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!
- 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