Chipotle: How non-real Mexican food became so successful
How a Mexican restaurant that doesn't offer real Mexican food is leading the category of fast casual restaurants
The first time I visited Chipotle I was disappointed. A friend told me that the restaurant had “real Mexican food,” which was not what I found there. In Mexico City, my hometown, I have never eaten a burrito, a bowl with rice and guacamole, or a crispy corn taco. Yes, a “burrito” is not a Mexican meal but a Tex-Mex one. While those meals certainly use ingredients of real Mexican food, they are not prepared in the way Mexicans eat.
My frustration soon became curiosity when I knew more about the tremendous success of this business. Chipotle started in 1993 in Denver, Colorado, selling more than one thousand burritos in the first month1. McDonald’s was a major investor of Chipotle from 1998 to 2006, expanding the business from 16 to 500 restaurants over that period. In 2006, Chipotle made its initial public offering (IPO), increasing its stock price exactly 100% in its first day as public company2.
Revenues of Chipotle have grown at 20% CAGR from 2006 to 2014. In 2014, the company had revenues of $4,108.3 million and a net profit of $445.4 million (10.8% of sales)4. The following graph shows the growth of revenues and profitability over the past decade.
Source: Graph made by Market Realist3 using Company Filings
To provide a clear idea of the fantastic success of the business, we can see the performance of its stock price. If we had invested $1,000 in Chipotle in January 2009, we would have had $13,585 by November 2014. Chipotle easily outperformed the return of competitors such as Panera Bread (PNRA), McDonald’s (MCD), and Yum Brands (YUM) which operates KFC, Taco Bell, and Pizza Hot. It also outperformed the S&P 500 index3.
Source: Graph made by Market Realist3
After some research about the company, I came to the conclusion that although Chipotle doesn’t offer “real” Mexican food, it is a company that effectively connects its business and operating models to create value for its customers and stakeholders. Chipotle is a fast casual restaurant that offers “food with integrity.” In simple words, the business appeals to customers who want healthy food with a quick service. The operations of the business behind scenes clearly connect with that value proposition.
THE BUSINESS MODEL: “I want fresh-food food… and fast!”
Chipotle positions itself as a fresh healthy option for young people. In its report of 2014, the CEO mentions that Chipotle target Millennials, who are increasingly more concerned about eating healthy food and supporting socially-responsible companies3. After some research, I came to the conclusion that the business model has the following two pillars,
a) A socially-responsible food chain…
According to Euromonitor, Chipotle’s customers are young students and professionals who prefer companies that implement human practices, prepare food on-site with raw ingredients, and work with suppliers who use resources in a sustainable way4. Millennials connect better with companies that have a social-oriented mission and a value proposition that goes beyond the product they buy. This formula is behind the success of other companies such as Wholefoods.
b) …that provides fresh food quickly!
Chipotle attracts health-conscious customers who want a quality dining experience. Chipotle also offers the convenience of fast food but in a cleaner, catchy environment. In fact, Chipotle initially targeted university students, who usually demand quick service and who usually hang out in a friendlier environment5. This core proposition is still part of the business model of the restaurant.
This formula of fresh, tasty, and quick food delivered by a business that uses responsibly sourced ingredients is the core of the business model, which is the fascination of Millennials and health-oriented customers. The business model is efficiently delivered by a strong operating model.
THE OPERATING MODEL: “A consistent story across the value chain”
The Operating Model of Chipotle perfectly connects with the value proposition of the business. Every decision in the supply chain and in the production process connects to the two components of the business model. The Operating Model has four main components:
1) Sourcing from high quality suppliers that use human practices
Chipotle carefully screens suppliers to select only those who use high standards of animal care and sustainable farming practices. It only selects from farmers who allow their pigs and cows to freely root and roam outdoors. Also, it doesn’t serve genetically modified food6. All these aspects connect with the socially-responsible consumer they are looking for.
