to attract their customers back to the restaurant. Currently, the strategy seems to have worked and Chipotle’s shares has gone up this year. After the 2015 crisis, Chipotle has improved their food safety protocols and has come up with new technological advances that make the company stand out. The restaurant is now really strict with keeping their food fresh and in right temperatures so that they can prevent other negative events.

C.     Task Environment

One of the highest driving forces of the industry’s competition is the growth and profitability. Even though the restaurant sector has shown small growth in the past years, the fast-casual market (which is small) has seen growth. Chipotle falls in that category and is the reason Chipotle has been successful and has grown so drastically. A medium force driving the industry would be the fact that people are more aware of food nutrition. Nowadays, people want to eat good quality food in a fast-paced restaurant; where they can get food quick and at the same time, they want something healthy. This is the main reason why Chipotle has emphasized in showing the healthy benefits of their food.

A lowered driving force would be the impact of technology. Every restaurant has been impacted one way or another by technological advances. A lot of companies have taken advantage of these advances and have started to use it to facilitate their services. Chipotle is using technology to make their services online and so that they can speed up the process of serving food. These factors have impacted not only Chipotle in the United States, it has impacted every restaurant in the world. The industry keeps changing and it is important for each company to take into consideration these changes to be able to be competitive in the market.

Chipotle has maintained its growth in recent years and is expected to keep growing steadily. If an economic crisis happen then the market will get affected because people will look for more affordable means of food. The company already has slim margins on their food prices so that are not likely to lower them so they may get affected more than other restaurants. Therefore, if the economy stays positive then Chipotle will stay growing.

D.    Summary of External Factors

For Chipotle the natural physical environment, the societal environment and task environment are crucial factors that are important to make the company successful. However, at this time the two most important factors would be the natural physical environment and the societal environment. Currently, our society is much more aware of health and environmental issues. Chipotle has to be careful with their processes of food safety and their waste disposal systems. Even though Chipotle has been doing a good job controlling these factors, they always need to make sure that they comply with all the regulations to prevent future problems. As time goes by and technology advances, there would be better ways to deal with waste disposal and definitely new changes with safety issues since it is one of the most important factors in the restaurant industry.

IV. Internal Environment Strengths and Weaknesses