Chipotle Case Analysis

Chipotle Case Analysis

Case Analysis: Chipotle

Read the Chipotle Case Study in Case Study section of the text. Write a summary of the case study. Be sure to discuss reasons why Chipotle would use internal governance mechanisms to monitor and control managers’ decisions. Your summary should be a minimum of 2-3 double-spaced pages and must be in your own words. Use APA style. You must include 3-5 references. Only one reference may be from the internet (not Wikipedia). The other references must be located within the Grantham University online library. Only the body of the paper will count towards the page requirement.

INTRODUCTION

 

This case features an entrepreneurial success story, set in what is now the fastest growing segment of the restaurant industry. The case study opens with a description of the early history of Chipotle Mexican Grill, the unique vision of founder Steve Ells, and his Food with Integrity philosophy, which is the driving force behind the innovative, young company. Then it discusses evolving concepts and rivals within the fast casual restaurant segment, which constitutes Chipotle’s competitive environment. In addition, the company’s supply chain, workforce, marketing, organizational structure, leadership, management of customer experiences, and financial performance are examined in detail.

 

Overcoming the challenges of rapid growth is a strong theme in this case. Steve Ells does not lack long-term vision or a strategy for differentiating Chipotle from the increasing crowd of competitors, but the pathway to future success has yet to be defined. A study of the company’s entrepreneurial character, synthesis of SWOT factors, and review of Chipotle’s business and growth strategies will expose suitable measures that can be recommended to guide the company into its next era of high growth and performance.

 

• Describe the entrepreneurial character of the Chipotle business. How has Ells promoted entrepreneurship within the organization?
• What insights does a SWOT analysis reveal about how the company should be positioned in the future?
• Define the components of Chipotle’s business strategy. Based on the analysis, what changes should Ells make in his efforts to significantly differentiate the company?
• Integrate the results of the analysis into recommendations for growing the business and combatting competitive pressures to maximize performance.

 

Entrepreneurial opportunities exist because of competitive imperfections in markets and among factors of production. Steve Ells’ original concept for the Chipotle Mexican Grill did not fit into any conventional restaurant business models. He envisioned a way to shake up the traditional made-to-order burrito by adding gourmet ingredients, and in the process, discovered an undefined niche between fast-food and casual dining. With personal loans, Ells took a decided risk to turn his brainchild into a reality. There is no doubt that his passion and confidence for the concept played a role in the early success of the new venture. Ingenuity, dedication, and a problem-solving mentality gave it legs to run on. And through strategic management, Ells’ provided an enduring foundation upon which the company could survive and grow.

Blazing a path in a loosely defined industry, Ells recognized the importance of fostering internal innovation and entrepreneurial mind-sets among his employees. He is committed to providing the support needed for employees to remain creative and independent in their efforts to enhance the customer’s experience. The “Restaurateur Program” is designed to encourage Chipotle’s strongest performers to be career managers —rewarding behavior that results in restaurant staff development and increased store revenues. Positioning managers as closely as possible to ownership status promotes entrepreneurial actions and fierce loyalty. Also, empowered front-line employees receive above-industry-average wages and health care benefits. A positive work environment and heightened morale reinforce the company’s goal of enriching customer experiences.

 

Delving into the company’s internal and external environments reveals the strengths, weaknesses, opportunities, and threats prevailing in Chipotle’s current situation.

 

Strengths
Visionary leadership	No debt
Quick service	Cash flow to fund expansion
Fresh, gourmet-quality food—unique taste, difficult to imitate—organic and sustainable	Leading market capitalization, EBITDA, EV/EBITDA
Customer satisfaction (except for Houston), leading to customer loyalty/retention	Strong balance sheet, returns, and revenues (nearly tripled in past 6 years)
Efficient kitchen design	Growth rate 19.6%
Leader in sustainable restaurants	Expansion rate—126 stores in 2010
Brand awareness	Stock performance—up 141% in 2010
Manager selection and development; maximum retention and performance	Same store sales growth and per restaurant sales (exceeded only by Pei Wei)*
Entrepreneurial culture	Network of organic farmers
Empowered workforce	Social media and word of mouth marketing
Advertising advantage—less than 2% to competitors’ 3–5%	Supply chain management capabilities (from McDonald’s partnership)

