Chipotle Case Study

Chipotle Overview

Steve Ells founded Chipotle Mexican Grill (CMG) in 1993 and has been with the company ever since.

The company operates on an almost 8% profit margin which is fantastic for a fast food restaurant. For the fiscal year ending December 31, 2015, revenues increased to $4.501 Million representing an increase of 9.6% over the previous year fiscal end. The company’s net income increased roughly 7% to $476 million. The company currently has 1,900 domestic stores and is expanding rapidly internationally. It has a goal of adding at least 5,000 stores in this space within the next several years. It has no plans to slow growth of domestic stores which is on track to approach 4,000 during this period.

The company hires top-quality chefs to oversee the menu and cooking methods. It adheres to freshness in the food choices second-to-none in the industry. By limiting its menu, the company can focus on quality control that would be much more challenging with more choices.

How the Chipotle Started

Steve Ells noticed a growing popularity of taquerias and burrito stands in his duration as a line cook in San Francisco. He discussed this with his father, who agreed the concept was sound and loaned him $85,000. Ells created his first store in Denver, Colorado. He and his father projected the breakeven point was selling 107 burritos per day, which they surpassed by a landslide. After a short period, they were selling over 1,000 per day, which they used to fund another store opening.

He opened another store with cash flow from operations as well as an SBA loan. His father invested $1.5 million to keep the growth engine going. The McDonald’s Corporation saw potential in this chain and in 1998 invested a large sum of money. This capital allowed the company to expand rapidly to 500 stores by mid-2000’s.

Initial Problems

Chipotle passes itself as fast food that is healthy. They use fresh ingredients and organic whenever possible. When McDonald’s became a major shareholder, customers saw a disconnect. McDonald’s is not considered by any to be a health-conscious organization, at least not back then. There was a stigma attached to having McDonald’s as a significant shareholder.
Along the lines of keeping the operation as natural as possible, the company was able to find farms that raised the pork naturally. That was not the case with chicken and beef. The majority of chicken and beef served was below their quality standards due to lack of supply.

People like to have choices. Chipotle prides itself on keeping its operations simple. They did this by offering only a few items on the menu, and the fixings were limited as well. Its competitors came in (like Qdoba) and offered many more choices.

Why it Works

Fresh ingredients are the big appeal of this company, even to this day. Even though they had trouble getting naturally-raised chicken and beef, in the beginning, a health-conscious society has led more farmers to adopt these practices. If you look on their website, they have a section dedicated to explaining their philosophy which is “Food with integrity.” They use the most natural (they call real) ingredients possible, and they cook it themselves. They have diverted themselves from any GMO ingredients and are staying clear of animals raised using hormones and not free range.

The company also chooses top quality chefs. The CEO, Steve Ells is culinary trained and hires others who are as well. The company believes that processed food should never be a part of their brand.

There is no doubt Chipotle enjoys word-of-mouth promotions. Where they exist in large cities, you’ll hear office workers often include them as a regular place to go. People are more concerned about their health, and the menu is full of healthy ingredients.

The company has maintained the image of freshness since its inception. This gives them a huge advantage as being the first on the block. The reputation has potential customers trying them out for the first time.

Interestingly, you’ll find few advertisements from the company on television. They believe that the brand should speak for itself and not rely on advertising as the basis to bring people in. The company believes that spending too much on advertising would affect their pricing strategy, meaning they would have to raise the price of the product. Whether or not this ad-free strategy can continue to sustain the company remains to be seen. The company is aware that advertising does increase the bottom line. If they eventually run into financial difficulties, they may have to reassess their strategy.

Another subtle promotional strategy the company uses is how it hires and nurtures its employees. Having employees who are happy will help to keep customers happy. The employees will be on board with promoting the company. This is unique in the fast-food industry.
The company firmly believes in promoting internally. They believe that all employees should start at the bottom (whenever possible) and work their way up. They map out a career path that includes increases in both pay and responsibility for every promotion. Employees become champions of the brand, and this helps with marketing the company.

If you take a look at Yelp for Chipotle, you’ll see mostly favorable reviews, although, they are not as near to five stars as you would believe, given its reputation. That also depends on the city you punch into the website. Most complaints will tend to be store-specific and does not necessarily reflect on the company as a whole.

The menu remains sparse compared to other chains, and this is often a bone of contention with purists of Mexican dishes. These purists don’t like the concept of Chipotle and probably never will. The company is not trying to cater to these purists either. It believes in providing real and simple food. End of story.

Lessons Learned by The Business

  1. Mistakes happen. The company is going through some tough PR right now due to health and safety issues surrounding E. Coli outbreaks. If anyone can recover from this type of scare, it is Chipotle. There’s no guarantee, but the chances are greater this company will see it through.
  2. Chipotle has turned the fast food industry upside-down by charging high prices for their product and a limited menu. This is an unheard of practice in this industry. The company stands by this strategy as it offers up a quality product.
  3. When you keep the cooking in-house, you get to control the process and make changes quickly. Many restaurants outsource the cooking and give up control of the entire process. Even if you get to choose the ingredients when you outsource, there are no guarantees those ingredients will be used in the manner you desire.

How Other Businesses Can Learn from This

When you focus on your brand to the point where people make comparisons using your brand, you are in a great strategic position. People actually will use the reference “It is the Chipotle of…” and choose whatever industry you are trying to make the comparison.

Another key component is the company focuses on making their employees brand ambassadors. This is accomplished via their hiring practices of promoting from within. This adopts an environment of loyalty to the company and the brand.

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