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Cjipotle

In: Business and Management

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14

October

21

Chipotle Mexican Grill
Caroline Burke, Mary Harris, Stuart Hooks, Jacob McCanless & William Vaughan
A complete strategic analysis of the Chipotle restaurant chain from its founding in 1993 through the fiscal year 2012.

Table of Contents Introduction 3 I. Core Competencies 3 II. SWOT Analysis 3
Internal Analysis: Strengths & Weaknesses
External Analysis: Opportunities & Threats
Future Prospects III. Value Chain Analysis 5
Primary Activities
Support Activities IV. Generic Competitive Strategy 6
Chipotle’s Strategy for Success V. Financial & Operating Performance 6 VI. Analysis of Competition 6
Rival with Strongest Resources & Capabilities
Chief Differences Between Chipotle’s & Moe’s Strategies
Can Chipotle Compete Effectively Against Taco Bell? VII. Recommendations 7 VIII. Appendix 8 Works Cited 13

In 2012, an analyst on Wall Street referred to Chipotle Mexican Grill as “the perfect stock”, while another suggested it could become “the next McDonald’s” (Thompson C-114). Since it’s founding in 1993, Chipotle has utilized founder Steve Ells’ leadership and culinary expertise to execute its vision of “changing the way people think about and eat fast food” (Thompson, C-114). From the day Chipotle’s first restaurant opened its doors to now running 1230 restaurants in three countries, it has become a huge success and has caught the attention of leaders in the industry. One fascinating element of Chipotle’s strategy that has allowed it to differentiate itself from rivals is that it never tried to compete directly against front-runners such as its previous owner, McDonald’s, nor expand too quickly. Under the effective leadership of Ells, Chipotle has grown at a sustainable rate and has developed numerous capabilities that set it apart in the increasingly competitive restaurant industry.

I. Core Competencies
Chipotle’s limited, focused menu is one of their core competencies because it is central to its operations and provides a unique value to the customer. Chipotle’s competitors have a difficult time competing against or imitating this competency because the times on Chipotle’s menu are tested and proven. Competitors don’t have the time or ability to test this concept or perfect their menu items. Chipotle on the other hand has been able to apply this limited menu style to the other ventures such as their two Shop House locations in Washington D.C.
Another core competency, shown in Figure 1, is their dedication to high quality ingredients such as the organic cultivation of produce and naturally raised meat. Chipotle meets high customer expectations with their ‘Food with Integrity’ campaign. None of Chipotle’s competitors have taken as strong of a stance, nor have they moved as quickly to increase their efforts for sustainable, humane cultivation of their ingredients. Chipotle has and continues to lead the way in this area of fast-casual dining.
Another key factor to the success of Chipotle is the speed and effectiveness at which their friendly and multi-skilled crewmembers serve customers. Crewmembers are trained at every position so they are able to jump in and help any other member at any time during preparation or service. The crewmembers, along with the serving style maximize efficiency because the crew is energized and motivated to move customers through the line while working as a team. Competitors have a difficult time imitating this largely in part due to the distance between their associates.

II. SWOT Analysis a. Internal Analysis i. Strengths
As shown in Figure 2, Chipotle’s commitment to creating an experience sets it apart from competitors. The Chipotle experience includes friendly employees welcoming customers to its restaurants with upscale exteriors and sleek, modern interior designs.
These simple designs have lowered development and construction costs while positioning Chipotle as a restaurant in consumers’ minds. Chipotle’s limited menu requires minimal employee training and advertising expenses while increasing efficiency in preparation and throughput. In addition, customers can customize their meals by interacting with enthusiastic crewmembers and selecting natural, fresh ingredients to add to their meal. By

