Chipotle Mexican Grill – The creation of “Fast-Casual”
Chipotle – Ownership allows control and drives efficiency, allowing for consistent delivery of a complex value proposition. Quintessentially TOM- assembly line service and holistic management of 1,800 wholly owned fast casual outlets.
Chipotle Mexican Grill was founded in 1993, entering the extremely mature fast food space in the United States. Goliath-esque forty year old incumbents like McDonalds, Burger King & Dunkin Donuts were instead looking for growth and expansion abroad. Chipotle capitalized on the weaknesses in the existing model – food quality and health, sourcing ethics and restaurant experience – to carve a new niche for itself, fast-casual.
Chipotles business model has three pillars – food ethics, healthy ingredients and an expedited & intuitive restaurant experience.
- Food Ethics – The company has consistently created and cultivated an image of ethically sourced, Genetically Modified Organism (GMO) free ingredients along with a motto “Food with Integrity”. Each restaurant location has signage informing customers of this promise and the company spends marketing dollars on the same across channels. Chipotle has proven adherence to this model, in early 2015 it suspended pork sales at one third of its restaurants over concerns that a supplier did not adhere to animal welfare standards. There were no problems with the quality or healthiness of the ingredients, but the company still chose to forsake millions of dollars in sales on principle.
- Healthy – Within the above context of ethics, the company contends that food prepared from fresh, ethically sourced ingredients and made in front of consumers is inherently healthier than traditional fast food.
- Restaurant Experience – Restaurant experience is based on a now ubiquitous process of ingredients laid out in front of customers, allowing them complete customization while still ticking them forward in an assembly line fashion. Apart from the operational aspects of this, discussed below, this method of dispensing fast food has become unique associated with Chipotle.
- Franchising – Chipotle’s operations integrate with the above business model by employing a non-traditional zero franchising model. Its strict adherence to zero franchising is unique in this space. All its major competitors franchise out many stores, allowing exponential store growth by outsourcing store management and real estate investment. By taking on the challenges of a capital intensive, own-and-operate model Chipotle is able to control the quality and supply of ingredients as well as customer experience and employee satisfaction. Preventing franchising is also profitable if complemented with a suitable business model. Chipotle finished 2014 with a per-store profit of $250,000 vs $131,000 for McDonalds. The only catch is that franchising is capital intensive and makes store opening more cumbersome – Chipotle has 1,800 stores to McDonald’s 36,000. The company employs extensive, centralized employee training and video surveillance at all locations. This translates to a dramatically superior restaurant experience and efficiency. Video surveillance is routinely used to assess the speed of service and movement of people and employee performance, something unlikely to be permitted in a franchise outlet.
- Restaurant Experience – Operations The roughly 25 ingredient menu items are physically displayed with individual prices for each. Between three and five people operate separate workstations on the line. Each employee is almost entirely flexible in usage across the line allowing for movement to address bottlenecks. Stores also have one to two separate cashiers. Anecdotal evidence suggests that there is some cross-operability between the line server and cashier role as well. Furthermore, each operator is trained on issues like time food can stay outside and quantities to be served, emphasizing both the core values of the firm and efficiency.
Both these operating model principles work hand in hand. With a franchise model, it is extremely difficult for the company to prevent an individual store from serving food that does not comply with its ethics framework in order to lower costs. A franchisee or group of franchisees often source certain ingredients themselves. Individual franchisees are also well capable of compromising on store employee numbers and training, dramatically reducing both costs and often efficiency. While this may be acceptable at a McDonald’s, overtly cost conscious franchisees can undermine the two core tenets of Chipotle’s business model, high cost, high quality ingredients and a fast, enjoyable restaurant experience. One or two bad apples can severely undermine this case.
Note: The recent health scares from Chipotle foods affecting students in Boston with Norovirus are not within the scope of this assignment as they have just occurred.
Student comments on Chipotle Mexican Grill – The creation of “Fast-Casual”
Very interesting! Being a big Chipotle fan, I didn’t know much about its operating model. I’m not surprised that they don’t have any franchises, as quality seems to be very consistent among different stores.
