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Chipotle Mexican Grill

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Chipotle: the Challenges of integrity ryan ruud, Jennifer lee, garrett Borges, Monica Bethke, ron Bomkamp, preston Jensen arizona state University
‘Fresh is not enough anymore.’
Steve Ells Chipotle Co-CEO, Founder, and Chair

Chipotle Mexican Grill (NYSE: CMG) in the USA has experienced great success satisfying the desire of consumers for a quick-serve restaurant that does not sacrifice quality for speed. Known in the food industry as a ‘fast-casual’ restaurant, Chipotle is part of the fastest growing segment of the restaurant industry.1 With annual revenues pushing US$2 billion and a stock price that doubled in 2010, Chipotle’s steady growth and strong financial statements make it highly attractive to investors (see Tables 1–3). Chipotle achieves customer satisfaction while maintaining a unique vision that has committed the company to ‘finding the very best ingredients raised with respect for the animals, the environment, and the farmers’.2 Coupled with a deceptively simple menu that allows for over 60 000 different burrito combinations alone, interactive ordering so customers can personalise their experience and meal, and a reasonable price, it’s no wonder Chipotle restaurants are full of happy customers and that the company has grown to nearly 1100 locations in only 17 years.

At an age when most of his peer group was still watching cartoons, Steve Ells was a dedicated fan of Julia Childs’ cooking show on US public broadcaster PBS. After earning a bachelor’s degree in art history from the University of Colorado, Ells began his formal cooking education at the Culinary Institute of America in New York. Following his graduation in 1990 and while working in San Francisco, Ells acquired a taste for the large, made-to-order burritos found at the many taquerias in the city.3 Deciding he could shake up the traditional Mexican made-to-order burrito by adding gourmet ingredients, the dream of Chipotle Mexican Grill was born. With a US$80 000 loan and a US$85 000 investment from his father, Ells opened the first Chipotle restaurant in Denver, Colorado in 1993. Quickly ditching the traditional

back-of-the-house kitchen, Ells brought customers and staff together with an open kitchen design that increased efficiency and gave customers more control over their food orders. While the menu and food ordering process was simple, Ells put his culinary education to work to imbue his burrito meats and other ingredients with gourmet flavour and panache.4 Chipotle’s original menu and ordering system was designed to offer only a few meal options (burritos and crispy or soft tacos) and a manageable number of ingredient options (16), but thousands of flavour combinations. While its menu has remained primarily unchanged from the original, sensible additions like tortilla-free burrito bowls and salads for diet-conscious consumers keep Chipotle current with consumer trends.5 The original Chipotle was an instant success and Ells was able to repay his father nearly a month after opening. With a subsequent US$1.5 million investment from his father and a US$1.5 million private stock offering, Ells opened two more locations in 1995 and another five in 1996.6 Chipotle had found its as yet unnamed niche market between fast food and casual dining: fast-casual. Ells quickly discovered that raising capital for expansion took him away from what he enjoyed most: the day-to-day business. Solving this problem, Ells established a board of investors. Interested in continued expansion but with limited capital, Chipotle’s board sent an unsolicited business plan to the McDonald’s Corporation. Following a year of negotiations, in 1998 McDonald’s ventured into uncharted territory, purchasing its first minority stake in a restaurant chain. As a result of this new partnership, Ells had significant capital at his disposal. By 1999, Chipotle had expanded to 37 restaurants nationally and increased its revenues from US$13 million in 1997 to US$31 million in 1999.7 Chipotle’s success eventually led McDonald’s to increase its stake in the company to a majority shareholder. It was after reading The Art of Eating by Edward Behr in 1999 that Ells’ ‘food with integrity’ mission came into being.8 Chipotle’s newfound commitment to organic and

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Ta b l e 1

Chipotle income statement, 2008, 2009 and 2010
31 December 2010 1,835,922 1,143,613 692,309 31 December 2009 1,518,417 965,317 553,100 31 December 2008 1,331,968 1,045,041 286,927

Period ending Total revenue Cost of revenue Gross profit Operating expenses Research development Selling general and administrative Non-recurring Others Total operating expenses Operating income or loss Income from continuing operations Total other income/expenses net Earnings before interest and taxes Interest expense Income before tax Income tax expense Minority interest Net income from continuing ops Non-recurring events Discontinued operations Extraordinary items Effect of accounting changes Other items Net income

– 321,494 7,767 68,921 – 287,831

– 273,730 8,401 61,308 – 203,705

– 89,155 20,963 52,770 – 124,039

(4,797) 289,330 269 289,061 110,080 – 178,981

(5,031) 204,630 405 204,225 77,380 – 126,845

3,469 127,508 302 127,206 49,004 – 78,202

– – – – 178,981

– – – – 125,845

– – – – 78,202

Source: Chipotle Mexican Grill, Inc. (CMG) Financials at Yahoo! Finance.

sustainable ingredients began with pork in 2000 and, while the increased cost of ingredients was passed along to its customers, Chipotle’s revenues continued to rise.9 Clearly, Chipotle’s customers were willing to pay a little more for quality ingredients and seemed interested in helping Chipotle realise its vision of reducing the environmental impact of its restaurants. Encouraged, Ells did not stop with pork: naturally raised chicken was introduced in 2002, followed by beef in 2007. Ells’ ‘food with integrity’ philosophy

soon reached beyond its ingredients: ‘It is the philosophy that guides every decision we make at Chipotle.’ As an example, Chipotle began to focus on reducing its impact on the environment by constructing sustainable restaurants – receiving the first platinum certification in the Leadership in Energy and Environmental Design (LEED) rating system ever awarded to a restaurant at a store opening.10 Over time, Ells’ commitment to his ‘food with integrity’ philosophy led him to re-evaluate Chipotle’s relationship with

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Ta b l e 2

Chipotle balance sheet, 2008, 2009 and 2010
31 December 2010 31 December 2009 31 December 2008

Period ending Assets Current assets Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets Long-term investments Property plant and equipment Goodwill Intangible assets Accumulated amortisation Other assets Deferred long-term asset charges Total assets Liabilities Current liabilities Accounts payable Short/current long-term debt Other current liabilities Total current liabilities Long-term debt Other liabilities Deferred long-term liability charges Minority interest Negative goodwill Total liabilities Stockholders’ equity Misc. stock options warrants Redeemable preferred stock

224,838 124,766 33,503 7,098 16,016 406,221 – 679,881 21,939 – – 16,564 – 1,121,605

219,566 50,000 7,897 5,614 14,377 297,454 – 636,411 21,939 – – 5,701 – 961,505

88,044 99,990 6,485 4,789 11,764 211,072 – 585,899 21,939 – – 6,075 – 824,985

122,933 – 121 123,054 – 13,486 174,192 – – 310,732

102,057 – 96 102,153 – 10,633 145,258 – – 258,044

76,706 – 82 76,788 – 8,735 116,872 – – 202,395

– –

– –

– – (continued)


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Ta b l e 2

Chipotle balance sheet, 2008, 2009 and 2010 (continued)
– 340 456,514 (240,618) 594,331 606 810,873 788,934 – 335 277,533 (114,316) 539,880 29 703,461 681,522 – 329 150,688 (30,227) 501,993 (193) 622,590 600,651

Preferred stock Common stock Retained earnings Treasury stock Capital surplus Other stockholder equity Total stockholder equity Net tangible assets

Source: Chipotle Mexican Grill, Inc. (CMG) Financials at Yahoo! Finance.

