Chipotle Mexican Grill Inc.

(NYSE: CMG) was founded in 1993 by Steve Ells, a

Culinary Institute of America graduate. Known for its increasingly organic ingredients,
Chipotle offers a fairly simple menu of burritos and tacos featuring chicken, pork, steak,
and vegetarian fillings. It began with a single location in Denver, Colorado, growing to
have 16 restaurants by 1998, when McDonald's made an initial investment in the
company. The investment fueled Chipotles expansion and initial growth.
This twelve year run was then followed by a tremendously successful IPO in
January 2006. By August of that year, McDonald's had divested completely from
Chipotle due to its refocus on its core brand. However, since the 2006 IPO Chipotle has
been the growth start and risen to be one of the leading fast casual restaurant chains,
with over 1,700 stores and a profit of $445 million in 2014. [1]
Industry analysis
The bargaining power of suppliers within the fast casual industry is usually low
because restaurants get their food from various butchers, farmers, and packaging
companies. They can switch suppliers easily and tend to make up a large portion of the
suppliers revenue which severely limits the bargaining power of suppliers. However,
Chipotle is a bit unique due to its differentiated sourcing strategies. Its focus on organic
produce and antibiotic-free meats increases supplier power as they can demand higher
prices for their products and increase food costs to Chipotle. On the other hand, the
bargaining power of customers is high. The customers demand high quality food and a
unique experience, coupled with a reasonable price. This industry cannot easily raise
price due to minimal switching costs forto the customers. If the price of fast casual food
becomes too great, customers would venture to other restaurant segments.

The threat of new entrants is high due to low barriers to entry. It is relatively
inexpensive for individuals to acquire resources to start their own restaurant. In a recent
survey, the median start-up cost for a restaurant is $275,000. [2] Similarly, the threat of
substitutes is high due to the variety of eating options. For instance, people may decide
to try a different restaurant segment just to enjoy another dining experience and service.
In addition, in tough economic times, customers might shy away from restaurants like
Chipotle and turn to eating at home or other restaurants which offer cheaper prices.
Rivalry among firms is high in this industry because each restaurant is trying to
maintain their edges and compete for market share by lowering prices, differentiating
products, and exploiting relationships with suppliers. Besides, low switching cost also
creates immense rivalry within the fast casual restaurant industry.
SWOT analysis
Chipotle is poised for its remarkable achievements thanks to its continued focus
on its core strengths. Chipotle has created a well-known brand based on exceptional
quality and integrity. Apart from the fresh and tasteful food, the playful packaging gets
people reading and laughing while they are eating. Another strength is its non-traditional
marketing strategy. In contrast to considerable investment on national campaigns,
Chipotle works with a much smaller budget, barely advertises on TV and does its work
in-house while seeing much better growth. Its strategy is to win over millennials by
solidifying its reputation for freshness and offering a healthier fare than its competitors.
One of the key weaknesses that Chipotle has is caused by its high standards
regarding the integrity and quality of the ingredients which reduce the number of
suppliers compared to others in the industry. This weakness makes the firm extremely

vulnerable to supply shortages. For instance, Chipotle stopped serving pork at hundreds
of restaurants early this year because of its strict standards for how animals should be
raised and fed. After dropping the supplier, the firm was not able to find replacements
that met its guidelines until 10 months later.
The domestic expansion of the ShopHouse Southeast Asian brand provides
exciting opportunities for Chipotle. By providing the same simple structured menu and
ambiance as Chipotle, the first ShopHouse kitchen opened in DC is a strategically
intelligent decision because executives can learn about consumer preferences and what
it will take for this chain to be as successful as Chipotle.
An increase in competition from either new entrants or established firms is a real
threat to Chipotles profitability. It is conceivable that Chipotles price premium based on
a differentiation strategy could be eroded as more and more competitors bridge the gap.
This may hurt Chipotles ability to increase prices and at the same time reduce same
store sales due to reduced customer visits.
Strategy
In the early 1990s the marketplace saw a rise into the fast casual concept
where the restaurant provides expedited preparation of near restaurant-quality food in a
casual setting, devoid of table service, at an attractive price point. Chipotle was one of
early success-stories from this arena. While other companies, such as Panera, had
also become significant players, Steve Ells approach of using quality ingredients
cooked in an open kitchen goes beyond the traditional, high margin mind-set of his
fellow competitors. Chipotle pioneered a rather unconventional strategy that offered
significant differentiation with respect to the other players within the market segment.