2) Cooking everything in restaurant
Chipotle doesn’t use artificial flavors or fillers. Most of its meals (except the pork and beef) are prepared in the restaurant to keep food fresh. Without preservatives, the company mentions that it provides natural, healthy food6.
3) Serving in an assembly line
Customers want fast service. For that reason, each meal is prepared in an assembly-line in front of the customer. To achieve that efficiency, customers choose from a simple menu. The customer must choose a base for his meal (tortilla, taco shell, burrito bowl, or salad) and top it with his choice of meat, rice, beans, salsa, and others4.
4) Offering a clean, good environment
Finally, consumer can enjoy his meal in a clean, trendy environment. While simple, the restaurant offers an environment that is usually cleaner than a fast-food chain.
The business model and operating model support each other
The following chart shows how the elements of the business model interact. As seen, both models align and support each other. Chipotle aims to attract health-conscious consumers that want quick service. Its operating model delivers that promise by serving fresh food in an assembly-line type production process. It sourcing processes guarantee high-quality ingredients, which connect with company’s value proposition.
It is not a surprise that they offer “Mexican” food! The food of my country is easy to prepare and it can easily use non-processed ingredients. This is clearly a key element for delivering fast service and delivering the promise of naturally grown ingredients. Also, Mexican food is already well known in the country, which provides a competitive advantage among other regional restaurants.
The key short-term challenge for Chipotle is to guarantee the strength of its operational model. In recent days the outbreak of E. coli traced to Chipotle restaurants have put in doubt the ability of the restaurant to deliver high-quality food7. If Chipotle doesn’t respond quickly to this emergency, all credibility around its operational model can go down. Without credibility on its operations, the business model and its promise of quality food cannot hold.
Overall, performance of Chipotle was been fantastic in the past years. Maybe Chipotle doesn’t prepare 100%-real Mexican food… but it is still delicious!
References
- Starting Chipotle from scratch. (Sep 22, 2009). Retrieved from: http://www.wsj.com/articles/SB125319598236119629
- Burrito Buzz. (March 12, 2007). Retrieved from: https://web.archive.org/web/20120110005039/http://www.businessweek.com/magazine/content/07_11/b4025088.htm
- The bottom line for Chipotle Mexican Grill. (December 18, 2014). Retrieved from: http://marketrealist.com/2014/12/bottom-line-chipotle-mexican-grill/
- Chipotle Mexican Grill. (October 13, 2015) [Euromonitor International] (2015). Retrieved from HBS Baker Library: http://www.library.hbs.edu/
- Chipotle founder had big dreams. (December 23, 2006). Retrieved from: https://web.archive.org/web/20080403013733/http://rockymountainnews.com/news/2006/dec/23/chipotle-founder-had-big-dreams/
- Chipotle Mexican Grill: Food with integrity. (December 7, 2015). Retrieved from: https://www.chipotle.com/food-with-integrity
- Chipotle Faces Another Foodborne Illness Outbreak, This Time In Boston. (Dec 9, 2015). http://www.npr.org/sections/thesalt/2015/12/09/459056550/chipotle-faces-another-foodborne-illness-outbreak-this-time-in-boston
Great blog post and very clearly structured!
Did you find any data on the throughput time of a Chipotle compared to a normal fast food chain or a casual restaurant? It would be interesting to see where the break point is for people that want fast-casual quickly. Conversely – is there a minimum amount of time where people get suspicious that their food is not as “fresh” and “good” as it could be if it is instantly prepared?
Based on your analysis, what’s striking to me too is that the core business model really has nothing to do with it being a Mexican chain, like you said, its Tex-Mex offerings are an approachable and popular choice in the U.S. However, the value proposition to the customer really doesn’t derive at all from the type of food on offer. I would also like to see how comparable fast-casual restaurants have fared. Have all done as well as Chipotle at executing this business model and operating model (fast and socially conscious)? Or is there more to the fact that it’s a burrito and not a pizza (Mod Pizza anyone) or a salad? At first blush, it would seem that burritos allow Chipotle to execute well operationally (an efficient operating model) thus fulfilling their business model, and other forms of food may have more trouble replicating this.
