Chipotle: It’s not the burrito – it’s the operating model

Chipotle, the popular Mexican restaurant chain, is a great example of effective alignment between business model and operating model. “It works because of our system,” says the founder Steve Ells [1], and I think he is absolutely right. We can see the alignment reflected in the way the company designs and manages each of its stores, as well as in the strategic decisions that they took for the restaurant chain as a whole.

As the company website stated [2], Chipotle is in “the business of good food”, with the emphasis on “good”. Their core business model relies on the creation of an enhanced fast food experience in all of their stores. Chipotle combines elements of fine dining with the convenience of quick-service restaurants, creating value for the customers by offering quality food, clean dining environment and efficient service. Such hybrid dining experience, as FastCompany magazines calls “Fast Casual” [3], really resonates with middle class consumers and made the Chipotle brand stand out from the competition.

Chipotle’s business philosophy is reflected in many features of the restaurant’s operating model, both on the “fast” and the “high quality” perspectives, and a lot of those features run against conventional wisdom in the fast food industry.

  • Chipotle stores maintain high throughput rate. Data shows the most popular stores turn over 300 customers per hour and an average store made $2.5 million revenue in 2014 with each bill averaging $10 dollars (that is, 250K customers turned over) [1]. In order to achieve high efficiencies, the ordering system in the stores is arranged like assembly lines. From start to end, customers construct their perfect burritos with the help from multiple servers, each taking ownership of only a small portion of the work. Such division of labor streamlines the process and reduces the variability in throughput speed without sacrifice the flexibility for the customers to make choices on what goes into the meal. This setup is very consistent across all Chipotle stores, so customers can expect the same level of service anywhere in the country.
  • Chipotle only sources high quality ingredients and prepares its food fresh (the stores have no freezers), because the company believes consumers can taste the difference [1]. This decision is reflected in the premium pricing. They also only sell full price items and rarely run promotions, which is a very uncommon strategy given competitors such as Taco Bell famously offer “value menus” that have items priced around one dollar [3]. Both of those decisions set apart Chipotle from similar fast food restaurants, and created the image of a higher-end, healthier food chain, making customers willing to pay a premium for the better quality food.
  • Chipotle’s menu remains very simple and focused. Despite the recommendations from McDonald, which was once one of Chipotle’s big shareholder, Chipotle refused to serve “low risk high profit items”, such as coffee and cookies [3], because they do not fit with their signature dining experience.

 

  • While fast food industry is notoriously for paying low wages, Chipotle pays its employees well. What comes with this policy is a rigid performance review system. Low performers are dismissed regularly. The result of this policy is reflected on the high customer and employee approval rate. Chipotle constantly placed among the tops on the ACSI Limited-Service Restaurant Ratings [5], which measures customer satisfaction among mainstream US fast food restaurants.

The list goes on. Each of the operating feature contribute to the business model (“Fast Casual”) and the business model leverages the operating features (e.g. fast moving line, high quality food) to further drive the brand. The performance impact is huge – Chipotle has expended quickly to now with over 1,700 locations and 45,000 employees [5], and frequently ranked the best chain Mexican restaurant in the country.

 

 

 

[1] David A. Kaplan, “Chipotle’s Growth Machine”, Fortune, http://fortune.com/2011/09/12/chipotles-growth-machine/

[2] “About Us”, Chipotle.com, http://www.chipotle.com

[3] Denise Yohn, “How Chipotle Change American Fast Food Forever,” Fast Company, http://www.fastcompany.com/3027647/lessons-learned/how-chipotle-changed-american-fast-food-forever

[4] “Why Chipotle Mexican Grill Stores are Way More Profitable than McDonald’s”, The Motley Fool, http://www.fool.com/investing/general/2015/04/15/why-chipotle-mexican-grill-stores-are-more-than-50.aspx

[5] Ashlee Kieler, “Chick-fil-A, Chipotle Lead In Customer Satisfaction Survey, McDonald’s Brings Up The Rear… Again,” Consumerist.com, http://consumerist.com/2015/06/30/chick-fil-a-chipotle-lead-in-customer-satisfaction-survey-mcdonalds-brings-up-the-rear-again

