Chipotle: Can I have some guac to go with that efficient service model?

Chipotle is highly effective at driving alignment between its operating and business models. It uses an efficient service model to deliver food quickly without sacrificing perceived quality; it uses technology in the food preparation process without sacrificing taste; and it sources only the highest quality ingredients in order to uphold its quality reputation for which customers are willing to pay extra.

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Operating Model Overview: 

Efficient service model

Chipotle’s assembly line food preparation process is central to its fast-casual service model. By placing all of its ingredients in front of the customer, not only is Chipotle able to gain the customer’s trust in the quality of the food, it is also able to offer customizability while still preparing orders quickly and accurately. As a result, Chipotle’s fastest restaurants have achieved maximum throughput rates of 350 transactions per hour (~6 per minute!) [1].

To achieve this level of efficiency, Chipotle relies on what it calls the “Four Pillars of Throughput.” These pillars refer to: having an “expediter” to quickly finish a customer transaction once the food is prepared, using “linebackers” to ensure that the employees will never have to turn their back on the customer to get additional ingredients, getting all ingredients and silverware in place before rush hours, and putting their best employees in the right places at peak times. Another important element is its simple menu; although it feels very customizable to the customer, every item is simply a derivative of one of a few different core products.

Technology incorporation

Chipotle is also obsessive in its attention-to-detail regarding how it uses technology at the store. As one example, the company had trouble finding the “perfect” tortilla warmer on the market, so it spent several years developing a custom tortilla warmer [2]. On the other hand, CEO Steve Ells once ordered the store to get rid of all onion dicing machines because he thought the onions tasted better when sliced by hand; clearly, he is willing to reduce efficiency when it conflicts with the taste of the food [3]. In 2014, Chipotle also announced a planned investment of $10 million in its mobile app and broader technology network; this order-ahead app helps increase customer satisfaction while increasing throughput [4].

Ingredient sourcing

While the in-service preparation can add to the perceived quality, good taste really starts at the farms. In 2013, 90% of Chipotle’s meat met its free-range, hormone-free, and antibiotic-free standards. Chipotle seeks to achieve this goal by working with a large number of small farms in America, but it was recently forced to import meat from Australia due to a supply shortage of grass-fed beef in the United States [5].

Business Model Implications:

Chipotle’s business model relies on convincing customers to pay premium prices for quick-service food. As described above, many aspects of its operating model support this strategy.

Due to its efficient food preparation process, Chipotle is able to spend less than its fast casual competitors on labor as a percentage of sales (21% versus an average of 29%). This makes up for the fact that it spends more than its competitors on food (34% of sales versus an average of 29%) due to its focus on high quality ingredients [6]. Nonetheless, Chipotle is typically able to pass food costs on to its customers; thanks in part to its “Food with Integrity” campaign, health conscious customers now equate Chipotle with high quality ingredients and healthier food.

Chipotle also has an advantage over its competitors on the revenue side. First, it is able to earn more than the $4-7 per transaction average for fast food restaurants; in fact, its $11.30 per person average is just short of the $12.42 average for sit-down restaurant Applebee’s [7]. Second, Chipotle is able to generate more sales per square foot, at $840 in 2013, than any of its peers. Even Panera Bread, a fast casual competitor with similar price points, averaged only $548 per square foot (while average restaurant sales between the two stores are similar, Chipotle stores average just 2,600 square feet compared to 4,500 square feet for Panera) [8].

In terms ofthe bottom line, Chipotle stores continue to increase profitability even while the company opens new stores at a 10+% growth rate. In 2014, it store-level operating margins averaged 26%, and the company grew same store sales by 17%. Furthermore, because all of the stores are company-owned, Chipotle and its franchisees do not split these margins [9].

 

 

[1] http://qz.com/172900/how-chipotle-is-going-to-serve-burritos-faster-and-faster-and-faster/

[2] http://www.cbsnews.com/news/chipotle-grills-secret-ingredient-obsession/

[3] http://www.esquire.com/news-politics/interviews/g1279/most-inspiring-ceos-1012/?slide=12

[4] http://www.entrepreneur.com/slideshow/231261

[5] http://www.restaurantbusinessonline.com/operations/sales-finance/chipotle-unwrapped

[6] http://www.restaurantbusinessonline.com/operations/sales-finance/chipotle-unwrapped

[7] http://finance.yahoo.com/blogs/michael-santoli/casual-dining-chains-struggle-to-adapt-to-changing-consumer-tastes-203955971.html

[8] http://www.restfinance.com/Restaurant-Finance-Across-America/May-2014/A-Look-At-Chipotles-Efficiency/

[9] http://www.fool.com/investing/general/2015/04/15/why-chipotle-mexican-grill-stores-are-more-than-50.aspx