Ta b l e 3

Chipotle statement of cash flow, 2008, 2009 and 2010
31 December 2010 178 981 31 December 2009 126 845 31 December 2008 76 202

Period ending Net income Operating activities, cash flow provided by or used in Depreciation Adjustments to net income Changes in account receivables Changes in liabilities Changes in inventories Changes in other operating activities Total cash flow from operating activities Investing activities, cash flows provided by or used in Capital expenditures Investments Other cash flows from investing activities Total cash flows from investing activities Financing activities, cash flows provided by or used in Dividends paid Sales purchase of stock

68,921 69,792 743 13,361 1,481 10,588 289,191

61,308 59,169 875 38,160 825 2,239 260,673

52,770 34,181 1,290 28,711 (457) 3,810 198,507

(113,215) (76,666) –

(117,198) 49,990 –

(152,101) (79,990) –




– (108,952)

– (72,296)

– (29,756)


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Net borrowings Other cash flows from financing activities Total cash flows from financing activities Effect of exchange rate changes Change in cash and cash equivalents

– (96) (94,522) 484 5,272

– (82) (61,943) – 131,522

(76) 284 (29,548) – (63,132)

Source: Chipotle Mexican Grill, Inc. (CMG) Financials at Yahoo! Finance.

McDonald’s and, soon after the company went public in 2006, it split from McDonald’s. Over the seven-year relationship, McDonald’s invested US$360 million in Chipotle and, in the end, had earned US$1.5 billion.11 Chipotle’s public offering and split from McDonald’s did not slow Chipotle’s success, as evidenced by a compound annual growth rate of revenue (CAGR) of 19.6 per cent for 2005 to 2010. Chipotle’s international expansion began in Toronto in 2008. A London location soon followed in 2010, and Chipotle has now set its sights on Paris and Munich.12 While international expansion may bring new challenges to Ells’ ‘food with integrity’ mission, Ells is optimistic explaining:
In many ways, the food culture in Europe matches our priorities much more closely than in the US, and I think we’ll be able to source beautiful ingredients from local and sustainable sources … and establish sustainable supply chains elsewhere as we look at other European markets.13

As a new segment, fast-casual remains loosely defined in the industry but is generally agreed to have higher average tickets, more upmarket fare and better decor and atmosphere than quick-serve (fast-food) restaurants. Additionally, many argue that to be considered fast-casual, a restaurant cannot offer table or drive-through service.15

Food fight
Chipotle continuously faces fierce competition. Chipotle’s niche, which relies heavily on its unique focus on taste and organics, has helped thwart the advances of some competitors. However, having already blazed the path, sourcing and offering quality ingredients is now a relatively simple model for any competitor to copy. An increasing number of fast-food and fast-casual restaurants are now using fresh and quality ingredients and marketing themselves as such. In addition, there is the simple pressure of rival chains that have the means and are moving quickly to expand both domestically and internationally.

The evolution of fast food – and devolution of full-service As a member of the fastest-growing restaurant segment, Chipotle has no shortage of competitors. Even fast-food chains – accustomed to modifying their formats with upgraded decor and new menu offerings – are beginning to compete with fast-casual restaurants.16 As fast-food chains make these modifications, they have the potential to undercut Chipotle’s price and create value that attracts Chipotle customers. With both full-service restaurant chains and quick-service chains entering the market, competition is on the rise. Demonstrating this flexibility, several of Chipotle’s competitors – including Qdoba and Pei Wei – are owned by companies that previously only operated restaurants in other segments. The evolution of fast-casual New concepts also threaten to dilute the marketplace. Fastcasual in the USA is currently dominated by bakery-style restaurants like Panera Bread and ethnic formats like Chipotle. In 2010, Mexican food became the largest food category within the fast-casual segment, surpassing bakery for the first time. Even so, ‘Better Burgers’ captured the fastest-growing menu category for 2010 with 16.1 per cent growth.17 While offering a different type of food, new concepts have the potential to unseat Chipotle’s reign as the hip place to eat. In the attempt to latch onto some of Chipotle’s success, Chipotle imitators have emerged in the market: ‘Many fast-casual start-ups describe themselves as the ‘Chipotle of [fill in blank].’’18 Examples

What is fast-casual?
Broadly, Chipotle competes in the restaurant industry with its primary competitors in the fast-casual restaurant segment.14

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include Piada Italian Street Food, the ‘Chipotle of Italian’ in Columbus, Ohio; Cava Mezze Grill, the ‘Chipotle of Greek’ in Washington DC; and Hello Pasta, the ‘Chipotle of Pasta’ in New York.19 Even Chipotle itself is testing the ability to imitate its own success with its new Asian food concept: ShopHouse. An additional threat to Chipotle comes from current competitors within the fast-casual segment revamping their existing formats to more closely replicate Chipotle’s offerings. For example, Baja Fresh – a fast-casual restaurant with Mexican food menu offerings – is similar to Chipotle in several ways, including fresh ingredients, custom prepared food and open kitchens. However, Baja Fresh prepares its food made-to-order on grills, creating a delay of several minutes between the time a customer orders their food at the counter and the time they actually receive their food. To better compete with Chipotle, Baja Fresh is redesigning select restaurants to its new Baja Fresh Express concept with fewer menu offerings and an assembly-line-style ordering process similar to Chipotle. It has also invested in new technology such as tortilla grills that reduce warming time from two minutes to only 25 seconds.20 Within the fast-casual segment, Chipotle faces numerous local and regional competitors, including many privately owned and publicly held companies. In 2010, three of Chipotle’s most successful publicly held competitors were Panera Bread, Qdoba and Pei Wei (see Table 4 for a comparison of select financial data).

Panera Bread Formed in 1998, Panera Bread is Chipotle’s largest competitor with annual sales in 2010 of US$1.54 billion. Panera operates 1453 bakery-style restaurants in 40 states, Washington DC
Ta b l e 4 Key competitor data
2010 samestore sales growth 9.4% 7.5% 2.8% n/a

and Canada. It comprises both company-owned restaurants (662) and franchise locations (791). Panera Bread touts a philosophy it calls ‘concept essence’. Concept essence is embodied by the quality artisan bread anchoring its menu, the warm, comfortable environment of its restaurants, and the relationships it builds with customers through passion and expertise.21 Panera Bread strives to deliver quality food that customers perceive as a value. Its menu includes ‘baked goods, madeto-order sandwiches on freshly baked breads, hearty, unique soups and sides, fresh, hand-tossed salads, and custom roasted coffees’. To provide a consistent namesake product, Panera relies on a dough production system to supply each restaurant with fresh dough daily. Additionally, it transports fresh tuna, cream cheese and other products from distribution centres up to 500 miles to its restaurants. Panera also continuously looks to update its menu by adding new, high-quality items. Examples of this in 2010 included its Cuban chicken panini and its all-natural steak chilli with cornbread crumbles.22 Panera also added steaks to its menu and panini grills to its restaurants in 2010. With a combination of company-owned and franchised restaurants, Panera is able to rely primarily on cash generated from operations to fund new company-owned locations while maximising expansion through new franchises. Despite ready access to credit, Panera incurred no debt when funding expansion in 2010.23 With a portion of franchisee payments dedicated to this expense, Panera Bread markets itself in a variety of ways. The focus of all Panera Bread marketing is to build brand image and strengthen relationships with its customers to drive repeat sales. As an example, in 2010 Panera

Company Chipotle Panera Bread (1) Qdoba (2) Pei Wei (4)

Annual sales (’000) $1,835,922 $1,542,489 $168,424 $310,131

Number of restaurants 1,092 1,453 510 168

Marketing expenses (’000) 25,703 27,400 5,053 (3) n/a

States/ Countries outside US 39/2 41/1 44/0 22/0

Company owned 100% 46% 34% 100%

Franchise – 54% 66% –

1 From Panera Bread 2010 Annual Report to Stockholders. 2 From JBX 2010 10-K. Other financial data from: Top 50 Special Report, QSR Magazine. 3 Marketing expense estimated at 3 per cent of revenue as JBX does not report advertising expenses by business segment. 4 From P.F. Chang’s Inc. 2010 10-K.


