How Chipotle Revolutionized Fast Food
Chipotle broke all of the fast food industry's rules and created a wildly successful restaurant concept by delivering high quality food fast with an operating model rooted in a unique culture, assembly line approach and simple menu.
Chipotle has delivered on its mission “to change the way people think about and eat fast food” with overwhelming success. Steve Ells, founder of the burrito chain, revolutionized the fast food industry with his commitment to high-quality “food with integrity” prepared using classic cooking techniques at only slightly higher prices than established fast food chains.
Most fast food chains drive labor efficiency by using frozen food which requires minimal preparation (“freeze, heat and serve” model), maximizing automation and paying workers as little as possible. Chipotle is only able to deliver high-quality without moving to a dramatically higher price point efficiently and profitably by delivering a series of remarkable operating model innovations (outlined below), many of which originally ran counter to the conventional wisdom regarding what made fast food restaurants successful.
Operating Model Innovations
1) Assembly Line: Ells was initially struck by the possibility of a concept like Chipotle when he was exposed to an extremely efficient assembly line approach employed by a small taqueria in San Francisco. The assembly line approach, coupled with other elements of the operating model like the simple menu, drives remarkably high throughput at Chipotle stores while also enabling considerable customization as discussed below. Chipotle has established “four pillars” of throughput to enable a fast assembly line experience: (i) a dedicated expeditor working just before the cashier to bag orders and get drinks & sides; (ii) a dedicated linebacker who makes sure the serving line is always stocked so employees on the line can stay focused; (iii) proper preparation (spend hours preparing food so it can be ready in seconds at the right time); (iv) ensuring they have “aces in their places” (i.e., the best employees at each position) at the busiest times.
2) Simple Menu: When Chipotle first started, they only offered burritos and tacos. This simplicity enabled its restaurants to be extremely efficient despite the decision to use classic cooking methods like marinating & grilling meats and hand-cutting produce rather than taking shortcuts like all fast food restaurants. This also limited waste, facilitating the ability to buy higher-quality ingredients and manage costs. The beauty is that despite the simple menu, customers can choose from four different meats (as well as tofu as of recently), two types of beans and a variety of toppings as part of the assembly line ordering experience without affecting throughput. This customization opportunity is a key component of the value proposition which falls naturally out of the operating model. Over time, burrito bowls and salads were introduced to accommodate emerging diets and consumer preferences without adding much complexity to the assembly line.
3) People Culture: Intense focus on recruiting, training and empowering hard working employees who provide great customer service. All employees, regardless of their position, are encouraged to interact with customers as much as possible. Employees are cross-trained so each can work at a variety of stations, allowing them to be more efficient at the busiest times and to develop a wider array of skills. Chipotle pays employees more than other fast food chains, but always expects a great deal more – and dismisses employees who don’t deliver. They have a robust employee training program and promote from within as much as possible, offering the potential for hourly workers to become store managers making over $100K / year (95% of Chipotle’s restaurant managers are promoted from within). All of these elements combine to make employees highly engaged and capable of delivering customer service and quality far superior to that of competitors. Based on a recent survey, 90% of employees are proud to work at Chipotle and 97% believe they work in an empowered culture where top performed are rewarded.
4) Ingredient Sourcing: To deliver on its “food with integrity” promise and help its food taste better, Chipotle uses very different ingredients than the rest of the fast food industry. Chipotle sources more meat from animals raised in humane ways without the use of antibiotics or added hormones than any other restaurant company, and has committed to using locally and organically grown produce whenever possible. The firm is highly committed to continuous improvement in sustainable ingredient sourcing.
5) Distinctive Interior Design: Chipotle’s open kitchen enables customers to clearly see them using high-quality ingredients and using high-end, classic cooking techniques in the preparation process. Their design is very simplistic and enables low cost expansion.
Summary of Business & Operating Model Alignment
Chipotle’s business model is to deliver high-quality, conventionally cooked Mexican food that customers love, commanding a small price premium to traditional fast food chains and attracting a more affluent customer base while still achieving many of the cost efficiencies of the fast food industry. The driver of their resounding success is the operating model.
Chipotle’s assembly line and limited menu enable restaurants to deliver food with best-in-class efficiency without sacrificing quality or ability to customize. Chipotle’s fastest restaurants run at >350 transactions per hour at lunchtime and still find a way to draw extremely loyal customers back time and again. The emphasis on culture contributes to a highly engaged and efficient front-line workforce that delivers consistently strong customer service and consistently high-quality food – no easy task in a large organization with minimal automation. Their ingredient sourcing enables them to offer fresher, better tasting food at scale without supply disruptions. Their open kitchen and simple interior design reinforces the fact that they use fresh ingredients, prepared right in front of the customer using classic cooking techniques. Controlling each of these elements is so important to Chipotle that the company does not franchise because of how important streamlined operations are to each restaurant’s success.
Results
Today, Chipotle is the leader in the massive “fast casual” category, partly as a result of the incredible alignment between the business and operating model. 2014 revenue was ~$4 billion, same-store sales growth was over 15% for the year (unheard of in the industry for such a large company) and new store openings continue to be robust. The firm’s unit economics continue to be remarkable, with annual sales per restaurant of ~$2.5 million and restaurant-level operating margins of ~28%, among the best in the fast food industry.