Unlike traditional chains, they do not claim to compete on cost or breadth of options. In
the words of Steve Ells, There were very few moving parts. We served just a few
things, burritos and tacos, and it was put together very simply with plywood. It had a
very funky, raw look to it. Of course it also had a low investment cost. And so what
resulted was this restaurant that was, in fact, quite replicable.[3]
The company also defines the quality of the ingredients of primary importance.
In Chipotles own words, the company strives to offer Food with Integrity [4].
Chipotles vision statement outlines the companys commitment to providing highquality, responsibly farmed food that is devoid of GMOs or other additives [4]; making it
clear that the quality of the food and steps that go into creating it lay at the very core of
what the company feels sets itself apart. Their commitment to this mission statement
was evident in early 2015, when they ceased relationships with a pork supplier that was
not raising pigs according Chipotles company standards. Despite the risk of a potential
loss in earnings, Chipotle removed carnitas from their menu to remain in-line with their
commitment to serving food thats appropriately sourced.
The vehicle for the companys growth had been organic expansion of the brand.
Chipotle deliberately forgoes the franchise model in favor of corporate owned sites.
While other companies seek revenue/operation growth via franchise opportunities, the
company believes giving up control of their restaurant via franchising compromises inhouse restaurant operations and potentially devalues the customer experience.
From a staging standpoint, the company expanded locally within the Denver area
in its initial years. After refining the conceptual design of the restaurant and feeling the
need to expand, Chipotle entered into a partnership with McDonalds. In doing so, the

company received a significant capital injection as well as the resources needed to

scale from 16 location to over 500 nationwide and become the player it is today [5].
However, by 2006 a rift had developed. According to Mr. Ells, "What we found at the
end of the day was that culturally we're very different," [6]. This led to a mutuallybeneficial divorce where Chipotle pursued an IPO; allowing McDonald's to reap a
tremendous profit and simultaneously affording Chipotle the freedom to chart its own
course. In doing so, the IPO vetted the economic logic of Chipotles adherence to its
strategy. Since going public in January of 2006, Chipotle has seen a 1266% increase in
stock price, which is well above any of its peers or the major indices.
Structure and Culture
At the corporate level, Chipotle exhibits a functional structure, with elements of a
geographic structure. Managers are divided up by specific lines of service (i.e.
marketing, investor relations, finance, etc.) and then focus on specific regions
throughout the world. In a one-on-one interview with Stacie Colburn, Marketing Strategy
Manager for Chipotle, she noted that segmenting each employee function by skill and
region has allowed Chipotle to manageably deliver a top-notch product on a national
(and international) scale. She also noted that the environment in the corporate offices
parallel the collegial, cohesive feel at Chipotles restaurant locations [7]. At the
restaurant level, the company exhibits a hybrid structure of customer, functional and
geographic focus. Each geographic location has its own full staff divided by function.
Chipotle has developed various key differentiators at the corporate level and
restaurant level to foster their unique culture centered on Food with Integrity. Chipotle
focuses on building their employees from within, placing high value on developmental

needs and retention. This insular culture has proven to create a feedback loop of more
engaged, motivated employees in their corporate offices. [8] This is illustrated in a
recent survey completed by Glassdoor.com, where Chipotle earned a rating of 3.4 out of
5 in employee satisfaction, beating the industry average of 3.2. [9] As mentioned earlier,
Chipotle fosters cohesion at the restaurant level through their training process; each
employee is trained on each function that takes place within the restaurant (i.e. cooking,
serving, cash register, etc.). Additionally, Chipotle places a majority of its staff on the
front line, optimizing customer interaction to ensure they are delivering the highest level
of service.
Effectiveness
Chipotles effectiveness goes far beyond their stock gain since its 2006 IPO.
Goal Approach Chipotles main goal has been simple, Food with Integrity. This
mission has been successful by sourcing only natural ingredients, which due to the
standards imposed on suppliers, results in higher ingredient costs [10]. It also is seen by
utilizing napkins and bowls that are made from at least 93% recycled materials [11].
Internal Process Approach Chipotles internal process is based around all employees
at a particular restaurant being able to accomplish all internal jobs, from washing
dishes, to cooking, to assembling and acting as cashier [12]. This allows anyone to
jump into any role and keeps internal processes smooth and customers moving through
quickly. They are also clear from the first interview what is important to them long term,
and how the culture is structured, that an entry level job, can lead to much more [12].
Resource-base approach Their Resource based approach could be seen as both
successful and unsuccessful. As mentioned previously, there is a considerable cost