 

*Per Store Sales
Chipotle	$        1,681,247	Qdoba	$            330,243
Panera Bread	$        1,061,589	Pei Wei	$        1,846,018

 

 

 

 

Weaknesses
Higher ingredient costs	International position/reach/performance
Higher ticket prices	Food calorie content
Dependence on network of organic farm sources—hard to substitute or replace	High sourcing costs to identify/develop; challenges to meet high standards
Immigration issue—negative impact on image and higher labor costs expected	No franchisees to share costs or fuel quicker expansion
Opportunities
International expansion	Domestic expansion
New food concepts (such as Asian)	Catering; off-premise offerings
Franchises	Same store growth initiatives
Menu expansion (alcohol, LTO’s)	Meal delivery service

 

Threats
Aging store base	Fierce competition on the rise
Imitation of sourcing strategy, ingredient model, and speed-to-grill	Rival chains with means to expand aggressively
Modification of fast-food formats to appeal to niche segment	Imitators able to undercut price and create value
Shifting consumer trends—new “hip”	Declining traffic rates
Economic pressure to lower prices	Rising food prices
Expansion oversights or mistakes	Cannibalization from new stores
Dilution of niche; new entrants (such as “Better Burgers”)	High visibility as proponent of ethical and environmental causes—target for criticism
Supplier shortages; interruptions in supply	Worsening cost structure**

 

**The biggest operating expenses for restaurants are CGS and Labor. In 2010, food, beverage, and labor expenditures totaled 65% of revenues on average in the fast-food industry (where fast-casual restaurants were also classified). Chipotle’s known costs are outlined below.

 

	2010	As %
Total Revenue	$        1,835,922	100.0%
Cost of Revenue	$        1,143,613	62.3%
Gross Profit	$            692,309	37.7%
Marketing Expenses	( $              25,703	1.4%)
Operating & SGA	$            321,494	17.5%
Non-Recurring	$                7,767	0.4%
Other	$              68,921	3.8%
Operating Income	$            287,831	15.7%
Net Income	$            178,981	9.7%

 

The company’s labor costs are not segregated from operating and SGA expenditures, but Chipotle’s cost of revenue is already at 62.3%. With labor charges added in, the company appears to be at a disadvantage when compared to the industry average of 65% for these two cost items. Employment cost indices have been rising 3–4% in the past several years, and compliance with immigration laws will also negatively affect the company’s labor costs. Produce, other food, and commodity costs are also on the rise, as are the company’s marketing and promotional expenses. Unlike some of its competitors, Chipotle has not yet passed on a general price increase to its customers. Its last significant increase in late 2008 was followed by several quarters of same store traffic declines.

 

Set apart from competitors by its commitment to organic and sustainable ingredients, a unique taste that is difficult to imitate, and Food with Integrity philosophy, Chipotle employs a focused differentiation strategy. The company’s business strategy is more fully described by the dimensions outlined below.

 

Target customers: ages 18–49 seeking (and willing to pay slightly higher prices for) high quality food ingredients

 

Niche market: fast-casual restaurant; more upscale than fast-food restaurants and high quality food served more quickly and affordably than at full-service restaurants

 

 

 

 

 

 

 

 

Hipper

Fresh-to-order

Visible prep

Customizable

 

Vision: long-term vision to change the way people think about and eat fast food; commitment to sourcing the best ingredients (raised with respect for the animals, environment, and farmers in the supply line) and to reducing the environmental impact of restaurants

 

Mission: Food with Integrity philosophy guides every decision made at Chipotle

 

Strategy: focus on the customer experience, using:

• Simple menu
• Gourmet quality food with panache
• Unique, better-tasting, sustainably raised food products
• Reasonable, albeit premium, pricing
• Décor and setting constructed of simple materials to create a sleek, modern feel and appealing, eclectic atmosphere

