the case is chipotle. i put two files so just read the files only also when you answer the qoustion do not use references answer on you own word. write 2 or 3 sentce for each qpustion and make it really simple 1- ID main issue 2- how is the the company doing in that year 3-swot analysis
case_7_chipolte.docx
chipolte_exhibit_3_and_4.docx
Unformatted Attachment Preview
Case 7
Chipotle Mexican Grill, Inc.: Conscious
Capitalism by Serving “Food With
Integrity”
Alan N. Hoffman
Bentley University
The author thanks Barbara Gottfried and Bentley University BMBA students Suman Akkinepally, Thomas Daly, Qing He, Donald
Khoury, Mena Mahaniah, Craig Richey and Elisaveta Tsvetkova for their research and contributions to this case. Please address all
correspondence to: Dr. Alan N. Hoffman, Dept. of Management, Bentley University, 175 Forest Street, Waltham, MA 02452-4705,
[email protected], (781) 891-2287. Printed by permission of Dr. Alan N. Hoffman.
Background
Founded by Steve Ells in 1993, Chipotle Mexican Grill, Inc. (CMG or “Chipotle”) quickly
became one of the fastest growing restaurant chains in history. A pioneer in the fast-casual
segment of the restaurant market, Chipotle focused on changing the way food was processed and
delivered to consumers by the restaurant industry.1 Over the course of 21 years, Chipotle grew to
over 1600 restaurants in the United States and 11 internationally. The first restaurant opened its
doors in Denver in a renovated Dolly Madison ice cream shop. In 1995, the company added a
second and third shop in Denver and eventually expanded to sixteen restaurants in 1998.
Through luck and hard work, Chipotle attracted the attention of MacDonald’s Corporation whose
investment of $350 million plus expertise in processes, systems, and real estate allowed Chipotle
to grow to over 500 restaurants by 2006. Chipotle filed its initial public offering (IPO) that same
year. In 2007, McDonald’s divested itself of Chipotle, resulting in an impressive return of $1.5
billion on its original investment. However, McDonald’s then missed out on CMG’s huge
growth in share price after the divestiture.2
Beginning in 2000, Steve Ells made a concerted effort to serve consumers “food with integrity”
utilizing a sustainable and responsible approach to ingredient sourcing, production, and service.
For example, CMG began serving naturally raised pork in some of its stores, highlighting the
company’s commitment to transparency. By 2010, all of the pork served in Chipotle restaurants
was naturally raised. In 2002, CMG began serving naturally raised chicken. By 2014 the
company sourced 100% of its chicken product from farms that met that standard. And as of
2007, 100% of its beef was naturally raised and 40% of its black beans were organically grown.
In 2009, Steve Ells testified before Congress about ways to try to eliminate antibiotics
completely from farming.3
Chipotle’s brand power, customer engagement, and loyalty was evident in 2000 when CMG
began to serve naturally raised pork in its burritos. The company was forced to raise the price of
its carnitas filling by one dollar, but was rewarded for its efforts rather than punished: sales rose
rather than fell, fueling Chipotle’s faith that customers would buy responsibly raised food and
even pay a premium price for it.4
The company’s cash reserves grew steadily from 2003–2013. The free cash flow increased by
48% in 2013 and was already at 49% (132.55 million) in the first quarter of 2014. This made it
possible for CMG to open 40 new restaurants each quarter without adding any debt to its balance
sheet.29 The target cash holding as a percentage of total assets was approximately 30%.
Sufficient cash in hand essentially prevented CMG from losing money as a result of the inflation
of food prices.
CMG Stock
CMG’s stock price accelerated consistently, climbing to $500 per share from $22 per share at its
initial public offering in 2006.30 The strong growth underscored CMG’s short-term price
performance and became a strong indicator of long-performance. From June 2013 to June 2014,
CMG’s earnings per share (EPS) showed moderate growth from $9.6 to $11.02. Although the
growth rate was slightly lower than what outside analysts had expected, it was still higher than
the industry average.
Marketing
From the first CMG saw marketing as essential to building its brand recognition.
Though the price point of Chipotle’s products was higher than most fast-food competitors and
comparable or slightly higher than other fast-casual competitors, the food was of much higher
quality than fast food, and more sustainable and slightly higher quality than that of most fastcasual alternatives. This pricing strategy was both a strength and a weakness for CMG. The
company was banking on the notion that customers would consider the increase in food quality
and sustainability a good value that more than justified the small price premium, which in turn
allowed CMG to enjoy a kind of premium brand image and supported above average profit
margins. Additionally, as the price was still close to other fast-casual alternatives, younger,
value-oriented customers could still be targeted. The weakness of this pricing strategy was the
potential exposure to competition entering the fast-casual segment and competing on price.