from suppliers for their ingredients due to the high standards, as well as a large number
of suppliers due to sourcing from only local suppliers [10]. However, due to their name
reputation, they are able to demand the high standards for the suppliers, so their
resource effectiveness is neither a strength nor a weakness for the firm as a whole.
Stakeholder approach Financially, Chipotle has been successful with more than
2,000% stock increase since IPO. Chipotle is unsuccessful from a supplier view as they
are held to extremely high standards that can increase costs and reduce profits (down
24% Q3 2015 YoY) [13]. This could also cause Chipotle to cancel operations with them
all together, further adding potential stress in firm/supplier relationship [14].
Triple bottom line Chipotle does not publish Triple Bottom Line report, however they
are effective of all three aspects. In addition to the environmental policies and
successful financial returns noted above, they have created a socially conscious culture
rooted in their Chipotle Cultivate Foundation which. This foundation has allowed the firm
to donate more than $2 million since 2011 to support sustainable agriculture, family
farming, culinary education, and innovation that promotes better food [15].
Congruence:
Chipotle has demonstrated a clear commitment to a well thought out strategy and
framed the organization to operate in pursuit of it. Operationally, the menu offerings are
simple, yet offer a multitude of permutations to provide customers with sufficient variety.
This focus on a few key critical tasks simplifies restaurant operations as well as the
supply chain infrastructure and allows Chipotle to focus on cultivating a cohort of
suppliers that achieve the significant quality requirements Chipotle seeks. The
company also emphasizes people as a key asset. This is highlighted by the fact that

the company largely promotes from within and incentivizes store managers who
promotes the highest number of direct reports. In addition, the formal organizational
structure provides each employee with the latitude to assume multiple tasks. This is
dually beneficial in that it fosters employees to take more ownership over the outputs of
their work and also ensuring more sustained motivation due to differentiation of daily
tasks. Lastly, the executive leadership team is helmed by Steve and Monty, who drive
home the embodiment of the companys values that permeate the informal organization
while providing a clear strategic vision for Chipotle.
Key challenges and management response
The burrito chains strategy of serving high-quality, fresh ingredients has ended
up causing it one headache after the other. The first challenge arises around Chipotles
"Pork supply shortage which is previously mentioned in the SWOT analysis and
strategy overview. Although it was painful, the management team did not compromise
quality, but instead chose to discontinue service the products affected until the pork
supply got back on par. The efforts reinforced to the public of its commitment to the
humane treatment of animals and sustainable farming practices.
Another key challenge is food safety. A few cases have been reported in 2015
related to Chipotle including the E. coli outbreak in November, sickening 37 people in
Oregon and Washington. As a result, the company was being sued for $75,000 with
claims of negligence regarding the E. coli case.[16] In the wake of this turmoil, Chipotle
has not only closed all of its stores in both Washington and Oregon temporarily but also
hired two food safety consulting firms to prevent future incidents. Chipotle also explains
in a public statement that it is moving aggressively to address these food safety issues,

including conducting environmental and food tests in both restaurants and distribution
centers, and bringing in health department officials to conduct additional tests.
Investment Recommendation
As of today, we would rate Chipotle Mexican Grill (CMG) stock as a HOLD.
Chipotles strong brand loyalty and robust unit growth/economics have led to impressive
share performance over the last 10 years. With a 24.63% Return on Equity (ROE) and
11.57% net profit margin for Q3, Chipotle remains a strong performer within its industry.
[17] With food costs as the most important line item at CMG, anything to structurally lift
those would be a negative. Additionally, movements and action towards higher minimum
wage in multiple states nationwide could hurt labor costs, their second most important
cost item.
Still, CMG has a strong brand and customer loyalty. With room for additional
expansion throughout the U.S. and abroad, Chipotle continues to add items to their
menus (i.e. breakfast) and increase their existing store productivity.
Career
Chipotle has a great culture for an individual with potential, but limited higher
education or culinary training in one of their stores. There is no education requirement
for team member positions, and Chipotle often will then promote from within their Team
member ranks. In 2013, nearly 86% of salaried managers and 96% of hourly managers
were the result of internal promotions [18]. Chipotle also outlines their career trajectory
on their website, increasing transparency for their employees, with both potential
benefits and salary information. It is possible to go from $9 per hour to $137,000 per