using organic ingredients, cage free animals, and fully committing to its “Food With Integrity” campaign, Chipotle can attract consumers with similar values.
Lastly, Chipotle has differentiated itself through its marketing initiatives including the use of print, online, outdoor, transit, theatre, and radio advertisements. Chipotle has also been involved in various community events where stores have opened and even started its own food and music festival called ‘Cultivate’ to educate attendees about sustainability and cooking. It has stayed up to date with technological advancements, allowing customers to place orders by phone, fax, online, or on an iPhone. It has also been mentioned in articles and on television, generating positive publicity and increasing brand awareness amongst consumers. ii. Weaknesses
The limited nature of Chipotle’s menu may drive customers to competitors. Also, there are few promotions for frequent customers to enjoy. Chipotle’s brand loyalty program, Farm Team, is an exclusive offering that sends invitations to customers based on their “passion” not on frequency of purchases (Thompson C-121). Users can receive deals on meals once they gain access to the website and participate in games and surveys. Since these rewards require more effort to receive, customers may prefer a competitor who has cheaper prices or provides more opportunities to save money. Lastly, Chipotle’s marketing department creates short films instead of commercials for television. This limits their reach and effectiveness because consumers have short attention spans and many will not go out of their way to find these films online. b. External Analysis iii. Opportunities
Chipotle is at an advantage because its food offerings already cater to health conscious consumers. As the trend of consuming natural, organic foods continues to grow domestically and abroad, Chipotle’s target market and profits will do the same. Western Europe could provide substantial business considering American fast food chains such as McDonald’s and Kentucky Fried Chicken have penetrated those markets and succeeded. It is also possible that as suppliers become aware of this trend, they will use environmentally friendly and sustainable methods for their crops, therefore increasing the number of potential suppliers for Chipotle.
As mentioned in Figure 2, Chipotle’s new chain, Shop House Southeast Asian Kitchen is another tremendous opportunity. By providing the same simple-structured menu, layout, and ambiance as Chipotle, consumers can easily understand how the restaurant works and the upscale dining image it is promoting. Testing Shop House in DC was a strategically intelligent decision because now Chipotle executives can learn about consumer preferences and what it will take for this chain to be as successful as Chipotle. iv. Threats
One major threat Chipotle faces is the volatility of crop yields and their prices. This risk is heightened by the fact that health conscious consumers and other chefs are also purchasing these limited natural and organic goods. This has made is difficult for suppliers to meet their growing demand. As a result, some Chipotle restaurants have returned to using “conventionally raised meats” in 2011 and 2012, which could hurt their image (Thompson, C-118). In addition, consumer demand for meals at restaurants fluctuates due to macro-environmental forces such as the economy and technology.
During an economic downturn consumers are extremely cautious of their money and are

hesitant to spend on items that are not necessities. With technology, there are no limits to the information that is shared with consumers online including the ingredients and recipes Chipotle uses. This could motivate people to stay home and prepare a dish themselves, causing the restaurant to lose business. c. Future Prospects
This SWOT analysis, summarized in Figure 1, shows that Chipotle’s future looks more promising than daunting. If Chipotle executives and managers continue to maintain its strengths and develop its opportunities while combating its weaknesses and eliminating its threats, the sky is the limit for this growing chain. If they apply these changes in their business model to Shop House Southeast Asian Kitchen, it could very well be the next big fast-casual restaurant in the United States and abroad.

III. Value Chain Analysis d. Primary Activities
Supply Chain Management: Rather than purchasing food products from farmers or restaurant supplies from manufacturers, Chipotle has built up strong long-term relationships with reliable food industry suppliers. Chipotle keeps a list of approved suppliers, which contains ones that can meat their quality specifications and guidelines. Operations: Chipotle has employed a Quality Assurance department that monitors quality and food safety. This department sets Chipotle’s standards for everything from the suppliers they buy from, the distribution centers they control, and the food they serve.
Distribution: Chipotle uses distribution centers to make purchases from suppliers. There are twenty-two distribution centers that are independently owned and operated in different regions that supply ingredients and other supplies to all Chipotle restaurants.
Chipotle is planning to add more distribution centers as they expand.
Sales and Marketing: In February 2012, Chipotle ran its first commercial on television during the Grammys, which was a short film called “Back to the Start.” Chipotle also gains publicity from favorable articles about their food and service. Chipotle has been trying to connect with the public through social media to facilitate direct communication with its customers. One part of their marketing strategy involves the use of promotional activities in newly opened restaurants to raise awareness about the new store opening.
Service: Chipotle’s biggest goal with service is to have a customer’s order ready as quickly as possible. They do this by using a service line that the employee and customer can move through efficiently as the customer tells the employee what they want. This not only helps the customer have an easy and quick experience with ordering food, but it also lets the customer see the fresh food and ingredients that are used to create it. e. Support Activities
Product R&D, Technology, and Systems Development: In 2003 and 2004, Chipotle started their “Food With Integrity” campaign. This campaign involves Chipotle researching ways to use organically grown ingredients. They researched farming companies who practiced animal ethics and cared about the environment. This effort was to ensure that they receive fresh and pure products that are healthy for their customers.
Human Resources Management: In each of its stores, Chipotle employs a general manager, an apprentice manager, one or two hourly service and kitchen managers, and an average of twenty full and part time crewmembers. The general managers hire and