Chipotle feared it would not be able to respond competitively, thereby losing market share.
Location and size were other facets of Chipotle’s successful marketing strategy. Typically
Chipotle restaurants were smaller than those of its competitors, especially in high traffic areas.
This allowed Chipotle to open restaurants in good locations, at somewhat lower rents than its
competitors. Building on this strength, Chipotle retained whole ownership of all locations, giving
the chain complete control over the look, feel, and design of its restaurants. However, a
weakness of Chipotle’s typical in-line retail outlet locations and smaller freestanding buildings
was that the company generally didn’t have exclusive rights over the locations so competitors
could, and often did, set up next door.
Analysts (and customers) agreed that Chipotle’s major strength was its product. The company’s
use of high-quality ingredients that tasted better, and custom made-to-order burritos set it a notch
above typical fast-food eateries. The simple but customizable menu meant less inventory was
required and orders could be processed very quickly. In addition, the healthiness and
sustainability of Chipotle’s products was consistent with trends in regulation and consumer
preferences. The company’s main weakness, however, was that nothing was proprietary and its
product was very easy to imitate.
Much of Chipotle’s success was attributable to its excellent promotional efforts. First,
advertising was done in-house which allowed greater flexibility and nimbleness, and insured
consistency with company values. Second, in keeping with its reputation for sustainability,
Chipotle did not use traditional media, which differentiated CMG from other major players in the
market such as McDonalds and Wendy’s. However, a weakness of this strategy was that it was
hard to scale; thus, recently Chipotle did move into more traditional media promotion with a
Super Bowl ad and some radio ads. Chipotle also expanded its use of a highly successful direct
mail campaign, but as with traditional media, these promotional practices were not quite
consistent with its reputation for sustainability. Finally, a major strength for Chipotle was its
focus on brand experience and its drive to create a loyal customer base that didn’t just eat at
Chipotle but loved the brand and spread Chipotle’s mission. A potential weakness with this
strategy was that if anyone had a negative experience with the brand, Chipotle would be held
responsible for breaking the bond of customer trust. Similarly, critical publicity with regard to
CMG business practices could deeply tarnish Chipotle’s relationship with its customers.
Human Resources
Chipotle’s higher food costs meant smaller margins for operational costs. Chipotle successfully
offset those higher food costs by controlling labor costs. The company made the strategic
decision to pay above minimum wage, and leverage its positive brand image to attract, motivate,
and retain quality employees, who, in turn, produced greater value for the company despite the
small price premium. Importantly, Chipotle also promoted 80% of store managers from within,
encouraging front line staff, cultivating company loyalty, and insuring that managers had an
insider’s strong understanding of restaurant operations.
Operational Efficiency
Throughout the industry, Chipotle was renowned for its operational efficiencies of scale. From
the beginning, the business was organized from the ground up for efficiency, yielding recordhigh restaurant throughput rates with data analytics that correlated throughput and repeat
purchases, indicating that faster throughput increased customers’ willingness to wait in line and
to return. In addition, the company fostered operational capabilities to scale up experimental
menu items. Chipotle’s operational efficiencies were expected to yield mid-single digit growth in
2014.
Chipotle’s unique “people culture” also strikingly differentiated it from its competitors, as
evidenced by the success stories included on the company’s highly dynamic website. Chipotle
prides itself on having a strong people culture built on hiring top performing employees,
developing and empowering them to deliver an exceptional dining experience for its customers.
The success of many companies, as Chipotle understood quite well, depended not just on
innovative products but on the people involved at every level. Analysts concurred, noting that
Chipotle’s people and its human resource policies were key to its success; and the company’s
employee retention figures and impressive revenues and efficiencies further validated the key
role that employees throughout the company played.
Mobile Payments Coming
In 2014, Chipotle spent $10 million on network upgrades for its restaurants to enable future
improvements, especially mobile payments via a barcode. Such payment devices would cost
each restaurant hundreds of dollars, however the company expected that the initial outlay would
increase its customer base and foster greater efficiency, as the company’s own research made
clear that in the fast service and fast-casual markets speed of delivery was vital to customer
retention.
However, critics pointed out that if cashiers were not the bottleneck for the restaurant’s service,
mobile payments wouldn’t necessarily increase throughput. Regardless, it was felt that the
initiative could help Chipotle with marketing efforts as it would also help the company
understand its customers better, as mobile payments would allow Chipotle to maintain records of
orders, analyze the data, and customize promotions to encourage repeat purchases.
