The Chipotle Case Study: Analysis and Overview

Strategic Profile/Introduction

Chipotle Mexican Grill Inc. is a public company that was founded as World Foods Inc. Later the company merged with a company out of Delaware named Chipotle Mexican Grill Inc. The company became public in January of 2006. An interesting note is in 1998 McDonald’s became the majority shareholder by making an equity investment in the company. However, in 2006 McDonald’s sold off its investment in the company.

“Chipotle began with a simple philosophy: demonstrate that food served fast doesn't have to be a traditional "fast-food" experience. Over the years, that vision has evolved. Today, our vision is to change the way people think about and eat fast food” (Pederson). Chipotle is a combination of a restaurant and fast food. The goal is to provide a casual atmosphere and provides quickly prepared food using fresh ingredients. The menu is limited and focused on offering items like tacos, burritos, and salads.

Chipotle has over 1600 restaurants located primarily in the United States. Chipotle also has restaurants located in England, France, Canada, and Germany. With Chipotles take on fast food, they have set themselves up to compete not only with fast food restaurants but traditional restaurants as well. They offer quick food like a fast food restaurant would but also a relaxed setting like a traditional restaurant would.

The industry of fast food is one that the primary competitors have chains of restaurants in multiple locations. Some of these competitors have been long established when Chipotle was founded. Fast food restaurants like Burger King and Wendy’s are only a few that Chipotle has to compete with. Panera Bread and Qdoba are to restaurants that have similar values that Chipotle operates by. They are also in the mindset to offer a fast casual dining experience.

Situation Analysis

• Greater disparities income levels- Chipotle has restaurants all over the country and also globally. The common income levels of customers will vary drastically depending on the city and country.
• Rising affluence- Certain areas in which chipotle restaurants are located there are many competitors in the same area that may take customers away from them. In nicer areas potential customers can afford to dine at higher- priced restaurants.
• Changes in ethnic composition
• Store Operations- The way a restaurant is ran may differ depending on each location since each restaurant may have a different manager who has different strategies and styles of how to run a restaurant.
• Greater concern for quicker food- In the current American society there is a culture of being busy and always on the run. This bodes well for Chipotle as they provide food that is ready relatively quickly after it had been ordered.
• Health and fitness- culture is shifting to becoming more aware of healthier options. Not all of Chipotles offerings are healthy choices. This may deter customers.
• Class structure- Other countries may have a different structure than what the U.S. currently has
• Education levels
• Taxation at local, state, federal levels
• American with Disabilities Act (ADA) of 1990
• Increases in minimum wages
• Political Stability. Especially internationally
• Work week. Other countries may have a different work week than what the U.S has.
• Employee benefits. Some may be mandatory
• Product labeling requirements
• Wireless communication
• Emergence of Internet Technology
• Social Media- media such as Facebook, Twitter, and Instagram can all be used to spread topics related to Chipotle.
• Value chain structure due to technology
• Automation processes
• Changes in stock market valuations
• Fresh ingredient prices- Chipotle relies heavily on using as many organic ingredients as possible. Cost of ingredients may change depending on many factors such as crop shortage or new vendors.
• Unemployment rates
• Interest rates
• Changes in stock market valuations
• Structure of economic system in other countries
• Inflation rates
• Economic growth rate
• Labor costs
• Worker skill levels
• Consumer demand. Consumers may demand more value for their money
• Increasing global trade
• Currency exchange rates
• Europe culture- Chipotle founder claims the food culture across Europe somewhat resembles what Chipotle is aiming for.
• New unknown markets

Porters Five Forces and Financial Ratios

Based on an article written on Quora.com, Chipotle’s legendary success can be credited to the ownership, mission statement, and the products and services that they offer in their restaurants. Below you will find numerous reasons for their success and the reason each makes the Chipotle organizations successful.

Elegant Simplicity: The dedication to high quality basic ingredients with no compromise.

Company Owned and Operated: Chipotle is able to control the food quality and customer experience through centrally controlled corporate owned locations.

Clear Mission: Chipotle lives by the phrase “Food With Integrity.” This initiative allows their customers to focus on their healthy eating habits. This has a drastic impact on the social status of their organization and its patrons.

Simple Product: All food served is a basic Mexican cuisine, making the choices easier for customers. A willingness to break the rules: Owner Steve Ells believes that this is not necessarily breaking the rules to break them, but it is a rethinking of the entire process. Corporate social responsibility commitments: Chipotle seems to take every initiative

to ensure that they are deemed socially responsible. They recycle, buy naturally raised meats and locally grown vegetables. Customer Responsiveness: Customers are able to contact the organization by writing, calling, emailing, or even Tweeting. The company ensures that their response time is almost immediate.