maintain crewmembers with a strong work ethic. Chipotle seeks to hire individuals who are very enthusiastic and team oriented to ensure a very positive work environment.
General Administration: Internally, Chipotle has a team of real estate managers who research potential locations for new restaurants. A lot of time and thought is dedicated to this process for things such as projected sales in an area and targeted return on investment. In 2011 alone Chipotle opened 150 restaurants. Chipotle is also looking to expand globally by opening stores in places such as Paris, France. Chipotle has started a new project by opening Shop House, which serves Southeast Asian cuisine.

IV. Generic Competitive Strategy f. Porter’s Five Forces
Figures 3 and 4 highlight how Porter’s Five Forces affects Chipotle’s success. ‘Competition Among Existing Rivals’ is moderate due to the low number of true competitors, increasing consumer demand for healthy, quick meals, and their product is differentiated by quality and most importantly, experience. The ‘Threat of New Entrants’ is low because it takes a significant amount of time and a great product to develop the brand loyalty that Chipotle has. There are high barriers to entry considering the suppliers they use as well their presence domestically and abroad. The ‘threat of substitutes’ is moderate because there are a variety of Mexican food options available and customer- switching costs are low. However, this does not include the experience Chipotle offers. ‘Power Among Buyers’ is low because there are few large buyers, increasing consumer demand, and variable substitute availability depending on location. ‘Power Among Suppliers’ is high because there are few that offer natural, organic ingredients and Chipotle has a number of requirements they look for potential suppliers to possess. g. Chipotle’s Strategy for Success
Considering the elements of Porter’s Five Forces, Chipotle has employed a differentiation strategy that is proving to be successful in their industry. From their unique ingredients and meals, to the distinctive experience they provide and commitment to ‘Food With Integrity’, Chipotle will continue to stand out from other fast-casual chains and attract customers.

V. Financial & Operating Performance
Chipotle’s outstanding financial and operating performance, displayed in Figure 5, has made it one of the restaurant industry’s leading companies. It has shown consistent growth trends and impressive operational data. Since 2007, Chipotle has shown revenue growth at an average rate of 20.2% with net income also growing at a compound rate of 32.1%. Between 2007 and 2011, average sales grew by $928,000. In 2006, Chipotle went public with the initial offering price set at $22 per share. As of late 2012, Chipotle’s stock has traded in the upper ranges of $380 to $385 per share.
In the 2011 fiscal year, Chipotle’s financial power became more evident, starting with an impressive Operating Profit Margin of 15.45%, which climbed by 5.49% since 2007. Chipotle’s Earnings per Share in 2011 was $6.89, which grew by $4.73 since 2007. These financial gains can be attributed to operating efficiency and increased market share. Because of CEO, Steve Ells’ goal to maximize customer “throughput”, Chipotle was able to expand and now serves over 800,000 customers per day with the average customer tab being around $9.

Chipotle has also shown consistent expenses since 2007. The reasons for this are because of its increased operations around the world. Chipotle has operations in over 40 states in the United States and also holds operations in British Columbia, Canada, and the United Kingdom. With this international expansion, Chipotle showed increased: Food, Beverage, and Packaging costs of $738,720 in 2011 compared to $346,393 in 2007, Labor costs of $543,119 compared to $289,417 in 2007, and ‘Other’ Operating costs of
$251,208 which also increased from $131,512 in 2007. With revenue consistently growing faster than expenses, Chipotle has shown net income growth of 20% in the most recent year. With Chipotle’s basic five-element strategy proven to be one of integrity and competitive uniqueness, the idea behind the company will continue to drive financial and operational success.