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launched its customer loyalty program – MyPanera – that rewards repeat customers with bonuses and gifts such as a free bakery item.24 To maximise sales opportunities, Panera Bread serves breakfast, lunch and dinner. A catering business currently in development is a key component in its growth plan. Driven by investments in its sales force and training programs, catering sales increased by 26 per cent in 2010. According to president and CEO William Moreton, ‘We believe that continued development of our off-premise solutions provides us with an opportunity for significant growth in the future.’25

Qdoba Mexican Grill With approximately half the restaurant locations of Chipotle, Qdoba Mexican Grill operates 188 company-owned restaurants and 337 franchised locations throughout the USA and generated US$168.4 million in revenue in 2010.26 Founded in 1995, Qdoba operates as a wholly owned subsidiary of Jack in the Box Company (JBX). Similar to Chipotle, Qdoba serves traditional Mexican food prepared to the customers’ liking. Fresh guacamole, slow-simmered beans, slow-roasted shredded beef and pork, and flame-grilled chicken and steak are all key components of a Qdoba burrito. JBX has successfully expanded Qdoba Mexican Grill into 43 states and Washington DC by offering hand-crafted, top-quality food prepared on open grills in front of waiting customers.27 Qdoba also offers healthy and less filling options including its Mexican lettuce wraps that were added to the menu in 2010.28 Bringing its food to locations other than its restaurants, Qdoba provides catering for groups up to 500, offering several options including fully staffed hot taco, nacho and burrito bars. Qdoba franchises are largely responsible for its growth. In 2010, 21 of the 36 restaurant openings were franchise owned. Franchising offers several advantages for JBX. Franchisees pay an up-front fee of $30 000 and royalty fees that are typically 5 per cent of gross revenues. JBX is able to use this income to offset the start-up costs associated with opening a companyowned restaurant. Franchisees also pay up to 2 per cent of gross revenue to JBX in marketing fees and are required to spend a minimum of 2 per cent on local advertising. Franchisees are eligible for rebates on portions of these fees if applied to the opening of a new restaurant, thus encouraging additional growth.29 Because franchise locations do not require the same level of support as company-owned restaurants, JBX enjoys lower corporate overhead than it would were all Qdoba locations company owned.

While franchise locations of all industries are sometimes perceived to lack the quality of a tightly monitored companyowned store, JBX has highly developed systems to ensure consistent operations across all restaurants. For example, its ‘farm to fork’ quality assurance program ‘combines employee training, testing by suppliers, documented restaurant practices and detailed attention to product quality at every stage of the food preparation cycle’. Additionally, while only 45 per cent of Qdoba restaurants utilise the JBX purchasing and supply chain systems, all restaurants are required to exclusively use JBX quality control approved suppliers.30 JBX expected to open 50 to 60 new Qdoba Mexican Grill restaurants in 2011.

Pei Wei Pei Wei, owned by P.F. Chang’s China Bistro, Inc., opened its first restaurant in 2000, and is another strong competitor in the fast-casual segment. In 2010, the 168 Pei Wei locations in 22 states produced US$310 million in revenue.31 P.F. Chang’s also operates full-service restaurants of the same name. Its strategy for Pei Wei is ‘to serve freshly prepared, wok seared, contemporary, pan-Asian cuisine in a relaxed, warm environment, with friendly, attentive counter service and take-out flexibility’. P.F. Chang’s believes that, by providing both a full-service offering as well as a fast-casual option, it gains brand loyalty.32 In addition to its standard fare, Pei Wei includes Limited Time Offers (LTOs) on its menu three to four times per year. Pei Wei typically keeps these dishes on the menu for a 12week cycle. Pei Wei’s LTOs keep its menu fresh by providing new dishes to customers. Examples of LTOs offered in 2010 were Thai mango chicken and Japanese chile beef ramen. Pei Wei also offers a limited alcohol selection that accounts for 1–2 per cent of sales revenue each year. With takeaway orders responsible for approximately 40 per cent of total sales, Pei Wei offers online ordering to facilitate customers that do not want to wait.33 P.F. Chang’s utilises a cooperative network of suppliers called Distribution Market Advantage to supply all its restaurant locations. For its Asian-specific ingredients, P.F. Chang’s relies on a single supplier and uses its size to negotiate reduced rates. Aside from the economies of scale it enjoys with this supplier, quality is more easily controlled with a single source.34 P.F. Chang’s relies heavily on positive customer experiences to drive positive word-of-mouth for its Pei Wei locations. While it has utilised traditional media advertisement in the past, it is

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generally on a very limited basis. Despite launching a loyalty program for its P.F. Chang’s customers, Pei Wei customers have not yet been offered their own, nor are they included in P.F. Chang’s program. To deliver the desired experience to customers, prospective Pei Wei managers must complete a nine-week manager training program that concludes with a certification process validating the manager candidates have achieved proficiency in both culinary and overall operational skills. Hourly employees receive a full week of training and, similar to managers, are required to pass a certification process specific to their respective positions before being allowed to serve customers.35 P.F. Chang’s announced plans to open between six and eight new Pei Wei restaurants in 2011.36

Chipotle’s plate … and what’s on it
Chipotle targets customers seeking high-quality food ingredients from a source that is faster and/or less expensive than a full-service restaurant. Chipotle also focuses on the ‘customer experience’ to build a strong following and to develop better branding. Initiatives to develop employees and maintain a strong workforce have also contributed to Chipotle’s success.

What’s for dinner?
Chipotle’s ‘food with integrity’ philosophy sets it apart from its competitors by creating a unique taste that is difficult to imitate. Its food develops customer loyalty, which helps to increase patronage by positive word-of-mouth. In connection with this philosophy is the dependence Chipotle has on organic farmers to supply its restaurants with the necessary ingredients. Chipotle’s use of a network of farmers keeps a heavy concentration from developing on any one supplier, which helps to minimise – but not eliminate – the risk of supply outages. Chipotle restaurants receive ingredients from 22 independently owned and operated regional distribution centres. However, Chipotle first approves all farmers the distributors use on its behalf. Distributors have little bargaining power as Chipotle selects farmers based on ‘quality specifications, and [distributors] purchase within pricing guidelines and protocols [Chipotle has] established with the suppliers’.37 Chipotle prefers to work with farms that are family owned and operated. They partner with suppliers like Niman Ranch (a network of independent ranchers),38 Meister Cheese Company (local Wisconsin farmers and founders of the Animal Friendly

Family Farms program)39 and The Chef’s Garden (a grower of artisanal produce straight ‘from earth to table’).40 Chipotle is the largest restaurant buyer of locally grown produce and the only national restaurant chain to expand its commitment to the use of local products year after year.41 Chipotle is highly dependent on the success of its suppliers because, without them, it cannot meet its ‘food with integrity’ goals. When Chipotle started working with the Niman Ranch network to increase supply over a decade ago, the network had only 50 farms; as of 2010, Niman Ranch now represents over 500 farms and, not surprisingly, Chipotle is its largest customer.42 Even so, Chipotle continues to encounter challenges in sourcing ingredients that meet its high standards in the quantities it requires. As a result of supplier shortages, it has not yet fully met its goals for 100 per cent naturally raised meat, pasture-raised dairy, antibiotic-free chicken or organic beans as,43 even when Chipotle has a sustainable supplier, the supplier may experience shortages thus leaving some restaurants without key ingredients. Because it takes longer to identify and develop supplier relationships, it costs more to establish them. This results in ‘higher costs and other risks associated with purchasing naturally raised or sustainably grown ingredients’. Additionally, because Chipotle depends on a smaller number of suppliers, it is more difficult to replace or substitute a supplier, resulting in serious interruptions to the supply chain.44 The cost of sourcing its high-quality ingredients results in a higher cost for Chipotle customers. The restaurant attempts to reduce other operating costs by using a centralised purchasing department that works with local suppliers and regional distributors to help reduce transportation costs.45 Fortunately, having previously partnered with McDonald’s, Chipotle has been able to leverage many of the supply chain management capabilities of its former owner. Despite the challenges and costs incurred by using only suppliers who pass the test of producing naturally raised meats and organic foods, Chipotle’s ‘food with integrity’ has been successful and it is evident that customers are willing to pay a premium for better-tasting and ethically produced food. On what is unfortunately the negative side of being a highly visible proponent of environmental and ethical causes, Chipotle faces sharp criticism any time its actions appear out of step with social causes. For example, the company did not initially agree when People for the Ethical Treatment of Animals (PETA) called for the use of poultry suppliers using controlled atmosphere killing (CAK) – a purportedly less

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cruel method of slaughter whereby a bird’s oxygen is slowly replaced with other gases. Arguing there were an insufficient number of suppliers using CAK to meet its needs, after heavy petitioning and a shareholder resolution, Chipotle relented and agreed to give preference to suppliers using CAK.46 Additionally, in Florida, despite putting the proposed wage increases in escrow while attempting to determine if farm workers would in fact receive the money, Chipotle came under fire from the Coalition of Immokalee Workers for its failure to act to improve wages and conditions of Florida farm workers.47 After months of protests and negative publicity, Chipotle completed its negotiations and paid the higher wages. As a leader in ethical business practices and self-designated member of the global community, Chipotle will continue to be a target for activists should it not respond as promptly as the activists deem it should or, even worse, should it disagree with a popular initiative – irrespective of its validity.