When the Chipotle organization entered the fast food market, they created overwhelming excitement with their iconic products. The company offers a large variety of basic options that the customers can create over 65,000 meal combinations. Their marketing campaigns are surpassed by none, as have become a marketing machine. They currently utilize employee t-shirts, the well known tin foil on the burritos, company facts and information written on customer drink cups, and even their delivery trucks contain printed marketing material. The Chipotle brand has been made abundantly clear and simple: “serve fresh, healthy, natural food in a clean and efficient manner at a reasonable price. Even though Chipotle has a track history of enormous success, there are always current and future companies looking to enter the market and disrupt Chipotle’s success. Panda Inn Inc., the Taco ell Corporation, and Qdoba Restaurant Corporation are just a few of the direct competitors looking to reduce the popularity and success of the Chipotle Mexican Grill organization.

Porters Five Forces Analysis

• Low initial capital costs.
• Paying for Training, food, drinks, financial, accounting functions, etc. lower operational costs and minimize some risks.
• Very few dominant competitors, leading to businesses entering the industry with new or existing food ideas.
• Price Based
• Establishment locations
• Food Quality
• • Style/Presentation
  • Food Range and Variety
  • Hospitality/Service
• High quality ingredients cause Chipotle to rely heavily on suppliers.
• A supplier price increase, would result in an increase in Cost of Goods Sold.
• Basic menu items result in stable purchase amounts.
• Immigration increases the population that consume these type of specialty foods.
• Chipotle is considered a product differentiator, and the value to seek out a similar product/service is high.

Threat of Substitution: MED

• Economic conditions may cause indirect substitution through customers cooking at home because they cannot afford to eat out.
• Other “specialty” restaurants providing food to taste, such as Barbecue Pits, American/Chinese cuisine, etc.
• Chipotle relies heavily on organics, which leads them to offer only quality ingredients.
• Chipotle is a leader in the Fast-Casual restaurant industry. Fast-Casual is loosely defined but understood as a more upscale than fast food restaurants, yet cannot offer table or drive through service.
• Food With Integrity. This philosophy sets Chipotle apart from competition by creating a unique taste that is difficult to imitate. Naturally raised ingredients help lead to its customer growth.
• Chipotle owns and operates all of its restaurants, and does not sell franchises. This allows Chipotle to place a strong emphasis on the restaurant manager and keep tight control of who and how each store is managed.
• Highly dependent on the success of its suppliers. It takes longer to identify and develop supplier relationships, and it cost more to establish them.
• The cost of sourcing high quality ingredients is directly relayed to consumers.
• Chipotle uses a relatively simple and standard hierarchy: staff employees report to a restaurant manager, who reports to a regional manager, who reports to company director, and lastly to the President.
• While the restaurant boasts on natural ingredients, this doesn’t mask the fact that its products may not be healthy. Average burritos run 900-1000 calories.
• International expansion opportunities. Chipotles Founder Steve Ells claims “In many ways, the food culture in Europe matches our priorities much more closely than in the US.”
• With the wide use of smart phones, specific deals and offers can be given via text.
• Chipotle has the opportunity of expanding their network via social media better than competitors. You can follow Chipotle via 6 different social media options; Facebook, Instagram, Twitter, Google, YouTube, and Pinterest.
• Chipotle is currently offering a $20,000 scholarship to 10 lucky winners. The Scholarship is named the Cultivating Thought Essay. It is just as much an opportunity for Students but the store alike. Students will get their essay published on Chipotles cups and bags. But this truly is a marketing opportunity for Chipotle that could continue for years to come.
• The evolution of Fast – Casual dining segment is happening. As this segment of the industry is rapidly expanding, Chipotle has no shortage of competitors. Panera Bread is Chipotles biggest competitor, but Qdoba and Pei Wei also compete in this industry segment.
• Threat of a competition in a foreign market, where Chipotle is minimally experienced.
• Relatively simple business model for a competitor to copy.
• Chipotle faces sharp criticism any time its actions appear out of step for social causes. In the public’s eye, it’s all or nothing. If they promote being environmentally healthy, using natural and organic ingredients, and proper treatment of animals, then they have to commit 100%. As soon as Chipotle cuts the corner or takes a shortcut, they are widely criticized.