[6] Jessica Shambora, “Chipotle: Rise of a fast-food empire”, CNNMoney.com, http://archive.fortune.com/2010/10/06/smallbusiness/chipotle_started.fortune/index.htm

 

 

 

 

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13 thoughts on “Chipotle: It’s not the burrito – it’s the operating model

  1. Great post! I’m a big Chipotle fun and always interested in it’s operation. Reading your post, I was impressed by Chipotle’s process line building and quality focus. I’m especially suprised that the stores don’t have freezers. Since Chipotle has a excellent store operation, I’m also curious about its supply chain of procurement. The “Fast Casual” concept is interesting for me, so I hope it will come to Japan in the near future.

  2. Great post Sam! I’m obsessed with Chipotle, which is why recent events have troubled me regarding the E-coli cases and the norovirus case in our own backyard: https://www.bostonglobe.com/metro/2015/12/10/chipotle-official-apologizes-for-outbreak-that-sickened-dozens-boston-college-students/bDQ05PjoiiBv63EgnbmTZN/story.html

    These cases are very interesting when you consider one of Chipotle’s key operating model characteristics – high quality ingredients. I wonder whether these health issues are more a result of certain stores not being kept as clean, or ingredients handling. Given the sharp uptick in number of cases nationally, it seems to be more on the ingredient handling side, which is especially troubling.

  3. I agree that through put rate is a key strategy to eat at Chipotle. I imagine that the fast food and now the casual food business are often looking for examples in making sure they keep up with speed in producing the food. McDonnald’s for example changed their assembly process when they noticed that the hamburger was a bottleneck in making the entire sandwiches. Regarding the simplicity of their menu, they managed to keep it simple and still deliver pretty good combinations to their customers (which is great)!

  4. Sam,

    Excellent post answering all questions explicitly.

    I am impressed with Chipotle’s high throughput rate, though I am curious to see if Chipotle believes that there is the problem with long queues during peak hours (lunch time)? I have lived in three different states over the last 5 years and have noticed the prohibitively long lines, which have actually caused me to select another restaurant for lunch, for which I have limited time. “Fast Casual” needs to be fast, and waiting 10 minutes in the line is not fast.

    If it is a concern to Chipotle, how they intend to solve it?

    Thanks!

  5. Great post! Something you highlighted was that Chipotle has designed its operating model such that its throughput and cycle times (1 hour/300 “dishes sold” or “people served”) are very low relative to its other competitors. While its operational efficiencies allow Chipotle to quickly serve customers, I wonder how the customer experience is impacted over time. Do customers seeking better customer service (more time to deliberate and ask employees questions about food options) avoid Chipotle? What is the potential impact on revenues (both negative and positive) of an operating model with extremely low cycle times? Ultimately, do low cycle times have negative impacts on customer service? All questions I would want to explore.

  6. Very interesting post! However, I wonder if the recent public health concerns surrounding Chipotle seem to indicate that their operating model may actually be working against their business model of providing “high quality food.” A recent piece in Forbes highlighted the following quote from Chipotle: “‘We may be at a higher risk for food-borne illness outbreaks than some competitors,’ the company admits in its filings with the Securities and Exchange Commission, ‘due to our use of fresh produce and meats rather than frozen, and our reliance on employees cooking with traditional methods rather than automation.'” This may indicate that practices that they formally highlighted (such as the fact that food is made directly in front of you and is not frozen) may actually be a key contributing factor in the multiple disease outbreaks they have had this year. Just some food for thought.

    http://www.forbes.com/sites/henrymiller/2015/12/14/chipotle-the-long-defeat-of-doing-nothing-well/

  7. Sam,

    Loved your Chipotle post. All of the measures you mention may seem common-sense, but in reality Chipotle is clearly setting themselves apart in terms of the end product and service they provide the customer so I loved reading your post about how there’s more to it.