Who’s hungry?
The fast-casual segment draws customers in search of betterquality food than fast food and ‘something hipper, faster and cheaper than full service’.48 Chipotle satisfies those customer needs by providing fresh, quick, customisable food that is prepared in front of customers while they wait.49 The chain
Ta b l e 5 The 2010 Zagat fast-food survey
Top food large chain 1 2 3 4 5 In-N-Out Burger Papa Murphy’s Chick-fil-A Five Guys Chipotle Best value McDonald’s Panera Bread Chipotle Taco Bell Chick-fil-A

has a wide appeal, mainly serving adults between the ages of 18 and 49.50 Chipotle has among the highest customer ratings in the fast-casual and fast-food segments (see Table 5 for 2010 Zagat ratings). The J.D. Power and Associates 2010 US Restaurant Satisfaction Study asked consumers in 10 markets to rate their top choices based on price, environment, meal and service. Chipotle placed among the top three in nine of the 10 markets, more than any other fast-casual restaurant (see Table 6).51 A study in the International Journal of Hospitality Management showed that customer satisfaction is a good predictor of customer purchase intentions; ‘High levels of customer satisfaction decreases the perceived benefits of service provider switches, thereby increasing customer repurchase intentions.’52 Even when the company had shared ownership with McDonald’s, Chipotle always ran its business autonomously without significant involvement from its parent. As a result, many of the initial concepts that made the restaurant successful continue today. One of its founding concepts was to sell to the customer that Chipotle was a hip place to eat. In alignment with Ells’ approach to food, Chipotle’s restaurant design mentality was to use simple materials without significant fabrication to create something extraordinary. Chipotle designs individual restaurants to fit into their distinctive environments. While

Best grilled chicken Chick-fil-A KFC El Pollo Loco Panera Bread Chipotle

Definitions Fast-food chain Large chain Food Best Top National restaurant chain offering burgers, chicken or other main-course items but no table service Fast-food chain with up to 5000 locations Quality of menu items Cited most often as being the best for a particular menu item Highest Zagat rating for food, facilities or service among all chains in a particular category

The survey does not have a separate category between fast food and full-service, so fast-casual is included within the fast-food category. National survey of 6500 diners. Source:


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Ta b l e 6

J.D. Power and Associates 2010 US restaurant satisfaction study: top three quick-service restaurant brands in overall customer satisfaction by market
1 2 3 Chick-fil-A Chipotle Mexican Grill Jason’s Deli Chipotle Mexican Grill Panera Bread Uno Chicago Grill Culver’s Chipotle Mexican Grill (tie) Jersey Mike’s Subs (tie) Chick-fil-A Papa John’s Jason’s Deli In-N-Out Burger Chick-fil-A Chipotle Mexican Grill Papa Murphy’s Take N Bake Pizza Panera Bread Chipotle Mexican Grill Panera Bread Sonic America’s Drive-In Chipotle Mexican Grill In-N-Out Burger Chick-fil-A Chipotle Mexican Grill In-N-Out Burger Chipotle Mexican Grill Baja Fresh Chick-fil-A Chipotle Mexican Grill Panera Bread

Atlanta, Georgia

Boston, Massachusetts

1 2 3

Chicago, Illinois

1 2 3

Houston, Texas

1 2 3

Los Angeles, Riverside, Ventura County, California

1 2 3

Minneapolis-St Paul, Minnesota

1 2 3

New York, Northern New Jersey

1 2 3

Phoenix, Arizona

1 2 3

San Francisco Bay Area, California

1 2 3

Washington, DC

1 2 3

Source: J.D. Power and Associates 2010 US Restaurant Satisfaction Study.SM Charts and graphs extracted from this press release must be accompanied by a statement identifying J.D. Power and Associates as the publisher and the J.D. Power and Associates 2010 US Restaurant Satisfaction StudySM as the source. Rankings are based on numerical scores, and not necessarily on statistical significance. No advertising or other promotional use can be made of the information in this release or J.D. Power and Associates study results without the express prior written consent of J.D. Power and Associates.


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each restaurant typically has a sleek, modern feel with plenty of exposed wood and steel, Chipotle believes this foundation creates an ‘appealing, eclectic atmosphere’.53 Chipotle prides itself on being unique in the industry due to its ‘Food with integrity’ philosophy and offerings. Indeed, as a competitor analysis shows, dishes made fresh-to-order with fresh ingredients – like those from Chipotle – appeal to the fast-casual segment.54 Chipotle believes that sustainably raised products make its food taste better, which, in turn, gives it a competitive advantage. Nevertheless, there is some uncertainty surrounding to what extent sustainable ingredients are at the forefront of its customers’ minds. In an in-house study, the Chief Marketing Officer found that customers do not necessarily return to Chipotle because of:
…the fact that we spend a lot of time and effort on making all of our food as sustainably and naturally raised as possible. We all assumed that that was a big driving factor. Even people who were coming to Chipotle for a long time, they appreciate it, but it’s not the reason they are coming in. They just love the way the food tastes. That was a little bit of a surprise to us.55

delay price hikes that could alienate customers living on dwindling budgets. In February 2011, domestic wholesale food prices were reported to have risen 3.9 per cent since January 2010, with global increases of 37 per cent for the same period.58 In its 2010 annual report, Chipotle acknowledged that increases in critical menu items could ‘adversely affect [its] operating results’ or force it to suspend an item from the menu temporarily, which could ‘negatively impact restaurant traffic and comparable restaurant sales’.59 While Chipotle implemented price increases in the Pacific region, it had no immediate plans to pass increases to other Chipotle customers before assessing customer resistance and the size and timing of inflation in Q3 2011.60 Analysts, however, warn that delaying price increases will result in a continued impact on margins and, more likely than not, make a more aggressive price increase necessary. Chipotle’s last significant increase in Q4 2008 ‘was followed by several quarters of same-store traffic declines’.61 Key competitors like Panera Bread and Pei Wei have already bitten the bullet and increased menu prices in Q4 2010 to mitigate higher commodity costs.62,63

However, others believe that naturally raised ingredients set Chipotle apart and lend to its customer growth.56 Either way, customers will continue to patronise Chipotle for the great taste and, whether intentionally or not, in doing so lend their support to the sustainability cause. In the meantime, Chipotle remains hopeful that sales will be driven even further as customers become increasingly aware of where its food is sourced. While Chipotle should be applauded for its efforts to source healthful foods, an important but often unconsidered fact remains: just because the ingredients of a meal are environmentally sound does not make the meal healthy. Even as Chipotle offers quality and sustainable ingredients, its menu options can be packed full of calories. As an example, the general rule of thumb dictates that a healthy adult should consume 1800 to 2000 calories – including 60 grams of fat and 2400 milligrams of sodium – a day. However, an average Chipotle burrito can contain 900 to 1000 calories, 50 grams of fat and 2300 milligrams of sodium.57 While Chipotle offers healthier options in the form of its burrito bowls and salads, and allows customers to easily customise a meal depending on their health needs, it might need to consider increased disclosure of nutritional information regarding its ingredients. Despite all the societal good and tasty reasons to eat at Chipotle, food costs for the restaurant industry have increased across the board making it increasingly difficult to further

