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. M G T 4 1 5 0 : B u s i n e s s S t r a t e g y – T e a m E C a s e A n a l y s i s 14 Table of Contents
Introduction
3
I. Core Competencies
3
II. SWOT Analysis
Internal Analysis: Strengths & Weaknesses
External Analysis: Opportunities & Threats
Future Prospects
3
III. Value Chain Analysis
Primary Activities
Support Activities
5
IV. Generic Competitive Strategy
Chipotle’s Strategy for Success
6
V. Financial & Operating Performance
6
VI. Analysis of Competition
Rival with Strongest Resources & Capabilities
Chief Differences Between Chipotle’s & Moe’s Strategies
Can Chipotle Compete Effectively Against Taco Bell?
6
VII. Recommendations
7
VIII. Appendix
8
Works Cited
13
2 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
3 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
i. 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.
ii. 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
4 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
a. 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.
b. 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
5 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
a. 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 customerswitching 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.
b. 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.
6 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
a. 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.
b. 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.
c. 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
7 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.
8 VIII. Appendix
Figure 1: Core Competencies
Small, Focused Menu
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
than 1 business
Shop House- 2 successful locations in D.C.
High Quality Ingredients
Valuable
Such As Naturally Raised
Meat and Organic
Produce
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
than 1 business
Shop House- 2 successful locations in D.C.
Create Efficient and
Appealing Method of
Service
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, but
they 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.
9 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.
Friendly, Multi-Skilled
Crew Members
Figure 2: SWOT Analysis
Internal Analysis
•
•
We aknesses
•
•
•
•
Str engths
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
• Menu too limited?
• Will consumers watch short films?
• Don’t offer promotions frequently
o Farm Team
o How do we find out about them
o Moe’s Monday
10 Figure 2: SWOT Analysis (Continued)
External Analysis
Opportunities
Threats
• International Expansion
• Shop House Kitchen
o Applying business model to other cuisines
• Health trend may motivate suppliers to use more
sustainable farming methods à Increase suppliers for
Chipotle
• Fluctuations in crop yields & prices!
• Ingredients hard to find in high quantities à
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 substitute
Power among Buyers: Low
Many individual customers
Increasing customer demand
Low cost of switching
11 Figure 4: Porter’s Five Forces in More Detail
Competition
among Existing
Rivals
Moderate
•
•
•
•
Threat of New
Entrants
Low
•
•
•
Threat of
Substitutes
Moderate
•
•
•
Power among
Buyers
Low
•
•
•
Power among
Suppliers
High
•
•
•
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.
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.
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.
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.
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.
12 Figure 5: Financial & Operating Ratios
Ratio 2011 2010 2009 2008 2007 Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Assets Net ROA Return on invested capital ROE EPS (basic) Current Working Capital 15.45% 9.47% 15.29% 15.08% 16.95% 20.58% 6.89 3.18 343,739 0.27 0.18 0.36 119.04 289,883 2269548 1918986 350562 2945 349705 134760 214945 501192 1425308 157453 381082 1044226 411096 151100 74938 15.68% 9.75% 15.98% 15.96% 17.92% 22.07% 5.73 3.30 283,167 0.28 0.19 0.38 1070.00 247,902 1835922 1548091 287831 269 289061 110080 178981 406221 1121605 123054 310732 810873 289191 113200 68921 13.42% 8.35% 13.23% 13.19% 14.76% 18.03% 3.99 2.91 195,301 0.27 0.18 0.37 502.98 188,153 1518417 1314712 203705 405 204225 77380 126845 297454 961505 102153 258044 703461 260673 117200 61308 9.31% 5.87% 9.84% 9.48% 10.45% 12.56% 2.39 2.75 134,284 0.25 0.17 0.33 41.32 130,972 1331968 1207929 124039 3002 127206 49004 78202 211072 824985 76788 202395 622590 198507 152100 52770 9.96% 6.50% 9.81% 9.77% 10.88% 12.55% 2.16 2.75 128,543 0.22 0.13 0.28 365.48 114,158 1085782 977599 108183 296 114002 43439 70563 201844 722115 73301 160005 562110 146923 141000 43595 Debt to assets Long-­‐term debt to capital Debt to Equity Times interest earned Internal cash flow Financial Statement Info Revenue Operating Expenses Operating Income Interest expense Income before taxes Provision for income taxes Net income Total current assets Total assets Current Liabilities Liabilities Equity Net cash provided by oper act. Capital Expenditures Depreciation 13 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.
14