 

Expansion/Growth: internally funded from cash; international expansion began in 2008

 

 

Value-creating activities

• Infrastructure corporate ownership and operation of restaurants (unlike many competitors who have some share of franchises) emphasizes the importance of selecting store managers who can execute the firm’s strategy
• Production interactive ordering process controlled by customer to personalize meal and experience; open kitchen design for efficiency, quick service, and customer experience
• HR management empowered workforce; development and reward systems to support strategy, retain employees, and facilitate innovation and high levels of customer service
• Procurement centralized purchasing to reduce operating costs; partnerships with local suppliers and independently owned regional distribution centers to reduce transportation costs and solve challenges of sourcing ingredients that meet high standards; supply chain leverage with capabilities acquired during McDonald’s partnership; sourcing from organic farmers (prefers to work with family-owned operations)
• Marketing social media and word of mouth marketing; lower costs than competitors

 

To position Chipotle against the five forces of competition, the company relies heavily on its unique focus on taste and organic ingredients to build customer loyalty and thwart the advances of rivals. Creating a customer following through high levels of satisfaction lowers their intention to eat elsewhere. As the only national restaurant chain to expand its commitment to the use of local products, Ells continues to differentiate Chipotle in significant ways.

 

In addition, the company limits the bargaining power of suppliers by cultivating a solid network of farmers to minimize supply outage risks. Chipotle selects farming partners based on quality specifications and purchases within a strict set of pricing guidelines and protocols. As the largest restaurant buyer of locally grown produce, distributors have little negotiating strength relative to the company.

 

Ells recognizes that Chipotle’s remarkable same stores sales growth is unsustainable over the long term. To maintain the company’s strong growth rate and stellar performance in the financial marketplace will require a shift in focus. He will need to rely more heavily on new stores or new methods of growing same store sales figures to offset anticipated reductions in traffic rates. In addition, greater focus on increasing margins will be necessary to balance the effects of rising costs in multiple expense categories.

 

Domestic and international opportunities for new store growth and stimulating growth in same store sales should be discussed separately.

 

Domestic  Because of the company’s vast geographic footprint, Chipotle believes that it will be challenged to find profitable locations for new stores. The number of current store sites by state is sorted from highest to lowest and shaded in tiers in the table below. In order to discover growth opportunities, Chipotle will need to analyze the density, demographics, income, and economic conditions of population centers throughout the country, taking care not to target locations where current store sales will be cannibalized by the introduction of new restaurants. Using current store performance figures, the company can establish the potential of new store sites. Consider the District of Columbia. Here, Chipotle has more stores in one metropolitan area than in 16 different states. This suggests that there are new sites to be found domestically if the company can more aggressively expand demand for the brand.

 

As of December 31, 2010, Chipotle operated 1,084 restaurants
California	165	Kansas	17	Tennessee	5
Ohio	123	New Jersey	17	Utah	4
Texas	93	Indiana	14	Alabama	3
Illinois	78	Georgia	13	Connecticut	3
Colorado	71	Michigan	12	Rhode Island	3
Florida	58	North Carolina	12	Iowa	2
Virginia	52	Oregon	12	New Hampshire	2
Minnesota	51	Washington	12	South Carolina	2
New York	50	Wisconsin	12	Canada	2
Arizona	41	Nevada	11	Delaware	1
Maryland	40	District of Columbia	8	Maine	1
Missouri	24	Kentucky	8	Wyoming	1
Pennsylvania	24	Nebraska	7	United Kingdom	1
Massachusetts	23	Oklahoma	6

 

Distinct from the popularity of sustainably raised foods, a local food movement is quietly sweeping the nation. Awareness and interest in reducing artificial food preservation methods and the environmental “footprint” required to transport food long distances is growing in areas throughout the country. It is becoming very visible in some regional markets, where support for local agricultural communities is being matched with consumer demand for fresh, in season, local food supplies. Other regions that value healthy lifestyles and eating choices offer additional growth opportunities for Chipotle.