Who’s serving?
Chipotle views its approach to employees as central to its success. Monty Moran, the company’s co-CEO, states:
The single best way to improve operations is to make sure that restaurant managers are the best they can be and that they have the company’s full support. The restaurant manager position is more important than my job and Ells’ job. It’s key to how a customer experiences our food every day.64

In the early days of the restaurant, Chipotle operated using a standard hierarchy: staff employees reported to a restaurant manager, who reported to a regional manager, who reported to company directors, who reported to the president. However, as Chipotle promoted managers to higher positions and they left their restaurants, Chipotle discovered the flaw inherent to its structure. ‘We promoted our best managers, those who had the best effect on customers, the best food, the cleanest restaurants, and the best crew,’ said Moran.65 To combat this issue, Chipotle launched the ‘Restaurateur Program’ in 2006. This program was designed to encourage good managers to make a career of the position by developing staff and increasing store revenue. The incentives for doing so included large bonuses that allowed good managers to earn as much or more than their supervisors. As Moran put it, ‘It’s truly entrepreneurial, and it puts the manager in a position that is as close to ownership as possible without being an owner.’66


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With incentives for good managers to remain in their positions, staff turnover decreased due to consistency in the workplace and because staff development was a key driver to a manager’s bonus. Moran believes that managers who are promoted from within are four times less likely to leave than those hired from outside: ‘We’re rewarded by the fact that once they become managers, they’re fiercely loyal and they know this company better than anyone else.’67 Expanding this view to the next level, Chipotle also wanted its employees to be innovative and to carry an entrepreneurial mindset. Marketing director Jim Adams is known for telling candidates interviewing for corporate positions that ‘the way to fit in at Chipotle is to be creative and independent’.68 Chipotle empowers its employees and shows this by entrusting them to prepare its food as a chef would in a restaurant. Employees are paid an amount higher than minimum wage and everyone has access to health-care benefits. Ells believes that by allowing his employees certain freedoms and self-empowerment, morale improves, creating a positive work environment that, ultimately, has a positive effect on the customer experience. Creating a notable impact on the culture and community of particular Chipotle locations, in recent years US Immigration and Customs Enforcement (ICE) shifted its focus from undocumented individuals and began instead to target employers that hire undocumented workers.69 Restaurants in particular were admonished to reduce their use (and thus the demand for) illegal workers and encouraged to carefully examine hiring practices.70 For Chipotle, ICE audits of its restaurants resulted in about 500 firings of illegal workers in Minnesota, Virginia and Washington DC, with investigations continuing in Los Angeles and Atlanta.71 These raids were not only embarrassing to its reputation but also carried fines and resulted in higher costs. Because all Chipotle locations are company owned, ultimately Chipotle is responsible for each restaurant meeting federal hiring regulations. Chipotle acknowledged the firings created a temporary increase to its labour costs as it hired and trained new employees. Chipotle also understands that, without franchisees to share the costs, it shoulders considerable more risk than many of its competitors.72

with 513 000 for Panera Bread, 102 000 for Pei Wei and 92 000 for Qdoba Mexican Grill.73 Chipotle fans both online and offline provide valuable word-of-mouth marketing for the company and drive the majority of first-time visits to Chipotle. Media consulting firms affirm that when people hear a recommendation from a friend or stranger ‘they’ll probably believe it since the tipster has nothing to gain. Chipotle so far has got it nailed. You have people evangelizing the brand because they love it.’74 As new restaurants open and the company works to attract new customers, a common marketing tactic is to offer free burritos to neighbouring businesses and residents.75 Although expensive, Chipotle believes the brand awareness created outweighs the cost involved. According to Adams, ‘When you take this idea that your best marketing tool is the restaurant and the experience customers have in it, then the object is, of course, to drive people in so they can experience it.’76 Chipotle also participates in charity fundraisers to help build the brand. In fact, the company has a dedicated group of marketing personnel specifically charged with working with charities, schools and other organisations to set up events, thus driving more customers into its restaurants. While learning about Chipotle’s unique approach to high-quality ingredients from sustainable resources is an incentive to some, customer positive word-of-mouth continues to be Chipotle’s best form of free advertising. Marketing director Adams notes that the company spends less than 2 per cent of revenues on advertising, while its competitors spend between 3 and 5 per cent.77

Keeping it in the family
Chipotle owns and operates all of its restaurants and has determined it will not sell franchises. Because management places such a strong emphasis on the importance of the restaurant manager, it has determined that having a direct say in who is managing individual restaurants is to its advantage. With Chipotle’s plan to expand both domestically and internationally, the company faces both organisational and cultural challenges. Organisationally, Chipotle is a simple structure with a single corporate office in Denver overseeing all of its restaurants. This creates issues with management and effective communication, as well as understanding local and cultural differences as they open new locations. Domestically, Chipotle will be challenged to continue to find ‘A’ locations given its vast geographic footprint. In 2010, there were 1092 Chipotle restaurants in the USA.78 Chipotle operates in 39 states, with California, Ohio, Texas, Colorado and Illinois being the largest markets (see Table 7). The

Who’s selling?
Leveraging its customer loyalty, Chipotle encourages fan interaction and uses social media to connect with seasoned and prospective customers alike. Chipotle has a much larger Facebook following compared with its top rivals: 1.3 million ‘likes’ compared

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Ta b l e 7

Chipotle restaurant locations

As of 31 December 2010, Chipotle operated 1084 restaurants Alabama Arizona California Colorado Connecticut Delaware District of Columbia Florida Georgia Illinois Indiana Iowa Kansas Kentucky Maine Maryland Massachusetts Michigan Minnesota Missouri Nebraska 3 41 165 71 3 1 8 58 13 78 14 2 17 8 1 40 23 12 51 24 7
Source: 2010 Chipotle Annual Report & Proxy Statement.

Nevada New Hampshire New Jersey New York North Carolina Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina Tennessee Texas Utah Virginia Washington Wisconsin Wyoming UK Canada

11 2 17 50 12 123 6 12 24 3 2 5 93 4 52 12 12 1 1 2

company planned to expand significantly over the following three years, including the opening of 135 to 145 stores in 2011.79 With the majority of openings in 2011 scheduled to occur in the second half of the year, the inconsistent pace could result in reduced oversight of construction projects, which could result in higher than expected costs. Additionally, in current markets, new stores could cannibalise sales from existing stores. Finally, approximately 30 per cent of the new stores will be opened using its A-Model format.80 This model has a smaller footprint and initially produced a slightly lower volume than the traditional Chipotle format.81 International expansion poses its own unique brand challenges. The primary issue with expanding into new

and unfamiliar territory is the risk of the product not being accepted by local consumers. Consumer tastes and discretionary spending habits are different from those in the USA: international customers may not understand or even appreciate Chipotle’s ‘food with integrity’ philosophy due to their country’s unique cultural or economic circumstances. At the end of 2010, Chipotle had only three international locations (one in the UK and two in Canada).82 Chipotle’s management expertise in the USA may lead it to make international business decisions that, while appropriate in the USA, may not be acceptable overseas. In addition, the company may not be equipped from an information systems or structural standpoint to support international operations properly.

