Individual Strategic Assignment: Chipotle Mexican Grill
Royal Roads University
BUSA506 – Strategy

Instructor: Dr. Terry Powers

Craig Westcott

November 22, 2015

Word Count: 2,050

Steve Ells may not have invented the “fast-casual” sector, but since his founding of Chipotle Mexican Grill in 1993, he has shepherded the development of the restaurant chain which many in the industry might say best exemplifies it. Growing Chipotle from a single unit Denver-based operation to an international 1,230-unit chain which one Wall Street analyst called “the perfect stock,” Ells, a Culinary Institute of America graduate, set out with a vision “to change the way people think about and eat fast food.” When Chipotle announced the launch of a second restaurant concept, ShopHouse Southeast Asian Kitchen, putting to the test Ells’ belief that “the Chipotle model could work well with a variety of different cuisines,” it left many optimistic that lighting, perhaps, could strike twice and that ShopHouse might prove to be a second home run for both Ells and Chipotle.
Core Competencies Chipotle Mexican Grill has two core competencies that can best be rolled up and described as “the Chipotle Experience,” namely the quality of their food, prepared as per Ells’ mantra of “slow food served fast,” and their setting being more upscale than a traditional fast food restaurant. Figure 1 – Core and Distinctive Competencies
Figure 1 illustrates that these core competencies are arrived at through four distinctive competencies of the five elements of Ells’ original strategy for Chipotle:
- Serving a focused menu of burritos, tacos, burrito bowls, and salads;
- Using high quality raw ingredients and classic cooking methods to create great tasting and reasonably priced dishes ready to be served to customers minutes after they were ordered;
- Creating an operationally efficient restaurant with an aesthetically pleasing and distinctive interior; and,
- Having friendly people take care of each customer.

Additionally, Ells wanted to capitalize on the increasing awareness and respect for the environment. This was done by focusing even closer on the ingredients, eventually shifting to the use of organically grown fresh produce and meats raised humane manner without hormones and antibiotics as a differentiator. This “Food With Integrity” campaign served to further improve and distinguish “the Chipotle experience.”
Attractiveness and Future Prospects An analysis of the strengths, weaknesses, opportunities, and threats facing Chipotle Mexican Grill (see Appendix A – SWOT Analysis) reveals a company which looks not only strong in the present, but a company that is poised for continued growth into the future. Chief among Chipotle’s strengths are their brand image. “The Chipotle Experience,” and especially their commitment to “Food With Integrity,” should continue to draw customers as consumer health consciousness becomes even greater. This should lead to continued expansion of the chain. Low start-up and construction costs compared to competing fast-food and fast-casual restaurants will then factor in, and are of special significance given that all Chipotles are company owned and operated and not franchised. Chipotle should continue to expand both within the United States as well as internationally, although one would expect the latter to take more time as well as require an increase above their typically low – by industry standards – advertising budget as it could be reasonably assumed that new and overseas markets would not have the benefit of word-of-mouth publicity and would most likely not have generated much other alternative (and free) media coverage. This lower brand awareness would also likely be an obstacle that any ShopHouse Southeast Asian Kitchen would encounter when rolling out using the Chipotle model. This would serve to temper growth, if only slightly, due to the cost and time associated with conducting the additional range of promotional activities required to build the brand. Although key to keeping costs down and throughput up, Chipotle’s limited menu availability might serve to drive away customers in the long run. Additionally, the cost pressures inherent in organic produce, naturally raised meats, and local sourcing, could continue to cut into profits, although these “Food With Integrity” ingredients are among the key differentiators between Chipotle and their competition. Should the competition decide to go more upscale, this could put additional pressure on this already limited supply chain, as could, potentially, the continued growth of consumer health consciousness, although it’s just as likely that an increase in demand for organic and/or sustainable ingredients could serve as the catalyst required for an farmers to switch to these methods, thereby increasing supply to correspond.
Value Chain (See Appendix B)
Primary Activities
Supply Chain Management: Reliable suppliers that are willing to comply with Chipotle’s specifications and forward, fixed, and formula-pricing protocols are put on an approved supplier list. Chipotle then uses independently owned regional distribution centres to purchase and deliver ingredients and supplies to its restaurants.
Quality Assurance and Food Safety: Quality and food safety programs throughout the company’s supply chain ensure compliance with applicable federal and local food safety regulations.
Restaurant Management and Operations: Each restaurant typically has a general manager, apprentice manager, and one or two hourly service managers and one or two hourly kitchen managers.
Marketing: Utilizing print, outdoor, transit, theaters, radio and online advertising, Chipotle’s budget is relatively small compared to largest competitor Taco Bell. Additional promotional activities take place in new markets to generate interest in the restaurant and brand awareness.
Restaurant and Food Service: With an average of 20 full- and part-time crew members, Chipotle’s staff are expected to give the customer quick and pleasing service, “one burrito at a time,” that is consistent with “the Chipotle Experience.”
Secondary Activities
Research and Development: Chipotle’s “Food With Integrity” initiative requires work with animal health and welfare experts as well as visits to farms and ranches from which it received ingredients.
Human Resource Management: Restaurant managers are responsible for hiring and retaining crew members, as well as providing hands-on training opportunities. Given Chipotle’s high reliance on internal promotion, and rapid growth, top-performing crew could expect promotion opportunities.
General Administrative: Field support staff tasked with fostering culture of high standards, constant improvement, and employee empowerment. Additionally an internal team of real estate managers take care of restaurant site selection.
Strategy
Chipotle’s original strategy is rooted in founder Steven Ells’ five elements:
- Serving a focused menu of burritos, tacos, burrito bowls, and salads;
- Using high quality raw ingredients and classic cooking methods to create great tasting and reasonably priced dishes ready to be served to customers minutes after they were ordered;
- Creating an operationally efficient restaurant with an aesthetically pleasing and distinctive interior;
- Having friendly people take care of each customer; and,
- Doing all of this with increasing awareness and respect for the environment, the use of organically grown fresh produce, and meats raised in a humane manner without hormones and antibiotics.

