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ENT 6126 Strategic Entrepreneurship
Kenneth Hamner
Leandre Meldener
Jessie Schneider
Tetyana Us
Chipotle Mexican Grill Case Study
Business Opportunity and Core Business Model
Chipotle Mexican Grill, Inc. capitalized on a perceived customer demand for
higher quality food, sourced from sustainable and responsible farms, and served in a
relatively new fast-casual market segment. The fast casual market segment fills the gap
between full service restaurants with table ordering and wide ranging but high average
ticket prices and quick service restaurants (previously known as fast food),
characterized by low average ticket prices and fast counter service. Chipotle recognized
a segment where high quality foods can be provided by efficiently managed kitchens in
a relatively fast service environment, enabling the customer to tailor their order by
combining a limited set of ingredients in a customized combination. This business
opportunity proved not only profitable, but its growth rate is essentially twice that of
the full service and quick service segments.
Chipotles barriers to entry may appear at first glance to be low, simply charging
a higher price for higher quality ingredients in a fast casual environment. However, the
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business model and the related execution of that strategy requires spending a higher
percentage of revenue on ingredients, less on traditional marketing, and less on human
resources due to efficiently designed operations and a limited menu. The limited menu
of ingredients enable customers to participate in customizing their meal but because
much of the preparation precedes the presentation of the meal to the customer, the lack
of table service enables Chipotle to save on human resources overall in terms of
percentage of revenue. Given the fact that Chipotle essentially pioneered the fast casual
market segment, it would be difficult to argue that they entered the segment too early
given their success to date. In essence, their innovation was to employ culinary school
skills in preparing high quality ingredients in an affordable manner and casual
atmosphere. They were clearly proactive in their approach and, with a significant
investment from McDonalds, not only in terms of capital but also in terms of processes
and management, much of the risk taking was mitigated successfully. Clearly,
Chipotles commitment to high quality and sustainable ingredients is internally
consistent with their advancement of this market segment and their historical growth
and financial performance supports their vision of the opportunity that exists and the
market demand for this restaurant segment.
Chipotle clearly continues to set innovation goals to differentiate their brand
from emerging competitors in their segment and from competitors such as Taco Bells
Cantina Bell menu offerings. Chipotles management team clearly understands that
they cant stand still and expect to maintain or advance market share. Consequently,
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they have pushed to develop to increase their focus on locally grown and sustainable
ingredients, including farms that employ naturally raised meat and to some extent
organic vegetables. Clearly a completely organic menu is not yet possible due to the
price points in this market segment, but the companys goal is to continue to
differentiate it from its competitors by focusing on high quality sustainable ingredients.
Additionally, the company focuses on innovative marketing approaches such as loyalty
programs and social media targeting millennials, who distrust traditional television
marketing but who value fresh high quality ingredients.
Market Focus and Resource Allocation
Chipotle is an extremely market-driven enterprise that relies heavily on customer
experience and perception of the brand for its success. Instead of using large ad
campaigns and large traditional advertising budgets through traditional channels, they
rely mainly on word-of-mouth promotion of satisfied customers. Social media provides
an efficient and cost-effective way for Chipotle to reach their customers and promote
their brand effectively.
In order to provide high quality ingredients to its customers, Chipotle
introduced a local sourcing program in 2008 that created a network of about 25 local
farms to produce at least 35% of at least on bulk produce item. This program not only
supports the local family farms and cuts down the cost and pollution from transporting
the produce, but it allowed Chipotle to secure a small share of that resource and a
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measure of control over the quality of ingredients. Chipotle is able to at least reasonably
maintain the ingredients from the local markets and stay favored within the
community. Ingredients are, therefore, a leveraged resource for Chipotle. Another key
resource for Chipotle is their distribution center approach, that contributes greatly to
the quality control for the produce. Chipotle owns and operates 22 distribution centers
that supply the restaurants within a geographic area. These centers are responsible for
evaluating the suppliers and aligning their values with Chipotles mission statement.
Because providing high quality ingredients is Chipotles core competency, having
influence and control of the distribution centers and being able to monitor the suppliers
closely is crucial to their business model. Their strategy for verifying and obtaining
resources changed significantly over time. Even though Ells started out with the
intentions of changing the fast food industry to a healthier alternative, with McDonalds
funding and mentorship since 1998, Chipotle followed somewhat in McDonalds
footsteps. It wasn't until 2000 that Ells researched CAFOs (Concentrated Animal
Feeding Operations) and decided to go with free range pork supplier. The sourcing
policy became formal in 2001 with the creation of Food with Integrity mission
statement. In 2002, Ells transitioned to naturally raised chicken and then beef.
None of the current resources provide a sustained source of competitive
advantage. All the resources are relatively easily imitable and obtainable by
competitors. Taco Bell for instance, came out with the Cantina Bell menu to directly
compete with Chipotle. Of course, Chipotle will argue that the quality of its ingredients
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is higher and that its customers know the difference. However, with Taco Bells lower
price points, only the future will tell whether Chipotles model will effectively compete
with this encroachment from a formidable competitor. As Ells has stated, they are
going through incremental revolution to gradually increase the percentage of organic
ingredients in their food. The ultimate goal may be to eventually become all organic,
but the high cost of the ingredients just does not allow for that at this time.