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The cooks in the kitchen
‘It’s not often that graduates of the Culinary Institute of America set out to make the burrito into a culinary experience.’83 His father was proud that Ells was well on his way to becoming a chef when working at Stars in San Francisco. So, when Ells borrowed money from him just three years out of school at the age of 28 to open the first Chipotle in Denver, most of Ells’ friends, family and acquaintances were sceptical. Ells remembered, ‘Everyone told me that [Chipotle] was a bad name to use, because no one knew what it was or could pronounce it. And now everyone knows what it is.’84 Ells attended Boulder High School, the University of Colorado at Boulder and the Culinary Institute of America in Hyde Park, New York, graduating in 1990. Ells continues to be Chipotle’s visionary leader and currently serves as co-CEO and chairman of the board.85 Alongside Ells as Chipotle’s business leader is co-CEO Montgomery F. (Monty) Moran. As the former CEO of the Denver law firm Messner & Reeves, LLC and general counsel of Chipotle, Moran was appointed to co-CEO in 2009 after serving as president and COO of Chipotle since March 2005. His experience as general counsel and COO of the business positions him for success in his current role. Moran holds a bachelor’s degree in communications from the University of Colorado and a JD from Pepperdine University.86 Also key to the future success of the company is Chief Development Officer since February 2010, Robert Blessing. Blessing opened the first Chipotle in the Northeast region after coming to Chipotle in 1999 as a regional director. From 2005 to 2008, Blessing’s role expanded to include the entire Northeast and Central regions. As Chipotle’s Restaurant Support Officer
Figure 1 Total company revenue
$2,000.0 $1,800.0 $1,600.0 $1,400.0 $1,200.0 $1,000.0 $800.0 $600.0 $400.0 $200.0 $0.0 2005 $627.7

from 2008 to 2010, he provided field support for marketing and oversaw five regional directors and purchasing. Prior to Chipotle, Blessing held executive leadership roles at Vie de France Retail and Restaurant Bakery, Franchise Management Corporation (an Arby’s franchisee), and Thompson Hospitality (a contract food service company).87

Coriander, lime and other shades of green
Chipotle has achieved unprecedented financial results over the past six years (see Figure 1 for total company revenue growth) due in large part to both rapid new store expansion and same-store sales (SSS) growth. CAGR over this period was 19.6 per cent with Chipotle building new stores at an average rate of 126 per year. Chipotle was able to drive SSS at existing units by, among other things, building brand awareness, promoting ‘food with integrity’, maintaining a simplistic approach to its menu and embracing social media. At the unit level, economics remain highly attractive. Chipotle earns restaurant level revenue of US$1.84 million and cash flow of US$0.49 million (26.7 per cent of revenues). Approximate investment cost per unit is US$0.80 million, which results in an ROI of 61.8 per cent (see Figure 2).88 As a whole, Chipotle generated US$179 million of net income on revenues of US$1836 million for fiscal year 2010. Its three international stores contributed only nominally to the overall performance of the company. Revenues increased 20.9 per cent as a result of 129 new store openings during the year and a 9.4 per cent increase in SSS.89 The increase in SSS was mainly the result of an increase in traffic, as opposed to increases in average ticket sales. Chipotle’s SSS have significantly outpaced the industry over the last six years (see Figure 3 for

$ in millions $1,835.9 $1,518.4 $1,332.0 $1,085.8 $822.9






Source: Chipotle Mexican Grill, Raymond James 32nd Annual Institutional Investors Conference, 8 March 2011 (PDF presentation).


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Figure 2
Average trailing 12-month sales Restaurant level cash flow Restaurant level operating margin % Approximate investment cost ROI%
$in thousands

$1840 $491 26.7% $795 61.8%

Average unit volume/ unit economic model

$2,000.0 $1,611 $1,500.0 $1,440

$ in thousands $1,734 $1,763 $1,728 $1,840


$500.0 2005 2006 2007 2008 2009 2010

Source: Chipotle Mexican Grill, Raymond James 32nd Annual Institutional Investors Conference, 8 March 2011 (PDF presentation).

Figure 3

SSS vs Traffic
6% 4% 2% 0% –2% –4% –6% YoY change –8% –10% –12% QSR SSS QSR traffic FSR SSS FSR Traffic

Same-store sales and traffic









1Q10 3Q10

Historically, SSS at QSRs are more consistent than FSR SSS, particularly for sandwich and chicken chains. During the downturn, QSRs (including snack and fast casual) experienced six quarters (3Q08–4Q09) of SSS decline, while FSRs (including fine dining) declined for 10 consecutive quarters (4Q07–1Q10). Both QSRs and FSRs are on similar recovery trajectories, rising 4.1% and 3.8%, respectively, in 4Q10. Note: Fast-casual restaurant chains such as Chipotle are captured within the segment QSR, or quick-serve restaurants. Source: GE Capital, Franchise Finance 2011 Chain Restaurant Industry Review.


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historical SSS and traffic trends by industry segment). The company’s stock was rewarded for 2010 results with notably better performance relative to broader markets. Chipotle stock gained 141 per cent (versus 13 per cent for the S&P).90 First quarter 2011 results built off a strong 2010. Total company revenue was up 24.3 per cent, SSS increased 12.4 per cent and net income gained 22.7 per cent. Similar to fiscal year 2010, the SSS increase was driven primarily from traffic since pricing increased only 0.7 per cent. Twelve new restaurants opened during this period.91 As for the balance of its profit and loss statement, Chipotle maintained its focus on prime costs, otherwise known as cost of goods sold and labour. Prime costs are traditionally the two biggest operating expenses incurred by restaurant chains and, for fast-casual restaurants, typically consume 60 per cent of revenues or more (see Table 8). Chipotle’s prime costs in first quarter 2011 were 100 basis points higher than fourth quarter 2010, of which 60 basis
Ta b l e 8 Components of the restaurant dollar

points were attributable to higher tomato and produce costs. Chipotle continuously monitors food and beverage costs, which is not surprising considering commodity pressures resulting from higher fuel prices, droughts, etc. (see Figure 4). Commodity costs are even more relevant for the company given its ‘food with integrity’ mission that inherently limits the number of available suppliers. Other costs experiencing pressure in the first quarter 2011 were labour (due to the previously mentioned immigration raids) and operating costs as a result of increased promotional and marketing expenses.92 Yet, relative to its competition, Chipotle continues to outperform. Panera Bread is considered by many as a leader in the fast-casual segment of the restaurant industry. As compared to Panera, Chipotle has 2.5 times the market capitalisation, close to 1.5 times the EBITDA and almost 2.0 times EV/EBITDA (see Table 9). Both companies have very

Menu price increases and components of the restaurant dollar QSR 2008 PPI – food mfg Employment cost index Food & beverage spend (% of sales) Labour spend (% of sales) Occupancy, operating & o/head spend (% of sales) % of net income before tax Menu price increase to maintain margin: Food costs Labour costs Total menu price increase to maintain margin Menu price increase (CPI FAFH FSR) Menu price increase (CPI FAFH QSR) Available for occ, operating & overhead costs: or improvement of income before tax
1 2

FSR1 2010 3.5% 1.7 31.92 29.42 29.92 5.92 2008 9.6% 4.0 33.1 33.5 27.7 3.6 2009 -2.5% 3.2 31.8 33.2 30.6 3.5 2010 3.5% 3.7 31.82 33.22 30.62 3.52

2009 -2.5% 2.2 31.9 29.4 29.9 5.9

9.6% 3.6 30.4 28.6 29.2 9.7

2.9 1.0 4.0% – 4.9 0.9%

-0.8 0.7 -0.1% – 4.2 4.3%

1.1 0.5 1.6% – 0.9 -0.7%

3.2 1.3 4.6% 4.0 – -0.5%

-0.8 1.1 0.3% 2.8 – 2.5%

-0.8 1.2 0.4% 1.3 – 0.9%

Average bill US$l5–24.99 Preliminary calculations based on NRA/Deloitte 2010 Restaurant Industry Operations Report. Source: BLS, Deloitte, NRA. Source: GE Capital, Franchise Finance 2011 Chain Restaurant Industry Review.

Note: fast-casual restaurant chains such as Chipotle are captured within the segment QSR, or quick-serve restaurants.