TOWS Strengths Weaknesses

• Chipotle can bring quality organic food to a completely new unique environment with international expansion.
• Being a leader in the Fast Casual market, Chipotle can continue to further expansion via smart phone deals and offers.
• International expansion will force Chipotle to use new suppliers, and the company can learn not to be highly dependent upon established suppliers.
• International expansion may force Chipotle to use a different form of management, rather than the simple hierarchy in domestic use.
• Quality organic ingredients will combat the threat of competition in this unique Fast- Casual industry.
• Since Chipotle owns and operates all of its locations, they can ensure quality at every location. Competitors and franchises can copy the business model, but won’t be able to ensure the highest of quality.
• High product cost is directly relayed to customers. Customers are however willing to pay for high quality products.
• Chipotle needs to continue to use only the best products available to continually combat the criticism they may face if they use less then the best.

Strategic Alternative 1: International Expansion.

According to the provided case on page 11, Chipotle only operates 3 restaurants internationally. The primary issue with moving into a foreign market is that it is unfamiliar. The company already has long established, and effective procedures for operation in the United States.

There are a lot of steps that will be required before international expansion can be completely successful. A native businessperson that Chipotle leaders can trust should be hired for each location. Chipotle generally promotes hiring “crew”, and then promoting from within the company. Crew employees can become, and hourly manager, then apprentice, General Manager, Restaurateur, and then a Restaurateur of multiple locations. For opening new locations in a foreign market this business model will fail. A native who can relate to the cultures, customs, and habits of those markets not in the US needs to be hired to head operations.

In order to be successful internationally, Chipotles management team and directors will need to undergo training on foreign markets. Generally accepted marketing and advertising may not be appropriate when speaking to a new audience. Chipotle has a long established line of success with happy customers enjoying Chipotles menu. If customers are properly informed about Chipotles Food with Integrity philosophy, it is probable that the company can succeed.

Cons of opening stores in foreign markets include not knowing your customers culture. Also the company may not be equipped with the information and technology for foreign operations.

Strategic Alternative 2 & 3: Chipotle provides its own products.

Chipotle could minimize several threats and capitalize on its strengths by producing its own product. Chipotle currently prefers to work with farms that are family owned and operated. They partner with Niman Ranch, Meister Cheese Company, Chefs Garden and other small operations. If Chipotle started farming their own product, they could ensure the very highest quality for every product. This would be a costly investment initially, but would pay itself off overtime. Chipotle is very dependent upon its suppliers. With only a few suppliers, Chipotle is at their mercy to meet their Food with Integrity goals. Starting a company farm would eliminate this. As a result of supplier shortages, Chipotle has not yet met the goal of 100% naturally raised meat, pasture raised dairy, antibiotic free chicken, or organic beans. Even with long established supplier relationships, restaurants have been left without key ingredients in the past.

Chipotle has previously been criticized by PETA (People for the Ethical Treatment of Animals), for not using suppliers, which use controlled atmospheric killing. A positive aspect of owning their own farm is being able to ensure the Ethical treatment of all their animals. Their website claims to use, “vegetables grown in healthy soil, pork from pigs allowed to freely root and roam outdoors or in deeply bedded barns.” This would be ensured if Chipotle owned its own farms.

With the ownership of their farms, Chipotle can provide a true organic farm to table experience. This would offer new marketing opportunities for continued growth. One of the threats that this company has to deal with a business model that is easy to copy. Having their own farms is a completely unique business model, which very few organizations currently employ. This is not easily duplicable, and would set Chipotle in front of competitors for a long time.

Recommendation and Plan of Action

International expansion – Strategic Alternative 1 – is the most viable of the three proposed plans of action. Chipotle’s brand is one that could resonate at a globalized level. For one, the company’s product is derived from a blend of ingredients with extra-territorial origins. This could lead to consumer familiarity if marketed properly, and also make the supply chain logistics easier through the use of foreign manufactures. Moreover, Chipotle’s annual revenue has spiked by approximately $300 million per year since 2005. While these are astonishing growth numbers, every reasonable investor knows that they are not sustainable in the long run. As more domestic competition emerges, granting consumers more bountiful options, the company could see its average annual revenue tail off. If Chipotle could market itself properly in foreign countries, then it would be able to expand at a rapid pace. There is little to no foreign competition in the realm of fast-casual dining at this moment. Thus, average annual revenues could continue to see an astronomical spike for years to come with proper international expansion.

Before embellishing on the metes and bounds of international expansion, it is necessary to highlight why Chipotle providing its own products – Strategic Alternatives 2 & 3 – would not be a viable approach. First and foremost, Chipotle’s current marketing campaign is centered on ideals like the support of small businesses and organic ingredients. If Chipotle were to provide its own ingredients, then it is likely that consumers would react harshly toward such an arrangement, viewing the company as just another faceless franchise seeking to appease its stockholders. The company has carved out a niche with the young, left wing millennial population who have grown disenchanted over the basic tenants of modern, corporate America. While quality control over its organic ingredients is a respectable goal, it is likely to have a negative financial impact on the company due to the possibility of upsetting the aforementioned marketing equilibrium. Such actions would also bring Chipotle’s company message closer to that of competitors like Baja Fresh and Qdoba, whose products are nearly perfect substitutes. Simply put, it is the Chipotle’s ideals that make it unique in the fast-casual dining industry. International expansion may be a riskier aspiration, but it is also one that carries with it the promise of a much more prosperous fiscal future.