Following McDonald’s 2006 divestiture, Ells continued to hold true to the above tenets while focusing on rapid expansion, ongoing innovation, and constant improvement. The boosting of “throughput” was seen as a key as delivering “slow food, fast” would continue to define the brand and, just as importantly, increase revenues.
Competitive Strategy Based on Ells’ five elements (above), the competitive strategy employed by Chipotle, although marketing themselves based on a broad differentiation strategy, is still most likely primarily a best-cost strategy. “The Chipotle Experience” and especially the “Food With Integrity” initiative increase value in the minds of a broad range of customers, but it’s Chipotle’s reasonable price – a tab of about $9 per customer – that gives customers the value for money for these differentiated goods that really sets them apart from any other competition within the fast-food or fast-casual sectors.
Differences in Strategy
Although similar in their cuisine, use of high-quality ingredients, adoption of online ordering technology, and emphasis on hospitable service, there are two primary differences in strategy between Chipotle and Moe’s Southwest Grill. Chipotle maintains a small focused menu whereas Moe’s has expended their menu to include kids, vegetarian, gluten-free, and low calorie options, as well as expanded hours allowing for Moe’s to serve a breakfast menu. Moe’s also encourages the customization of menu items, a practice that has, over time, become more and more discouraged at Chipotle. Chipotle, as well, tends to, where permitted by law, license their restaurants to serve beer and margaritas, whereas Moe’s does not. The single largest difference, however, is that Chipotle’s 1,230 restaurants are all company owned and operated, whereas Moe’s is a franchisee model, and none of their 420 fast-casual establishments are actually owed by global franchisor FOCUS Brands.
Financial and Operating Ratios (See Appendix C) Chipotle’s outstanding financial performance had, by 2012, left some believing it was on track to be the next McDonald’s. One analyst called it “the perfect stock,” what with revenues growing by 20.2% between 2007 and 2011 and net income growing by 32.1% over that same period due to increased efficiency boosting profit margins. Earnings per Share rose from $2.13 in 2007 to $6.76 in 2011. This fairly new company, having just been taken public in 2006, not only grew exponentially, but was able to grow it’s profit margin during this period of economic downturn. Additionally, it’s worth noting that, despite this rapid expansion, Chipotle was able to keep debt ratios in check, most likely due to the low average development and construction costs.
Competition
A SMART Model analysis (see Appendix D – SMART Model) was undertaken to size up Chipotle Mexican Grill against the competition and, based on the assessment, Chipotle does, in fact, hold a net competitive advantage over all of its rivals. The criterion Number of Locations was used in an attempt to gauge resource strength, as revenues and sales data was not available for all competitors. As such, this factor carried a full one quarter of the weight of all factors/attributes as it could also account for brand awareness and market share. From a resource perspective, however, it does not take into account that some or all of the locations of one competitor may be company owned where, for another, they may be primarily owned by franchisees. In this category, Chipotle finished second only to Taco Bell. For these two top competitors there is financial information available for 2011 in so far as sales per restaurant is concerned – Taco Bell average $1.28 million and Chipotle averaged $2.01 million per restaurant. Although Chipotle has revenues per unit of almost two to one over Taco Bell, Taco Bell has considerable more restaurants, although the majority of these are franchisees. When considering only company owned restaurants, Chipotle would actually have bested Taco Bell in sales $2.47 billion to $1.54 billion. The entire Taco Bell system, with 2010 sales of $6.9 billion, is a force to be reckoned with. Taco Bell, however, cannot be seen as a direct competitive threat to Chipotle, despite introducing new upgraded products in an attempt to take their menu more upscale. Taco Bell is still clearly fast-food and as consumers become more health conscious they will continue to move to healthier alternatives such as Chipotle, Moe’s, or Qdoba. As such, I forecast much slower growth for Taco Bell, if not a decline, and believe that Moe’s Southwest Grill is, in fact, Chipotle’s single largest competitive threat in the Mexican subsector of fast-casual dining.
Recommendations
Chipotle Mexican Grill should continue to focus on their core strength of providing “the Chipotle Experience” of good quality, reasonably priced, “slow food, fast” served in a pleasant atmosphere while continuing to leverage founder Steven Ells’ commitment to ongoing innovation and constant improvement. As they continue with their expansion, both domestically and internationally, as well as the expansion of their brand from fast-casual Mexican to fast-casual Asian and beyond, Chipotle should continue to differentiate themselves first and foremost through their “Food With Integrity” initiative. This could be achieved by not only strengthening relationships within their existing supply chain, but by also sourcing additional suppliers both in existing and potential markets in order to ensure that it can continue to meet the demand for ethical and organic ingredients. In fact, the idea of buying direct or even of raising their own produce and livestock should be investigated. Finally, differentiation and environmental cachet could be achieved through additional innovation, such as the high-efficiency lighting installed in Chipotle’s ShopHouse roll-out location, especially if such initiatives are able to either continue to lower development and contraction cost of new locations and/or reduce the operating expenses of new and existing locations.

Appendix A – SWOT Analysis

Appendix B – Value Chain

Appendix C – Financial and Operating Ratios

Appendix D – SMART Model