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Figure 4
250% 200% 150% 100% 50% 0% 2008 –50% YoY change –100% –150% Beef Chicken Pork Milk Cheese Wheat 2010

Select commodity prices

Source: GE Capital, Franchise Finance 2011 Chain Restaurant Industry Review.

strong balance sheets with no bank debt. Chipotle recently notified Bank of America it was cancelling its revolving line of credit because of non-usage. The restaurant chain will continue to fund new store development with cash on hand and cash flow from operations. Chipotle also faces the issue of decelerating SSS growth in 2011 and beyond. SSS directly affects overall sales growth and will continue to be a critical factor affecting profit growth – a strong evaluation metric for investors.93 Given the state of the economy in general and the restaurant industry in particular, Chipotle’s SSS performance has been unprecedented. In the long term, however, Chipotle’s current growth rate is not sustainable. Top management’s guidance for profitability is midsingle digit SSS growth for the full 2011 fiscal year.94 Assuming Chipotle does not alter its prices in the short term, declining traffic rates would result in a lower level of comp sales increases or even flat sales. If Chipotle’s overall traffic rates decline, analysts will likely point to one or a combination of four main causes:
1 2 an ageing store base decreased marketing expenditures

3 4

increased competition in the quick-serve, fast-casual, and/or casual dining segments sales cannibalisation due to new store openings.

Looking forward, the market will keep a close eye on SSS, specifically the rate at which it may decelerate in 2011 and beyond. Just as important, Wall Street will be focused on how 2010 store openings season after their honeymoon periods end as well as how 2011 store openings perform. Also, maintaining or increasing margins will be important, especially cost of goods sold and labour line items.

Next on the menu …
With the high level of growth Chipotle has realised thus far, there are many challenges related to organisational structure and personnel that could affect Chipotle maintaining or improving its performance as the company continues to expand. Chipotle’s approach of embracing environmental consciousness – unusual for chains in the restaurant industry – causes additional challenges for Chipotle and its supply chain, distribution operations and plans for growth. Nevertheless, to date, the loyalty of and word-of-mouth marketing provided by its customers have helped Chipotle’s

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Restaurant valuation EV/EBITDA (as of the close on 04/20/11)
Share Rating 1 Price O/S Cap Debt Equivalents Value 2010 2011E 2012E 2010 2011E 2012E Market Total Cash& Enterprise Calendar EBITDA EV/Calendar EBITDA

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Ta b l e 9

Quick-service N U B U N B $51.55 488.0 25,156 3,588 1,426 27,318 2,410 2,749 $4.75 418.4 1,987 1,572 514 3,046 397 406 449 3,050 $9.23 61.9 571 538 38 1,071 125 125 128 8.6 7.7 11.3 8.9X $78.40 1,068.3 83,794 11,505 2,387 92,912 8,756 9,423 9,919 10.6 $20.80 52.9 1,100 373 17 1,457 261 217 247 5.6 6.7 9.9 8.6 7.5 9.9 8.7X $18.38 62.1 1,141 1,452 133 2,460 252 263 268 9.8X 9.4X 9.2X 5.9 9.4 8.4 6.8 9.0 8.1X


part four ca se studie s







Casual dining B U B U U N $11.00 652 718 291 8 $28.06 15.7 441 159 18 581 1,000 $46.30 23.0 1,065 3 71 997 $48.46 140.0 6,784 1,603 90 8,298 $25.52 92.1 2,351 536 114 2,772 343 1,007 143 75 144 $30.60 60.6 1,853 52 82 1,824 200 214 362 1,103 150 81 144 232 382 1,206 164 94 152 9.1X 8.1 8.2 7.0 7.7 6.9 7.9X 3.5X 7.7 7.5 6.7 7.2 6.9 7.4X 7.9X 7.3 6.9 6.1 6.2 6.6 6.8X








Family dining B $51.00 23.9 1,220 577 63 1,734 235 248 270 7.4X 7.0X 6.4X


Specialty N N N $36.89 766.7 $123.38 30.1 3,713 26,284 $288.10 31.7 9,133 4 0 549 350 229 2,051 8,788 3,483 27,782 363 254 2,111 417 295 2,262 491 322 2,603 24.2X 13.7 12.7 16.9X 21.1X 11.8 11.8 14.9X 17.9X 10.8 10.3 13.0X
Source: FactSet Research Systems Inc.; Reuters; Thomson Financial; BofA Merrill Lynch Global Research estimates (1) Ratings: B = Buy N = Neutral U = Underperform. Source: GE Capital, Franchise Finance 2011 Chain Restaurant Industry Review.





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revenues grow thus keeping shareholders happy and funding Chipotle’s environmental agendas. Steve Ells and the Chipotle team are dedicated to the company and its vision for the future. In Ells’ discussion of first quarter 2011 results with staff and shareholders, he reinforced the company’s commitment:
I remain confident that our performance is rooted in our long-term vision to change the way people think about and eat fast food … This focused approach makes us unique in the restaurant industry, and continues to differentiate Chipotle in significant ways.95

It is clear that Ells feels the path Chipotle is on has made possible its high market share and continued growth. So far, Chipotle has maintained the success of its current locations and, based on this model, has significant growth plans for additional locations. With its potential for additional financial and market share growth, how the company reacts to and handles these opportunities will determine its future.

1. Fast casual restaurant growth continues to outpace rest of industry, finds Technomic, PR Newswire, 16 May 2011, retrieved 22 May 2011 from http:// What is food with integrity?, retrieved 28 May 2011 from Chipotle Mexican Grill, Inc. Funding Universe, retrieved 28 April from Ibid. Corporate Profile., retrieved 29 April 2011 from http:// Ibid. Ibid. What is food with integrity? Chipotle Mexican Grill, Inc. Funding Universe. 2009, Chipotle earns the first LEED-Platinum Certification awarded to a restaurant, Greener Buildings, 9 July, retrieved May 28, 2011, from http:// M. Heffernan, 2010, Chipotle Grill’s secret ingredient: Obsession, BNet – The CBS Interactive Business Network, 14 September, retrieved 19 May 2011 from _skin;content. 2009, Chipotle finalizes London location,, 17 November, retrieved 12 May 2011 from p=irol-newsArticle&ID=1356314&highlight=. Ibid. Chipotle: 2010 Annual Report & Proxy Statement,, http://phx. xMjg4fENoaWxk SUQ9NDM4OTQzfFR5cGU9MQ==&t=1. 2008, What exactly is fast casual? Franchise Times, January, retrieved 18 May 2011 from article=00643. Fast casual restaurant growth continues to outpace rest of industry, finds Technomic, PR Newswire.

2. 3.

4. 5. 6. 7. 8. 9. 10.



13. 14.