VI. Analysis of Competition h. Rival with Strongest Resources & Capabilities
Of all Chipotle’s competitors, Moe’s poses the largest threat. Although Moe’s is newer and has a smaller presence, specifically 420 restaurants in 26 states, it does offer a larger menu. For example, it provides quesadillas, fajitas, nachos, rice bowls, and desserts in addition to the same items Chipotle offers. It also has a kid’s menu and a variety of vegetarian, gluten free, low calorie, and side dishes. Food quality, efficiency and customer service is most comparable as well. i. Chief Differences Between Chipotle’s & Moe’s Strategies
A chief difference between these competitors’ strategies is that Moe’s franchises its restaurants, whereas Chipotle does not. As stated earlier, Moe’s has a larger menu, however this can result in a longer working line and often times a separate kitchen. These expanded distances result in degraded communication and ultimately decrease efficiency. However, because Moe’s provides chips and salsa with meals, unlike Chipotle, some consumers may view Moe’s as the best-cost option. Lastly, although Moe’s utilizes natural ingredients and cooking methods, it does not market this aspect as much as Chipotle. Rather, it offers frequent promotions including the weekly ‘Moe’s Monday deal on burritos. j. Can Chipotle Compete Effectively Against Taco Bell?
Recently, Taco Bell introduced the “Cantina Bell” menu, which consists of new ingredients such as black beans, cilantro rice, and corn salsa. These new items seem to mimic more upscale chains including Chipotle, Moe’s, and Qdoba. With that being said, Taco Bell has not come close to being a true competitor of Chipotle. In September 2011, a survey found that it had the lowest score in terms of food quality and atmosphere. It has also experienced a decline in the amount of restaurants due to underperforming, which could be a result of people seeking a better alternative in Chipotle. Despite Taco Bell’s recent breakthroughs in their menu including the Doritos Locos Taco and their new breakfast menu, it seems that consumers now prefer the healthier and better quality option of Chipotle.

VII. Recommendations
There are a number of recommendations Chipotle can apply to have continued growth and success. First, they need to gain power over supplies rather than vice versa. They could achieve this by integrating backwards. Specifically, they can invest in their

own farms to cultivate products and raise meat to their specifications. Another option is to find more local suppliers by utilizing a team to conduct regional searches. Second, Chipotle could experience tremendous success in Western European countries such as France and Germany considering companies such as McDonald’s and KFC have already penetrated those markets. Third, Chipotle should consider selling breakfast burritos or other meals that are quick and simple to make. By offering this at similar prices and on weekends, consumers may be more enticed to try it. Fourth, Chipotle can apply its business model to creating restaurants of other cuisines, like Shop House, at a time that’s best suited for the company. This could greatly increase net profits and revenues in the long term. Last, Chipotle should continue to reach out to communities in restaurant locations. Specifically, they could partner with agricultural schools to provide student scholarships, and planting gardens in schools.