Chipotle has been very present in the news in the last month, with the e coli outbreak and the closing of more than 40 stores in Washington State and Oregon. Since then, the stock has declined steadily, and the recent health scares in Boston that you mention in the end of your post will continue to affect the company’s reputation and value. In any business involving food, quality is the most important factor, so it would be interesting to understand further what is causing these outbreaks and how to prevent them in the future. These events clearly endanger the sustainability of the business.
Great post! I always took for granted how instrumental the staff is with creating a high-quality restaurant experience – a key driver of Chipotle’s business strategy. I think your point on a zero franchise model is important as this helps standardize employee recruiting and training – and ensures standards are kept high. As you mention, Chipotle’s competitors are weaker in the restaurant experience area – perhaps this is because they cut corners with a franchise model. Also, I really enjoyed the video you posted – I had no idea that everything was so measured and the staff are trained to hold eye contact to gauge customer satisfaction. Although these actions are subtle, they support Chipotle’s business model of having a high-quality restaurant experience and encourages the employees to seek non-verbal feedback. As you mention in your last line, this post does not include the recent health scares from Chipotle. It will be interesting to see how this plays out since it seems to directly attack the tenets of its business strategy.
Well done, Jay. Totally agree that avoiding the franchise model gives them more control over the operations and customer experience at any individual store. I wonder if they will regret not expanding more quickly? It seems like the fast casual space has been exploding as of late. Saturation was inevitable eventually, but earlier/quicker expansion maybe would have made market penetration a bit easier. Also thought you made a great connection between (i) the operating model: the company keeping control over labor numbers and training and (ii) the business model: ensuring a fast, enjoyable restaurant experience — untrained employees have a hugely negative impact on experience (especially if there are too few of them).
Great post Jay. I have been a Chipotle customer for many years and can attest to their great business/operating model. I did not realize that stores are not franchised though. While I agree that a corporate owned model lends itself to better quality and consistency across the store footprint, I worry that the lack of ownership by operators may demotivate them. I know Chick-fil-a has a similar model, but instead they split profits 50/50 with operators to offer them an attractive compensation package – allowing Chick-fil-a to attract A-level talent. I wonder if Chipotle offers similar economics to its operators. If not, how do you think they will retain and grow talent as the company continues to scale?
Great example of a company that has aligned its business and operating models. To your point at the end of your post, I would be very curious to see how things play out as a result of the recent health scare. I think their zero franchise model will enable them to rebound more quickly as they can effectively drive change throughout the organization and have confidence that the changes are being implemented.
Bruce raises an interesting point about how they incentivize their operators. Without a healthy equity stake, I would imagine it would become difficult to keep top-performers within the company as they scale. Perhaps they quickly promote to regional and general management positions that then oversee their stores to ensure standards are being upheld. I have to imagine the fast-casual model still has tremendous upside and Chipotle is well positioned to benefit from this growth.
Great example Jay – I’d be curious to hear your thoughts on their ability to use this operating model as a point of differentiation as competition heats up in the fast casual space. It’s amazing how well linked the Chipotle operating model is to its business model, and how that allowed them to distance themselves from McDonald’s and Co, but makes me wonder how they can stay differentiated when so many of the new fast-casual chains will follow the same route.
Not even a norovirus scare can keep me a way from Chipotle!
Loved your post, Jay. As I think about Chipotle’s expansion plans, given it has only penetrated the US with ~17 locations outside the US (primarily the UK and Canada), I wonder if it will continue to implement a standardized culture and marketing strategy. While I personally think “Food with Integrity” is a differentiator, I’m not sure that’s something that other countries would value and pay for. That may be what has stopped Chipotle from expanding to international countries quickly.
Given its focus on “Food with Integrity”, it also scares me when things like the e.coli or Norovirus outbreaks happen – does committing to healthy, clean ingredients then make the PR nightmare worse when a health scare occurs?
Separately, I wonder if Chipotle will suffer the fate of other public fast casual peers that have recently gone public – Potbelly, Noodles & Company, Shake Shack, Wing Stop, etc., or if its operating model will allow the company to capture a unique spot in the market and be valued accordingly.
I personally think their business model is “gettin you on the guac”.