Sources
i. Chipotle 2014 Annual Report: http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-reportsAnnual
ii. Chipotle Press Release: http://ir.chipotle.com/phoenix.zhtml?c=194775&p=RssLanding&cat=news&id=2081437
iii. Bloomberg: http://www.bloomberg.com/graphics/2015-chipotle-oral-history/
iv. Business Insider: http://www.businessinsider.com/steve-ells-and-the-rise-of-chipotle-2012-6?op=1
v. Fast Company: http://www.fastcompany.com/3027647/lessons-learned/how-chipotle-changed-american-fast-food-forever
vi. Restaurant Business Online: http://www.restaurantbusinessonline.com/ideas/50-great-ideas/chipotles-pillars-throughput
vii. Entrepreneur: http://www.entrepreneur.com/article/226997
Great post, Tyler. I believe one reason for Chipotle’s success is that their food is perceived to be healthier than more traditional fast food. The ingredient sourcing strategy you outlined in your post has definitely helped fuel this perception. Do you have any insight as to whether this perception a reality? I’ve always wondered just how healthy the food actually is compared to McDonalds/Burger King/KFC (generally perceived to be unhealthy), or compared to Subway/Panera/etc (generally perceived to be healthy).
I am also always fascinated by businesses in the food and beverage industry that focus on simplicity/limited menus. This seems to be “hot” right now. In Los Angeles, these gastro pub style restaurants with very few entrees to choose from are currently popping up everywhere. Do you see this continuing into the foreseeable future? People are annoyed/overwhelmed by choice in their lives and yearn for simplicity? Or is this just a trend that will soon end, and businesses like Chipotle may have to change their business and operating models as folks demand more choice/variety?
Thanks for the thoughtful comment. I do think the perception of Chipotle being healthier is a reality. They source their food from a range of smaller farms and farm associations that engage in much more humane farming techniques than the massive, vertically integrated farming operations that supply other fast food chains (e.g., Tyson Foods, Perdue Farms). They also source a lot of their produce locally so it is fresher. While this has clear benefits, it is a challenge operationally and Chipotle has had serious issues at times: (i) a shortage of pork that resulted in most Chipotle stores across the U.S. removing Carnitas from the menu for months and (ii) difficulty pin-pointing the recent E Coli outbreak that has been causing massive PR issues for Chipotle. Interestingly, one of Chipotle’s largest pork suppliers, Niman Ranch, was recently acquired by Perdue Farms — that trend could make the challenge even harder.
I think the question about simplicity is really interesting as well. What Chipotle has done well is marry an incredibly simple menu with a lot of room for customization, so they effectively have the operational benefits of simplicity with the value proposition associated with customization. I’m not familiar with LA restaurants you mention, but have seen a number of new, healthy food delivery concepts in San Francisco with simple, rotating menus (2-3 items/night) that aren’t customizable that have also had a great deal of success. I think there is probably room for concepts that make the process incredibly simple (1-2 choices delivered to your door in 10 minutes like Sprig, Spoonrocket, Munchery in SF) as well as fast food concepts that build customization into their operating processes – but it’s definitely very much up for debate!
Awesome blog on a great company… timing a little funny given what just happened in one of the Boston locations… do you think the operating model may be somehow to blame or is it only a random event?
It doesn’t fit with my argument that Chipotle has incredible business/operating model alignment, but I do think the outbreak of E. coli at a number of Chipotle restaurants is closely tied to the operating model. In order to source higher-quality, more humanely produced ingredients, Chipotle has had to go out to a much wider supplier base than traditional fast food players. My intuition tells me that given that they have a more complex supply chain (more small suppliers), Chipotle has struggled to identify the source of the problem. The larger, vertically integrated suppliers used by prominent fast food chains use more antibiotics and likely have more robust quality assurance / testing. As a result, they may be less likely to have these same issues and may be able to identify similar problems faster. Earlier this fall, Chipotle had to close 43 restaurants in the Northwest U.S. The news that this issue has now surfaced in Boston as well is alarming and has started to take a serious toll on same-store sales as well as Chipotle’s stock price.
The supply chain has also led to supply shortages at times — earlier this year, Chipotle wasn’t able to source enough pork to serve Carnitas at most restaurants on the East Coast and many locations across the country. One of Chipotle’s largest pork suppliers, Niman Ranch, was acquired by Perdue Farms, a massive vertically integrated conglomerate (with ~7% share of chickens in the U.S.) that I believe serves many fast food chains.
Everything seems so standardized and well-run maybe they should standardize the amount of meat they serve. When you walk in hungry and get a small portion it can really be a day ruiner!!!!!! But in all seriousness I am shocked that they haven’t standardized portions. With food costs where they are today, I bet the numbers would be staggering as to how much a company like this could save annually if they controlled the portions of proteins and other expensive items like cheese and sour cream (would be extremely simple, just need spoons that hold the desired quantity). Instead, employees just pile it on at their own discretion. Portioning would also make the assembly line a tad more efficient since employees don’t need to think about how much of an ingredient to serve. The only downside I can think of is the customer experience. When I go to restaurants that do this or a bar that measures shots before pouring it in a glass it bothers me and to be honest I’m not sure why…