17. Ibid. 18. 2011, The next Chipotle? Emerging fast-causal players vie to repeat success of highly regarded burrito brand, Nation’s Restaurant News, 7 March, retrieved 12 May 2011 from gi_0198-737151/The-next-Chipotle-Emerging-fast.html. 19. Ibid. 20. L. Jennings, 2008, Baja Fresh adapts Chipotle order style with ‘speedline’ interactive revamping. Nation’s Restaurant News, 12 October, retrieved 22 May 2011 from 21. 2011, Panera Bread Company 2010 Annual Report to Stockholders, Panera, 18 April, retrieved 18 May 2011 from http://www.panerabread. com/pdf/ar-2010.pdf. 22. Ibid. 23. Ibid. 24. Ibid. 25. Ibid. 26. Jack in the Box, Inc. Form 10-K, as amended for the fiscal year ended 3 October 2010., retrieved 14 May 2011 from http://phx. 9Nzc0MDV8Q2hpbGR JRD0tMXxUeXBlPTM=&t=1. 27. Our philosophy., retrieved 18 May 2011 from http://www.qdoba. com/Philosophy.aspx. 28. V. Killifer, 2011, releases top 100 movers & shakers. Fast, 17 March retrieved 19 May 2011 from http://www.fastcasual. com/article/180020/FastCasual-com-releases-Top-100-Movers-Shakers. 29. Jack in the Box, Inc. Form 10-K as amended for the fiscal year ended 3 October 2010, 30. Ibid. 31. PFCB P.F. Chang’s China Bistro, Inc. 2010 Annual Report, retrieved 14 May 2011 from =UGFyZW50SUQ 9NDE3NzY0fENoaWxkSUQ9NDMwNDk3fFR5cGU 9MQ==&t=1. 32. Ibid. 33. Ibid. 34. Ibid. 35. Ibid. 36. Ibid. 37. Chipotle: 2010 Annual Report & Proxy Statement, 38. 2011, Farmers strike gold, The Gold Burrito Digest, Vol. I, 2011, retrieved 19 May 2011 from ingredients/downloads/TheGoldBurritoDigest-vol1.pdf. 39. 2011, Profiles in farming: World’s best cheese also most friendly, The Gold Burrito Digest, Vol. I, March, retrieved 19 May 2011 from http:// TheGoldBurritoDigest-vol1.pdf. 40. 2011, Gourmet garden of eatin’ found in Ohio, The Gold Burrito Digest, Vol. 2, April, retrieved 19 May 2011 from story/gold_ingredients/downloads/TheGoldBurritoDigest-vol2.pdf. 41. 2010, Chipotle remains largest restaurant buyer of locally grown produce,, 18 May, retrieved May 19, 2011 from http://phx. ID=1428368&highlight=. 42. Farmers strike gold, The Gold Burrito Digest. 43. What is food with integrity? 44. Chipotle: 2010 Annual Report & Proxy Statement, 45. Ibid. 46. 2008, Chipotle bows to PETA’s demands on chicken suppliers, Nation’s Restaurant News, March 13, retrieved 24 May 2011 from http://www. 47. K. Glover, 2009, Chipotle agrees to raise tomato wages (finally). BNet – The CBS Interactive Business Network, 10 September, retrieved 19 May 2011 from 48. M. Rowe, 2009, Why fast casual kicks butt. Restaurant Hospitality, 1 April, retrieved 18 May 2011 from why-fast-casual-0409.


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49. Personal Interview with Chipotle mid-day shift supervisor, Javier Ramirez, in Glendale, CA on 20 May 2011. 50. M. Lepore, 2011, The amazing story of Chipotle. Business Insider, 31 March, retrieved 20 May 2011 from the-chipotle-story-2011-3?op=1. 51. J. Melnick, Local heroes top golden arches, QSR Magazine, retrieved 13 May 2011 from 0810/customer-1.phtml. 52. K. Ryu, H. Han & T.-H.Kim, 2007, The relationships among overall quickcasual restaurant image, perceived value, customer satisfaction, and behavioral intentions, International Journal of Hospitality Management, 27(3) 459–69. 53. Chipotle: 2010 Annual Report & Proxy Statement, 54. B. Hendrickson, 2010, Mintel offers up insights, trends for fast-casual segment, The Food Channel, 15 November, retrieved 20 May 2011 from 55. E. Wong, 2009, Chipotle CMO wants the whole enchilada, Adweek, 13 February, retrieved 18 May 2011 from news/advertising-branding/chipotle-cmo-wants-whole-enchilada105272. 56. C. Tice, 2010, How Chipotle got to 1000 restaurants, BNet – The CBS Interactive Business Network, 29 June, retrieved 19 May 2011 from http:// 769?tag=content;drawer-container. 57. B. Fong, 2010, Chipotle Grill nutrition information,, 10 June, retrieved 14 May 2011 from 58. K. Severson, 2011, Behind the rising cost of food, New York Times, 23 April, retrieved 14 May 2011 from weekinreview/24food.html. 59. Chipotle: 2010 Annual Report & Proxy Statement, 60. 2011, Chipotle Mexican Grill’s CEO discusses Q1 2011 results-earnings call transcript, Seeking Alpha, 20 April, retrieved 12 May 2011 from 61. J. Buckley, 2011, Great 4Q but downgrade to neutral,, 11 February, retrieved 24 May 2011 from 71361885/?key=YjQyOTAzYjUt&pass=NWNjYi00MWU3. 62. R. Ruggless, 2011, Panera sales, profit surge in 4Q, Nation’s Restaurant News, 10 February, retrieved 14 May 2011 from article/panera-sales-profit-surge-4q. 63. R. Ruggless, 2011, P.F. Chang’s 4Q profit rises, Nation’s Restaurant News, 16 February, retrieved 14 May 2011 from pf-changs-4q-profit-rises. 64. C. Warren, 2006, Chipotle’s fresh mission, NYSE Magazine, May/June, retrieved 21 May 2011 from JUNE_06_Chipotle.pdf. 65. Ibid. 66. Ibid. 67. Ibid. 68. Ibid. 69. L. Baertlein, 2011, Federal agents widen Chipotle immigration probe, Reuters, 4 May, retrieved 14 May 2011 from article/2011/05/04/us-chipotle-idUSTRE74307S20110504.

70. L. Jennings, 2011, Chipotle: Immigration crack down has been ‘eye opening’, Nation’s Restaurant News, 8 February, retrieved 14 May 2011 from http:// 71. Baertlein, Federal agents widen Chipotle immigration probe. 72. Chipotle: 2010 Annual Report & Proxy Statement, 73. Facebook pages of Chipotle, Panera Bread, Qdoba Mexican Grill and Pei Wei, retrieved 16 May 2011 from,, MexicanGrill, 74. M. Arndt, 2007, Burrito buzz – and so few ads, Business Week, 12 March retrieved 20 May 2011 from magazine/content/07_11/b4025088.htm?chan-gl. 75. Personal Interview with Chipotle mid-day shift supervisor. 76. Warren, Chipotle’s fresh mission. 77. Ibid. 78. Chipotle: 2010 Annual Report & Proxy Statement, 79. 2011, Chipotle Mexican Grill, Inc.: 4Q10 solid: ’11 comp and cost reversion, Barclays Capital, 11 February, retrieved 24 May 2011 from http://box407. 9c62acaa/attachment-0003.pdf. 80. Buckley, Great 4Q but downgrade to neutral. 81. Chipotle Mexican Grill’s CEO discusses Q1 2011 results-earnings call transcript, Seeking Alpha. 82. Chipotle Mexican Grill Inc. 2009 Form 10-K and 2010 Form 10-K, retrieved 14 May 2011, ?action=getcompa ny&CIK=0001058090&type=10-K&dateb=&own er=exclude&count=40. 83. K. Dizon, 2004, A moment with … Steve Ells, Chipotle boss, 6 April, retrieved May 12, 2011 from article/A-moment-with-Steve-Ells-Chipotle-boss-1141563.php. 84. Ibid. 85. Steve Ells: Chairman of the Board and Co-Chief Executive Officer, Forbes. com, retrieved 12 May 2011 from 86. F. Montgomery, (Monty) Moran: Director and Co-Chief Executive Officer., retrieved 12 May 2011 from montgomery-f-monty-moran/19166. 87. Robert (Bob) N. Blessing: Chief Development Officer., retrieved 12 May 2011 from 88. 2011, Chipotle Mexican Grill, Raymond James 32nd Annual Institutional Investors Conference presentation, 8 March, PDF. 89. 2011, Chipotle Mexican Grill, Baird 2011 Growth Stock Conference presentation, 11 May, PDF. 90. Chipotle Mexican Grill, Inc.: 4Q10 solid: ’11 comp and cost reversion, Barclays Capital. 91. 2011, Chipotle Mexican Grill, Inc. announces first quarter 2011 results,, 20 April, retrieved 14 May 2011 from http:// ID=1552867&highlight=. 92. Chipotle Mexican Grill, Inc.: 4Q10 solid: ’11 comp and cost reversion, Barclays Capital. 93. Ibid. 94. Chipotle: 2010 Annual Report & Proxy Statement, 95. Chipotle Mexican Grill’s CEO discusses Q1 2011 results-earnings call transcript, Seeking Alpha.


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