As a chipotle enthusiasts I loved reading this posts. Do you think there is a way Chipotle could create a sustainable authentic Mexican fast casual restaurant chain? What are some of the difficulties in preparing food in a way that is true to Mexican culture that would change the way Chipotle must structure it’s business and operating model?
Lately, I have read many news about customers from Chipotle that have fallen sick with E. Coli. In fact, reading a news from Dec. 7, 2015 I realized that they have already closed one store in Boston after several Boston College students reported being sick.
Is there anything in how Chipotle serves the food or how it distributes or produces the ingredients that could present flaws to the “Offering a clean, good environment” as you suggest in the post?
Is it just a coincidence or is there something else that they can do to assure its customers that they are eating a healthy product?
It seems that they are investigating, but we will see if they make any change in their operational model to adjust to the last episodes.
Rafael, great job writing this post!
While CMG has clearly had a successful run, my question is how Chipotle can continue to maintain long term growth. Once the US market is saturated (arguably, it may already be today), will CMG’s business and operating model continue to drive organic growth in its exisitng markets or do you think CMG launch overseas? Honestly, I’m not sure if the concept would translate to France or Germany!
If not, the challenge for CMG will be maintaining growth once it starts opening so many doors each year and once it starts to lose market share due to other, fresher, newer concepts.
Thanks!
What surprises me the most about Chipotle is how good they were able to tie their operating model to reflect the latest market trends and to create value for their consumer. I believe they are doing a tremendous job in keeping up with market, however, the competition is still growing and with new entrants expanding their value proposition for consumers (healthy food + comfortable seating area for example), makes me think how Chipotle will be able to keep differentiating from its competitors and whether they will be able to adjust their operating model to keep bringing one of a kind consumer experience.
Great post, Raf!
The business and operating models at Chipotle clearly align. But I can’t help but think that there has to be something else Chipotle has that others can’t replicate. I constantly ask myself: Why is Chipotle so successful? I remember reading that the first Chipotle restaurant was started so that the founder could save up enough money to start a fine dining restaurant given his training. Did this add to the intitial success of the restaurant? Will Chipotle’s other concepts, including ShopHouse and Pizzera Locale, be as successful as the Chipotle banner? Is it something about Mexican ingredients? Is it something about burritos? What “secret sauce” does Chipotle add to its business or operating model that makes the company a winner?
I also think about this. Why is Chipotle the only restaurant establishment that I can eat 3-4 times a week and still enjoy it. Not to mention I even order the SAME salad bowl.
Rafael,
It will be especially interesting to see if this model can be replicated overseas. Domestically the lock stop of their business/operating models have found great success but I express similar concerns to Sara. A second concern is how Chipotle will handle rising food costs. Just in the past two years I have seen my burrito in San Francisco increase in price a few times. What would have been an $8 meal is now approaching $10 or $10+. While this is a small increase I feel there is a large concern looming of when Chipotle is no longer a great value option.
By the way…can we petition for one on campus! 🙂
Hi Brandon,
Sad to hear that the price of your burrito is increasing over time.
Chipotle has had problems to be replicated abroad. The company tried to open Chipotle restaurants in London and Paris, but revenues were lower than expected. In part, prices were relatively higher than those in the USA because it was more difficult to find reliable partners. Also, Mexican food is not as common as it is in the USA.
I agree with the fact that Chipotle needs to finds a way to control its costs. It offers a clear value proposition of high quality, sourcing from suppliers with high standards but the question is… Is Chipotle going too far? Does customer really value the fact that all suppliers rise their animals in open areas? Maybe Chipotle really doesn’t need to implement such extreme regulations to itself. It needs to listen his consumers better and identify areas where they can make those tradeoffs.
Yes, please bring Chipotle to campus! Great post Rafael 😀