International  Chipotle’s reach beyond the U.S. extends into only a few major cities: Toronto, London, Paris, and Munich. According to the analysis, the company is experiencing weak financial performance in its international stores. In addition, global food prices rose 37% in 2010 (compared to domestic food price increases of just 4%). Also taking into consideration enormous variations in consumer tastes and discretionary spending habits in foreign nations, pursuing a global growth strategy will be very challenging for the company. Global reaction to Chipotle’s approach is uncertain and is likely to vary across the cultures and economic conditions of different countries. In Europe, where cultural priorities and sourcing advantages align with Chipotle’s strategy, the company may elect to export its U.S. approach. On the other hand, it should consider other modes of entry elsewhere (including franchises, licensing arrangements, joint ventures, or other types of cooperative partnership agreements).

 

Same store  Several reasons have been cited for the decline of Chipotle’s same store traffic rates. Each requires a different response.

 

• Aging store base: may require capital investments to renovate existing restaurants
• Lower marketing expenses: should be reevaluated, as increased marketing initiatives are actually warranted by current conditions
• Increased competition: more aggressive strategic moves are necessary as competitive conditions intensify (including increased branding messages and efforts, locking in limited organic ingredient sources, securing prime real estate sites, proactively pursuing new customer groups, and regularly implementing fresh marketing and product strategies)
• Sales cannibalization from new stores: should use suggestions in the domestic new store growth discussion above to minimize the negative impact of new restaurants on existing operations

 

New initiatives to grow the revenues of existing stores could involve developing a meaningful customer loyalty program, promoting catering services, introducing a breakfast burrito menu to extend sales earlier in the day, or establishing online ordering or meal delivery services to create value and enrich the management of customer relationships.

 

Getting Real  Some cautionary comments are necessary to focus Chipotle on setting realistic expectations. First, Marketing Director Adams has miscalculated the level of marketing expenditures of the company’s biggest rival. Rather than spending between 3% and 5%, Panera Bread’s marketing expenses constitute only 1.8% of revenues. This disproves Chipotle’s claims of an advertising cost advantage over competitors. It also opens a small window of opportunity to gain advantage by investing more in advertising to strengthen the brand.

 

Second, it is unwise for Ells to disregard the evidence that, though customers appreciate Chipotle’s emphasis on delivering environmentally responsible and sustainable ingredients and are willing to pay a slight premium for better tasting food, it is not at the forefront of customers’ thoughts or the primary reason behind customer purchases. The driving force for Chipotle’s sales is the company’s great tasting food. Chipotle should avoid over-estimating the willingness of most of its customer base to seek or pay for its high level of environmental consciousness.

 

Third, given the nature of Chipotle’s vision and mission, the company should consider right-sizing its domestic operations, rather than blindly pursuing growth for growth’s sake. The appeal of its offering may or may not have peaked, but given the supply constraints to truly deliver organic, sustainable ingredients for its menu items, the company may want to consider expansion only to the degree to which it can attain its goals of using 100% naturally raised meats, pasture-raised dairy, antibiotic-free chicken, and organic beans. It is compromising the company’s vision and distinction by expanding beyond the ability to meet these commitments. In addition to challenges with supplier shortages of critical ingredients, intense pressure on margins is expected as labor, food, marketing, and capital costs are increasing. By determining what share of its market is willing to absorb higher prices for its truly unique product, the company may find that margins are maximized with higher prices and a reduced store count or volume.

 

Finally, any aggressive expansion (whether domestic or global) will probably require a more complex organizational structure for Chipotle. Its single corporate office in Denver oversees activity at all Chipotle restaurants. Consequently, the company’s current simple/functional structure is already the source of some domestic management and communication dysfunction. Adequate systems are not in place to effectively support a major expansion of international operations. The distance from local and cultural differences will grow as the company expands into new territories abroad. The appropriate organizational structure for international operations will depend on the mode of entry and type of international strategy ultimately selected by the company.

Is this the question you were looking for? If so, place your order here to get started!