Chipotle Mexican Grill
MBA 680 – Case Study – 10.11.15
Tim Irwin
Chipotle Mexican Grill
MBA 680 – Case Study – 10.11.15
Tim Irwin
2015
2015

Chipotle Mexican Grill
Steve Ells, founder of Chipotle, after graduating from the Culinary Institute of America, ended up in Denver where he cultivated his idea for Chipotle. Starting with one restaurant in 1993, to 1,595 units in 2014. (Thompson, 2014). His mission was simple, Food with Integrity. (Thompson, 2014). The concept was to “change the way people think about and eat fast food.” (Thompson, 2014). Since that time, the idea has been defined more specifically to read, “Food with integrity is our commitment serving the most delicious ingredients we can find, raised responsibly and prepared using classic cooking techniques.” (Chipotle, 2015). This idea was seen as innovative and forward thinking early on, when McDonalds invested in the business and eventually purchased a majority stake in the company. This provided the young start up the capital backing and cash infusion to continue to grow. When McDonalds decided to take Chipotle public through an IPO and then sell all of its interest, this provided Ells the opportunity to take the organization in whatever direction he desired. (Thompson, 2014). That direction was an aggressive and sustained growth strategy with plans to open several hundred domestic and international locations annually. This is ironic given that the huge success of Chipotle has its sights set on market share once held only by McDonald’s.
In reviewing the company’s commitment to integrity and values, the six foundational expectations within the strategy are a specific menu, minimum ingredient standards, customer experience (engagement), operational efficiency, organizational culture and operating through environmental consciousness. (Thompson, 2014). The importance and relevance of these expectations are that they provide support for each element of the successful operation, and define the company initiatives that will help leadership and other employees to operationalize the mission and vision. The commitment to maintaining these standards has posed some challenges. Food with integrity has prompted the company to change to organic, locally sourced products, in a measured approach beginning in 2011, even to the extent to avoid products grown using genetically modified seeds. Coupled with this change is the expectation to use “responsibly raised” meats. These expectations have posed significant challenges to Chipotle and others because crops take longer to grow, they are more susceptible to environmental factors, the costs of growing and producing these ingredients is higher. This can create challenges with supply chain availability. However, an interesting approach this problem has been taken by Chipotle. In instances where the restaurant is forced to use ingredients that do not meet these standards, they post temporary signage to inform their patrons, allowing customers to choose. (Thompson, 2014). This may seem like a small thing, but the proactive and honest decision to inform consumers is a strategy that will create trust with the public and potentially garner a more loyal consumer base in the long term. Small decisions like this, also show the company’s commitment to the mission of Food with Integrity.
A review of the most recent SEC information shows an impressive growth track in total revenue volumes from $1 billion in 2007 to $4.8 billion in 2014. Equally impressive are that the company has been able to grow aggressively while maintaining low debt and increasing shareholder equity annually. Total expenses in 2007 were, $1.5 billion with a growth to $3.3 billion in 2014, while earnings per share grew from $5.73 to $14.35, from 2007 to 2014, respectively. (CMG, 2014). The expectation of operational efficiency is validated when reviewing year over year expenses from 2012 to 2014, a limited menu, consistent store size and amenities and targeted marketing strategy have all contributed to the ability to maintain consistent expenses. Occupancy, labor, general administrative and other costs all remained flat or decreased slightly, which represents prudent and efficient management. (CMG, 2015). $ represented in (,000s) | 2014 | 2013 | 2012 | Occupancy costs% of revenue | $2305.6% | $1996.2% | $1716.3% | Labor costs% of revenue | $90422% | $73923% | $64123.5% | General Admin% of revenue | $2736.7% | $2036.3% | $1836.7% | Other% of revenue | $43410.6% | $34710.8% | $28610.5% |

Another trend that represents the success of the company is the trend on shareholder return, as represented by the graph below. (CMG, 2015).

The main competitors of Chipotle, specifically Moe’s Southwest Grill, Taco Bell and Qdoba Mexican Grill provide interesting and mixed results. Taco Bell has struggled over the past few years, trying to boost sales and keep market share by adding breakfast items and partnering with other companies like Doritos. But efforts to redesign the menu items with more upscale offerings and a newly redesigned Cantina menu, seems to have started to rebound. Moe’s is one of many subsidiaries of a larger company, Focus Brands. With sales of $526 million, it is significantly smaller than Chipotle, but the focus on healthy menu selections and healthy, high quality ingredients, the positioning seems accurate. Qdoba, also a Denver based company, is the 2nd largest company in this segment in 2014, and probably the largest competitor of Chipotle. The main advantages that Chipotle has over its competition are size, focus and commitment to a single strategy, independent ownership and operational balance (revenues versus expenses). While the competitors listed above, all have the resources of a larger, parent organization behind them. Each, with possibly the exception of Qdoba, are one of many businesses within that organization. Thus the focus given and resources allocated are going to be evaluated and measured as an element of a larger strategy. While Chipotle can apply purpose, focus and resources to support its single mission and vision. Chipotle is positioned well against its competition and the growth strategy, while aggressive, is balanced.
Leadership and direction of Chipotle appears to be on track. The opportunities presented are continuing to focus on the commitment to quality and continued measured growth. The caution would be that while goals to rival companies like McDonald’s are ambitious and sounds good to investors and shareholders, they need to be wary of competitors like Moe’s or Qdoba. Qdoba is gaining market and as was learned from Under Armour, when larger global companies do not take competition seriously, for whatever reason, the progressive erosion of market share can have a larger impact. Being wary and keeping one eye on the rear view mirror is important in strategic planning, as objects in the mirror may be (getting) larger than they appear.

References
Thompson, Arthur A, 2014. (Thompson, 2014). “Chipotle Mexican Grill in 2014: Will Its Strategy Become Model for Reinventing the Fast Food Industry?”
Chipotle Mexican Grill, Inc., SEC-10K, (CMG, 2015). Retrieved on October 10, 2015 from: https://www.sec.gov/Archives/edgar/data/1058090/000119312515033771/d861905d10k.htm
Cardenal, Andreas. (Cardenal, 7 Sept, 2015). “3 Things Chipotle Mexican Grill Inc Is Doing Better Than Everyone Else.”, The Motley Fool, retrieved on October 11, 2015, from, http://www.fool.com/investing/general/2015/09/07/3-things-chipotle-mexican-grill-inc-is-doing-bette.aspx www.chipotle.com, (Chipotle, 2015). Retrieved on October 11, 2015, from https://chipotle.com/food-with-integrity