Core Competency and Cost Structure
Chipotles core competencies include the ability to provide high quality food at a
reasonable price and speedy service. These directly relate and align with the original
concept of Steven Ells to provide the public with flavorful highest quality fast food
where the customers could see how the food was prepared. Chipotles cost structure is
more variable-cost based than fixed-cost based. Because their focus is on quality of the
ingredients, their food costs are higher than average and is one of their biggest expense.
Their profit margin is bolstered and supported by achieving operating efficiencies. The
actual restaurant sizes are smaller in comparison to its competitors so its fixed costs
should be slightly less. The restaurants also dont have freezers or microwaves and
some have installed solar panels to reduce its energy consumption. The limited
selection of the menu allows for more efficient assembly line and keeps the employment
costs low. Having the distribution centers serve only within their own geographical
areas also minimizes the transportation costs. Overall, Chipotle has to be highly
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efficient in its operations in order to sustain their profit margin without compromising
the quality.
Management Style and Culture
Steven Ells is the founder and the current CEO of the company. He possesses the
vision for Chipotle to become one-of-a-kind fast casual restaurant with real food and
integrity. His friends advised him against having the open kitchen and insisted
customers wouldnt pay over $5 for Mexican food when it was offered so much cheaper
by competitors. Ells believed in his vision and created his own path to success through
dedication and drive. He also believes in maintaining strict operational control and
uniformity of execution. He and his senior management team personally visit over 200
different Chipotle restaurants every year in the attempt to maintain consistent quality
and to ensure that their employees and local managers maintain a high level of
dedication and passion for Chipotles mission. Such a hands-on approach enables them
to promote from within, thereby offering their employees opportunities for
advancement. Clearly, the companys high growth rate also offers current employees
room for advancement and encourages entrepreneurial behavior and process
innovation. Arguably, since high quality ingredients play such an integral part in
Chipotles mission, Ells is a key innovation champion considering his commitment to
food sourcing. Chipotle takes risks by sourcing higher cost, but higher quality
ingredients. Another key innovation champion is Mark Crumpacker, the Chief
Marketing Officer, whose aproach is innovative in that it targets a segment of the
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market that arguably favors social media over expensive, mass-market television
advertising. This marketing innovation is not only less expensive, but arguably more
effective and tailored to the values of their customer base.
The company does not appear bureaucratic given its size, and the simplicity of its
business model enables it to focus on execution. Their management team focuses on
communicating closely with their restaurant employees. As discussed, the senior
management team regularly take surprise visits to their restaurants in order to
interview all employees to make sure they are happy, and operations are running
smoothly. They put their employees at ease and make sure that they speak from their
heart and tell them how they feel about the company, and how they like to work there.
This shows how important the culture, and well-being of their entire company is for
Steve and Monty, and that in order to have a successful and profitable company, you
must have employees that have pride in worker there. The company model also puts a
lot of responsibility to the store manager, and she or he is in charge of finding the best
employees, promoting them when they do good work, and making sure the entire
restaurant is operating well.
Chipotle is very conservative when it comes to change. The restaurant chain has
a small amount of options when it comes to their menu. They want to give customers
the freshest and highest quality foods, and to prepare those meals directly in front of
the customer, so that they can see and smell the superior quality. However Chipotle
keeps their options minimal as it might not present more opportunities for profit, as it
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would require more training of the staff, and a larger amount of variety of foods they
would have to buy, which as a result would increase their prices. Chipotle has however
tried in recent years to capture the vegetarian and vegan community by introducing the
Sofritas option in their California restaurants. This option is a shredded organic tofu
blended with various sauces and spices.
Unlike its competitors, Chipotle does not advertise their latest menu options like
most fast food chains do, but rather emphasis that quality is their main worry, and not
to create the latest sandwich with fish, beef and eggs all in one. The company has only
made one commercial in its history, as it believes that advertising is only a small part of
promoting a brand. By selling food of the highest quality, they trust that customers will
recognize that, and tell other people about their experience. Failure is not accepted in
the company as they want employees that truly love what they do, and put all of their
efforts into their jobs. This is why Steve Ells and Monty Moran regularly make surprise
visits to their restaurant locations in order to make sure that operations are running
smoothly. One of the locations they visited, the store manager told them that she had
actually fired her last crew, and hired a brand new one. She said that her past
employees did not perform well enough, and that it hurt the restaurants location. This
shows that even though it is an environment where employees are respected, they also
Problems on the Horizon
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As profitable as Chipotle is, several analysts have said that their shares have
gone ahead of themselves. The company trades at forty times earnings, four times sale,
and trading over forty to fifty percent higher than their industry peers, which indicates
that the company may be overpriced. Some have even said that the company is trading
as fast as an Internet company, and that they could quickly see repercussions of that
quick success. Investors believe that with increases in labor costs, the company will be
forces to increase their prices, and that customers will not be willing to pay much more
for a burrito. When minimum wages increase, every company will get hit, but
companies like McDonalds only trade at fifteen times earnings, compares to Chipotles
forty times earnings, which could signal a market correction in terms of stock prices.
However, the companys focus on high quality ingredients and delivering customer
value has yet to translate into anything short of success. Although competitors may
become fast followers and imitate the business model, Chipotle shows no appreciable
signs of decline. Same store sales growth has slowed, but there is plenty of room for
international and domestic growth by opening new restaurants. Additionally, the
company can expand into different cuisines, such as Asian fusion, Indian, or Italian.
Consequently, the fast casual business model could provide significant future growth
for the company. The company simply focuses on what it does well, rather than
complicating its menus, which has allowed it to leverage its high quality ingredients
with consistent execution.