VIII. Appendix

Figure 1: Core Competencies | | Small, Focused MenuHigh Quality Ingredients Such As Naturally Raised Meat and Organic ProduceCreate Efficient and Appealing Method of Service | Valuable | Allows for fast service | | Unique | Most restaurants bombard you with options and a large menu—ex) Moe’s huge board with many entree, add on, and combo options. | | Hard to imitate | These items on the menu are tested and proven- competitors don’t have the time or ability to test this concept and perfect the menu | | Applied to more Shop House- 2 successful locations in D.C. than 1 business | | Valuable | The Chipotle customer places a high value on quality of the ingredients in their products. They have high expectations, but Chipotle meats them with their ‘Food with Integrity’ cultivation campaign. | | Unique | None of Chipotle’s competitors have taken as strong of a stance nor have they moved as quickly to increase their efforts for sustainable, humane cultivation of their ingredients. Chipotle had and continues to lead the way in this area of fast-casual dining. | | Hard to imitate | Chipotle started with local farmers and has kept those long-term relationships to ensure that their competitors cannot gain an advantage in this area. This conversely gives Chipotle’s suppliers more power than some of our competitors, but that give Chipotle even more of a reason to continue to make moves that are in the best interest of everyone involved with the production and consumption of their products. | | Applied to more Shop House- 2 successful locations in D.C. than 1 business | | Valuable | Customers enjoy being able to walk through the line and watch their food being made. This ensures customer satisfaction; from the guy who hates cheese, to the woman who is a germaphobe, everyone can specify exactly what they want at Chipotle and the multi-skilled crew workers are prepared to handle it. | | Unique | Moe’s Southwest Grill offers a similar style of service to Chipotle, butthey do not offer the same experience that Chipotle offers with their minimalistic approach to dining and preparation areas. This setting provides an experience that is unique to Chipotle. | | Hard to imitate | Many of the large chain restaurants are moving towards a minimalist, chic design when they are constructing new establishments or renovating old ones. Often times, this change in decor or food style drives away long time customers who were happy prior to all the changes.This is something that Chipotle has made central to their image from the get go, so they do not have to worry about this. |

Friendly, Multi-Skilled Crew Members | Applied to more than 1 business | Shop House- 2 successful locations in D.C. | | Valuable | Everyone values being served quickly, that’s a fact. But, Chipotle crewmembers not only serve their customers as efficiently as possible, they also do it with a smile.Chipotle crewmembers are trained at every position in the store so that they are able to jump in and help any other member at any time during prep or service. | | Unique | The crew members paired with the serving style maximizes efficiency because the crew is energized and motivated to move customers through the line while working as a team. | | Hard to imitate | Competitors have a difficult time imitating this largely in part due to the distance between their associates. Chipotle only offers a few items, which allows them to have a short work line and a relatively small prep kitchen. Other restaurants, such as Moe’s have a much larger menu, which results in a longer working line and often times a separate kitchen. These expanded distances result in degraded communication and ultimately decrease efficiency. | | Applied to more than 1 business | Shop House- 2 successful locations in D.C. |

Figure 2: SWOT Analysis
Internal Analysis


Weaknesses




Creating an “experience”
Strong company culture o Hires friendly & enthusiastic employees Distinctive interior & exterior designs
Simple menu has improved efficiency and throughput
Fresh, natural, organic ingredients and cooking methods as part of its Food with Integrity Campaign
Marketing and Accessibility
Strengths
* Menu too limited? * Will consumers watch short films? * Don’t offer promotions frequently * Farm Team * How do we find out about them * Moe’s Monday
10

Figure 2: SWOT Analysis (Continued)

External Analysis

Opportunities *
International Expansion * Shop House Kitchen o Applying business model to other cuisines * Health trend may motivate suppliers to use more sustainable farming methods Increase suppliers for Chipotle

Threats *
Fluctuations in crop yields & prices! * Ingredients hard to find in high quantities  could hurt image! * Demand for eating at restaurants depends on economic and technological factors

Figure 3: Porter’s Five Forces
Porter’s Five Forces

Threat of New Entrants: Low
Decent brand loyalty
High Barriers of entry leading to small pool of candidates for entry

Power among Suppliers: High
Differentiated products required Suppliers have shortages Suppliers have environmental requirements

Competition among Rivals: Moderate
Few close competitors Increasing customer demand
Moderately differentiated products Spend little time and effort competing

Threat of Substitutes: Moderate
Substitutes not considered better quality
Experience is difficult to substitut

Power among Buyers: Low Many individual customers Increasing customer demand Low cost of switching 11