It is next important to explore the financial metrics associated with international expansion. Chipotle has built new stores at an average rate of 126 per year (see case study, p. 82). The company has an approximate investment cost of $795,000 ($0.80 million per unit) that has resulted in a return-on-investment of 61.8%. However, it has been acknowledged that previous international expansion – into London and Toronto, for example – has only had a nominal effect on these figures. However, it is important to note that the reason these effects are small may be due to the simple fact of small sample size. A couple new international stores out of an average of 126 new stores per year will obviously yield minimal results. In order keep its ROI at a healthy level, though, Chipotle should play the slow game and seek to open 10 new stores in international locales over the nest one-year period. This would allow the company to maintain a high level of annual sales revenue, which in turn could be used to promote steady growth in the foreign sector. The one-year timeline is sufficient as a means to test the international waters and obtain a foothold in several markets. Once the company has a strong presence in these countries, which could take three to five years, it should seek to initiate another phase of international expansion.

Prior to exploring the strategies listed above, it is first important to note the risks of international expansion. The first of these is marketing costs, which was mentioned above. Chipotle would likely see an initial increase in its operating costs due to such campaigns, but if done properly could achieve economies of scale down the road. Another risk is that Chipotle does not franchise its stores, instead choosing to operate them all itself. This could lead to problems in the international realm if Chipotle does not expand its central employment properly or incorporate overseas. Lastly, Chipotle could have problems with its supply chain logistics. It would need to find an efficient way to get its ingredients in overseas markets, which could pose several problems due to the companies use of family operated suppliers. This could make the restaurant susceptible to spikes in food costs, like grain and rice, in countries experiencing adverse weather or political strife. An effective supply chain strategy will be needed to make foreign expansion a success. In summary, Chipotle will need to select foreign markets where it can reduce its marketing costs while also achieving proper quality control.

It is advised that the company first expand to modernized countries and, specifically, cities within those countries with a high American presence or fast-paced culture. Examples would be Tokyo, Beijing, London, Vancouver, Munich, Paris, Sydney and Montreal. Each of these cities has a youthful population, strong technological foothold, and a significant connection to the United States. This would allow for Chipotle to make its footprint known in a relatively short period of time. Moreover, the company would have the benefit of using social media and word-of-mouth advertising to cut down on its marketing expenses. Lastly, due to the globalized nature of these cities, the company could ensure that it received its ingredients at proper (or lower) cost and also could effectively operate its business without heavy burden.

Chipotle’s mission of international expansion will also need to emphasize the unique cultures, governments, and economies of each new country. In order to maintain its use of family owned suppliers, Chipotle will need to make sure that it thoroughly analyzes each countries unique supply chain. It should also tailor the ingredients used, as well as portion size, to each of these countries consumer tastes. This has already been seen in the London store, which was one of the first to offer wheat-based tortillas and also has smaller portions than its American counterparts. The company should also implement a strategy to achieve economies of scale in the supply chain by using each countries different economic condition to its advantage. For example, in a market like Tokyo, Chipotle could use the higher availability of rice to its advantage as a way to keep its costs lower. Lastly, and most importantly, Chipotle must ensure that it emphasizes each countries demographic base in all its decisions, from employment down to product pricing. If Chipotle is to succeed overseas, then it will need to be flexible in its approach. A good example of this is McDonalds, Chipotle’s former parent company, which became an international behemoth by maintaining a fluid approach to expansion. Instead of forcing the same product, service, and the like on foreign consumers, McDonald’s instead chose to tailor its menu, service, and restaurant decorum to meet the needs of the countries population.

In summary, international expansion is a risky endeavor, but of the proposed plans of action has the most likelihood to allow Chipotle to maintain its sky-high growth rate. In order to succeed, Chipotle is going to need to take a highly cognizant approach to each new market. It will need to make sure it caters to the populations consumer tastes, while also using each countries economic situation to its advantage to ensure low operating costs. Lastly, Chipotle will need to continue to embrace the use of social media as a low-cost, highly effective way of creating marketing leverage. If Chipotle follows the steps above, then its shareholders will likely see it grow from a domestic powerhouse to an international juggernaut in the next decade or two.