Socially Responsible Strategy
Chipotle always believed that addressing societal concerns could foster innovation and increase
productivity. Over the years, the company implemented the following socially responsible
initiatives.
•
A 10-year project with Good Shepherd Poultry Range to resurrect heritage breeds of
chicken that could survive on pastures31
•
The use of organically grown beans (40%), with another 5% grown using conservation
tillage methods, thereby reducing soil erosion
•
Refusing to use genetically modified corn even though 65% of American corn came from
GM crops as of 2014
•
Sourcing lettuce from local farms during the growing season
•
Using only organically grown cilantro and working toward the goal of using 10% organic
avocados
•
Only using dairy products from cows that were never treated with the synthetic hormone
rBGH. However, only 30% were pasture-raised, as supply was limited supply. To get to
100%, the chain planned to build its own dairy cooperative.
•
Every time two Chipotle restaurants opened, another farmer whose pigs were naturally
raised was allowed to join the Niman Ranch network and become a supplier to the chain.
When Chipotle began this initiative, there were 50 to 60 such farmers. By 2014 there were
between 600 and 700.
•
Involvement in community events and charities, and with local farmers and business owners
through marketing outreach
•
Signing an agreement with the Coalition of Immokalee Workers (CIW) to improve wages
and working conditions for tomato pickers in Florida. The company agreed to pay an extra
penny per pound of tomatoes purchased for its 1,300 restaurants nationwide, with the
money appearing as a bonus in workers’ paychecks.
A “Cool” Brand
As noted above, Chipotle’s greatest strength and competitive advantage was its brand: edgy,
trendy, and cool. People loved Chipotle not just because of the tasty and healthy food but
because of the values the brand conveyed. Creative viral marketing techniques such as the
scarecrow video32 that was viewed over 12 million times showcased Chipotle’s sustainable
sourcing, quality, and integrity as well as distancing the company from the heartless profitfocused giants in the food industry. Chipotle’s successful branding showcased its competitive
advantage in corporate culture by highlighting its focus on social responsibility. The sense that
they were helping make the world a better place together with a preferential internal promotion
system enhanced employee satisfaction and attracted high quality employees with low turnover.
Efficient supply chain management, which allowed CMG to use sustainable sourcing and
maintain low inventory and accurate forecasting, also contributed to Chipotle’s competitive
advantage, in turn allowing Chipotle to use more local suppliers than its competitors and offer a
higher-quality product at a comparable price. Chipotle’s branding, efficient supply chain with
sustainable sourcing, and socially responsible corporate culture were consistent and, taken
together, supported the company’s mission as well as sustained a competitive advantage.
Another important core competence was its restaurant operations expertise in the fast-casual
segment. Chipotle could potentially use this expertise as a platform to expand into other fastcasual alternatives. Recently Chipotle tested a pizza as well as an Asian cuisine fast-casual
restaurant. Finally, Chipotle declined to franchise its restaurants, thus wholly owns all locations,
giving it complete control over the look, feel, design, and management of every location, and
allowing it to leverage its restaurant operations expertise.
Key Challenges Facing Chipotle
By 2014, the fast-casual domestic U.S. market was growing, but also becoming increasingly
competitive and crowded with many new entrants, especially traditional fast-food players who
were attracted by the double-digit revenue growth. Jack in the Box entered the fast-casual market
with Qdoba, directly challenging Chipotle. Many new regional fast-casual chains were growing
and starting to go national such as Slim Chicken and Q Barbeque. In addition, Chipotle faced
increased competition from imitators such as Boloco and Moe’s Southwest Grill.
At the same time, Wall Street had extremely high growth and earnings expectations for the
company. Speculation on Chipotle’s future growth and earnings pushed the share price to 47
times earnings.33 Chipotle’s P/E ratio was the highest of the major companies in its segment,
compared to a P/E ratio of thirty for YUM! Brands and twenty-three for Panera. As the fastcasual segment began to reach saturation in the U.S. market and the industry life cycle moved
from a high growth phase toward maturity, living up to analysts’ expectations was predicted to
become increasingly difficult.
Future Growth Opportunities
Despite the challenges within the fast-food industry, analysts saw room for further growth if
Chipotle focused on customers and markets previously untapped or underserved. For instance, in
2014, 54% of fast-casual customers were female, yet Chipotle’s advertising and large portions
were skewed towards males. Females and weight conscious fast-casual customers might be
enticed by offering calorie conscious portions and more health and lifestyle advertising that
highlighted how wholesome and healthy the food at Chipotle could be.