Competition among Existing RivalsThreat of New EntrantsThreat of SubstitutesPower among BuyersPower among Suppliers | Moderate | | | Low | * Chipotle has decent brand loyalty, which is common for differentiated products. * There are high barriers of entry for large-scale operations such as Chipotle, which deter new entrants and results in a small pool of candidates for entry. * Chipotle does not spend much effort competing due to the fact they are thriving in a business model that they essentially created. | | Moderate | * Price is not a factor among substitutes for Chipotle. * Substitutes such as the products of Taco Bell are hardly comparable to Chipotle, and those who are do not offer an experience that exceeds Chipotle’s. * Though customers do incur low costs of switching, there are few if any real substitutes for Chipotle. | | Low | * There are many individual customers for Chipotle, rather than a few large buyers. * Chipotle is experiencing increasing customer demand. * Customers incur low costs of switching to substitute products, but they are not always available. | | High | |

Figure 4: Porter’s Five Forces in More Detail

* Chipotle incurs low numbers of competitors that are operating on the same scale. * They are experiencing increasing customer demand. * They spend little time and effort competing due to their revolutionary business model. * Their products are moderately differentiated due quality ingredients, and most of all the experience.

* Suppliers have differentiated products that are central to the Chipotle mission and thus its’ products. * Different ingredients are in short supply at various times of the year due to growing seasons, and even natural disasters. * Chipotle also limits the number of their suppliers because they have a set of environmental and humanitarian requirements to ensure their mission is being met at every step of production.

Figure 5: Financial & Operating Ratios

Ratio | 2011 | 2010 | 2009 | 2008 | 2007 | Gross Profit Margin | | | | | | Operating Profit Margin | 15.45% | 15.68% | 13.42% | 9.31% | 9.96% | Net Profit Margin | 9.47% | 9.75% | 8.35% | 5.87% | 6.50% | Return on Assets | 15.29% | 15.98% | 13.23% | 9.84% | 9.81% | Net ROA | 15.08% | 15.96% | 13.19% | 9.48% | 9.77% | Return on invested capital | 16.95% | 17.92% | 14.76% | 10.45% | 10.88% | ROE | 20.58% | 22.07% | 18.03% | 12.56% | 12.55% | EPS (basic) | 6.89 | 5.73 | 3.99 | 2.39 | 2.16 | | | | | | | Current | 3.18 | 3.30 | 2.91 | 2.75 | 2.75 | Working Capital | 343,739 | 283,167 | 195,301 | 134,284 | 128,543 | Debt to assets | 0.27 | 0.28 | 0.27 | 0.25 | 0.22 | Long‐term debt to capital | 0.18 | 0.19 | 0.18 | 0.17 | 0.13 | Debt to Equity | 0.36 | 0.38 | 0.37 | 0.33 | 0.28 | Times interest earned | 119.04 | 1070.00 | 502.98 | 41.32 | 365.48 | Internal cash flow | 289,883 | 247,902 | 188,153 | 130,972 | 114,158 | | | | | | | Financial Statement Info | | | | | | Revenue | 2269548 | 1835922 | 1518417 | 1331968 | 1085782 | Operating Expenses | 1918986 | 1548091 | 1314712 | 1207929 | 977599 | Operating Income | 350562 | 287831 | 203705 | 124039 | 108183 | Interest expense | 2945 | 269 | 405 | 3002 | 296 | Income before taxes | 349705 | 289061 | 204225 | 127206 | 114002 | Provision for income taxes | 134760 | 110080 | 77380 | 49004 | 43439 | Net income | 214945 | 178981 | 126845 | 78202 | 70563 | | | | | | | Total current assets | 501192 | 406221 | 297454 | 211072 | 201844 | Total assets | 1425308 | 1121605 | 961505 | 824985 | 722115 | Current Liabilities | 157453 | 123054 | 102153 | 76788 | 73301 | Liabilities | 381082 | 310732 | 258044 | 202395 | 160005 | Equity | 1044226 | 810873 | 703461 | 622590 | 562110 | | | | | | | Net cash provided by oper act. | 411096 | 289191 | 260673 | 198507 | 146923 | Capital Expenditures | 151100 | 113200 | 117200 | 152100 | 141000 | Depreciation | 74938 | 68921 | 61308 | 52770 | 43595 |

Works Cited

Arthur A. Thompson, “Chipotle Mexican Grill in 2012: Can It Hit A Second Home Run?” in Crafting & Executing Strategy, ed. 19 (New York: McGraw-Hill, 2012), p. C-114-121.…...

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