year as a top performer, managing several restaurants. I would certainly recommend

anyone looking for a strong career with a low barrier to entrance to consider Chipotle.
Conclusions and recommendations
Chipotle has a unique business strategy that is both consistent with their mission
and values the customers. It is also a reputable organization with the characteristics of
lean structure, passionate leadership, dedicated frontline crews, motivating company
culture and overall congruence among those elements. However, a supply shortage of
quality ingredients could threaten its future success. Therefore, we recommend the
company gain power over suppliers by integrating backwards. Specifically, they can
invest in their own farms to cultivate products and raise meat to their specifications.
Furthermore, while ShopHouse Kitchen is a fresh attempt to democratize sophisticated
food, the brand extension strategy could turn out to be brand dilution. Therefore,
management should continue to assess this risk and work to mitigate it throughout the
life of its operations. One way we recommend is to include a tagline such as inspired
by Chipotles sensibility, which would provide awareness of the extensions association
with Chipotles core brand. On balance, by managing a viable and intact brand
extension strategy, Chipotle will be in a very desirable position and reach the success
beyond the burrito.

Reference
[1]. "Chipotle 2014 Annual Report" Chipotle Investor Relations. October 20, 2015
http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-reportsAnnual

[2]. "Industry Survey: How Much Does it Cost to Open a Restaurant"

Restaurantowner.com.
http://www.restaurantowner.com/public/811.cfm

[3]. "9 Quotes for Startups and Small Business from Chipotle Founder, Steve Ells" Logo
maker.com. June 1, 2015
https://www.logomaker.com/blog/2015/06/01/9-quotes-for-startups-and-small-businessfrom-chipotle-founder-steve-ells/

[4]. "Our Company" Chipotle.com.

https://www.chipotle.com/company

[5]. "Chipotle: The One That Got Away From McDonalds" Bloomberg.com. October 3,
2013
http://www.bloomberg.com/bw/articles/2013-10-03/chipotle-the-one-that-got-away-frommcdonalds

[6]. "Chipotle founder said McDonald's chicken farm was the most disgusting thing he'd
ever seen" Businessinsider.com. February 2, 2015
http://www.businessinsider.com/chipotle-founder-on-mcdonalds-farm-2015-2

[7]. "Interview with Stacie Colburn, Marketing Strategist Manager at Chipotle" December
3, 2015

[8]. "Are Chipotle's Workers Any Happier Than Their Fast-Food Peers?"
Bloomberg.com. September 11, 2014
http://www.bloomberg.com/bw/articles/2014-09-11/are-chipotles-workers-any-happierthan-their-fast-food-peers

[9]. "Chipotle Reviews" Glassdoor.com.

https://www.glassdoor.com/Reviews/Chipotle-Reviews-E15228.htm

[10]. "Food With Integrity" Chipotle.com.

https://www.chipotle.com/food-with-integrity

[11]. "Chipotle's Sustainable Endeavors" Recyclenation.com. July 5, 2013

http://recyclenation.com/2013/07/chipotle-sustainable-endeavors

[12]. "Chipotles Brilliant Hiring Process" Recyclenation.com. September 22, 2014

http://voiceglance.com/the-brilliance-of-chipotles-hiring-process/

[13]. "Chipotle Mexican Grill's Suppliers Performance" Csimarket.com.

http://csimarket.com/stocks/suppliers_glance.php?code=CMG

[14]. "Chipotle 10Q" Chipotle.com. October 16, 2015

http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irolSECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lw
YWdlPTEwNTMyNTQ4JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJU
kUmc3Vic2lkPTU3

[15]. "Chipotle Cultivate Foundation" Chipotlecultivatefoundation.org.

https://www.cultivatefoundation.org/about

[16]. "Chipotle Responds to the E. Coli Scandal Delish.com November 5, 2015

http://www.delish.com/food-news/a44670/chipotle-damage-control-food-safetyconsulting-firms/

[17]. "Chipotle Stock Price" Finance.Yahoo.com.

https://finance.yahoo.com/q/ks?s=CMG

[18]. "How Chipotle transformed itself by upending its approach to management"

QZ.org. March 20, 2014
http://qz.com/183224/how-chipotle-transformed-itself-by-upending-its-approach-tomanagement/