Chipotle also offered the potential to develop a breakfast menu. In 2014, Taco Bell launched its
new breakfast menu that included items such as the “a.m. crunch wrap” and the “waffle taco.” At
Dulles International Airport, Chipotle was required to be open during breakfast hours. It tested
breakfast items but found that early morning customers tended to order regular lunch and dinner
menu items so it dropped its experimental breakfast options.34
Finally, Chipotle already had a very healthy kids menu that was not very effectively promoted.
Additional marketing to health conscious parents could support the expansion into this potential
new customer segment.
Chipotle established itself as a successful company practicing “conscious capitalism” by serving
“food with integrity.” However, by 2014 it had become clear that Chipotle needed to find new
markets in order to continue to grow its revenues and keep Wall Street happy.
Exhibit 1 Change in Customer Traffic
Exhibit 2 Fast-Casual Industry Segment Perception Map
Exhibit 3:
Survey U.S. Participants ldentified Their Favorite Cuisine (see attachment)
Exhibit 4: See attachment
Exhibit 5: Revenue and operating market
Exhibit 6: Historic Stock Performance
Exhibit 7 CMG Growth Comparison
See other exhibits in attachment
Notes
1.
1. Chipotle Mexican Grill, Inc. 2013 Annual Report and Proxy Statement.
2.
2. http://www.businessweek.com/articles/2013-10-03/chipotle-the-one-that-got-away-from-mcdonalds
3.
3. Ibid #1
4.
4. The Chipotle Story. Web: http://www.chipotle.com/en-us/chipotle_story/where_did_we_come_from/where_did_we_come_from.aspx
5.
5. Ibid #1.
6.
6. Chipotle: Food with Integrity. http://www.chipotle.com/en-us/fwi/fwi.aspx
7.
7. Chipotle Mexican Grill, Inc. Announces First Quarter 2014 Results. http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irolnewsArticle_print&ID=1919590&highlight=
8.
8. Ibid #1.
9.
9. Ibid #1.
10. 10. Ibid #5.
11. 11. Subramanian, Ram (2013) Chipotle: Mexican Grill, Inc.: Food with Integrity. Ivey Publishing,
https://www.iveycases.com/ProductView.aspx?id=58576
12. 12. Ibid.
13. 13. Ibid.
14. 14. Chips, Salsa, and a Side of Solar Power: http://www.getsolar.com/blog/chips-salsa-and-a-side-of-solar-power/5176/
15. 15. Restaurant, Food and Beverage Research Handbook 2014–2015. Atlanta: Richard K. Miller, 2014. http://www.rkma.com/bentley/rfb14/.
Web. May 8, 2014.
16. 16. Ibid.
17. 17. Blackstone Equity Research. Chipotle Mexican Grill: Explosive Growth Is Expected To Continue. http://seekingalpha.com/article/2031641chipotle-mexican-grill-explosive-growth-is-expected-to-continue. Web. February 19, 2014. Retrieved May 8, 2014
18. 18. Restaurant, Food and Beverage Research Handbook 2014 –2015. Atlanta: Richard K. Miller, 2014. http://www.rkma.com/bentley/rfb14/.
Web. May 8, 2014.
19. 19. Ibid.
20. 20. Blackstone Equity Research. Chipotle Mexican Grill: Explosive Growth Is Expected To Continue. http://seekingalpha.com/article/2031641chipotle-mexican-grill-explosive-growth-is-expected-to-continue. Web. 19 Feb. 2014. Retrieved 8 May 2014
21. 21. Business Insights: Essentials http://bi.galegroup.com/essentials/company/888510?u=mlin_m_bent. Web. Retrieved May 8, 2014.
22. 22. S & P CAPITAL IQ. Industry Surveys: Restaurants. New York: McGraw Hill Financial January 2014. Web.
http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?task=showIndustrySurvey&type=pdf&code=rs
t
23. 23. Neurdorf, Samantha. America’s 15 best Tex-Mex chain restaurants. USA Today. Web.
http://www.usatoday.com/story/travel/destinations/2014/01/04/best-tex-mex-mexican-restaurants-food/4308625/. January 4, 2014. Retrieved May
8, 2014.
24. 24. Business Insights: Essentials http://bi.galegroup.com/essentials/company/888510?u=mlin_m_bent. Web. Retrieved May 8, …
Purchase answer to see full
attachment