    1. Optimizing Throughput Rate

    Throughput rate is the one metric I think people think about a lot when they think about Chipotle and a lot of people would probably attribute their success almost entirely to combining high throughput with high quality ingredients.

    I used to think about throughput only in terms of Chipotle’s superior fast execution of order-taking, but you talk about how the average bill at Chipotle is $10 and that really made me think about how Chipotle’ high throughput rate is not only stemming from streamlined ordering, but also from a uniform pricing and the customers’ faster ordering and paying because they already know their bill will be around $10 and thus they don’t need to make judgement calls throughout the process as to what to include or not include in their order based on price. They are already bought into slight premium pricing for fast casual food when they enter the restaurant.

    2. Staying True to their Signature Dining Experience
    My favorite insight in your post was about external pressure to offer these “low risk high profit items” like coffee and sweets. It’s so interesting that, in general, people give credit to the aspects of a business they can see. Here, fast service combined with high-quality healthier food, is what is often viewed at Chipotle’s success criteria. But, as you point out so aptly, it’s also about what they are not doing that makes them successful. Being adamant about sticking to their identity and value proposition and not muddling that experience with extraneous (albeit potentially profitable) offerings.

    Thank you for such a great post.

    Rox

  8. Hey Sam!
    Great post! I really liked your analysis of the “assembly line” type structure that Chipotle have put in place to reduce throughput time as well as to ensure that the variability is minimised. You also mentioned that they have put in place a very simple menu structure so that people do not have a lot of options to modify their order or experiment. I was contrasting this approach with that of Starbucks. In our marketing case, Starbucks in trying to be customer first was very open towards making customisation to the dishes as requested by the customers (for e.g. extra cream, different flavours for coffee etc.). This led to increase throughput time and dissatisfaction among some customers as they had to wait a lot in the line but Starbucks still went ahead with this approach as customisation was what their loyal customers expected from them. It was interesting to see the different approach used by Chipotle!

  9. Hey Sam!
    I loved your piece! I also agree with the fact that Chipotle is a very successful company, in which a lean operating model meets the essentials of a simplistic and premium business model.
    One of my favorite points in your post was that Chipotle refusing to add low risk, high margin items to their menu. In my opinion, this helped both their customer branding and also their inventory costs. Keeping their menu simple with limited ingredients eliminated “waste” and prevented the need for refrigerators. Also, a focused, simple menu helped customers to identify Chipotle brand with premium Mexican cuisine.

  10. Hi Sam,

    Great post! Even though the burrito “assembly” process is broken down into the smallest of tasks, I think it’s worth noting this well-developed process extends to the back end as well. Replenishing the ingredients before they run out reminds me a lot of the Toyota case, where suppliers were dropping off raw materials and subassemblies just minutes before they were needed on the line. In this case it’s the kitchen that is performing the just-in-time delivery of raw materials (like tortillas), and subassemblies (like salsa).

  11. Hi Sam

    Great post — enjoyed learning about the operating decisions that Chipotle has made to truly fulfill its ambition of being a fast casual restaurant. While certainly these decisions have enabled the brand to grow over the past years, they are also very replicable decisions that any to-be fast casual entrepreneur can incorporate as part of launching a new brand. I am curious to see how Chipotle views the future and what it needs to do to remain competitive given most of the IP that is discussed in your piece is very replicable and not defensible. Perhaps their locations and access to prime real estate is a great barrier to entry and sustaining customers.

    Thanks again
    Yasmin

  12. Interesting insights Sam, thank you for analyzing and sharing.

    I am an avid Chipotle fan and I do appreciate their fast cycle times. In addition to the optimizations you mentioned, I believe their staffing model is also very intentionally designed to keep customers moving through the line quickly. They staff more people in the assembly line during peak hours than during non-peak hours.

    One area where I have seen Chipotle mess up quite frequently is with information flow through the assembly line. I often order a “double chicken bowl”, and as the bowl passes from person to person, the “double” often gets lost in translation or they forget that I asked for “chicken” instead of steak or tofu. I have seen that they pass this information via word of mouth, but when the line is crowded and when the store is noisy, they mishear each other all the time. Only at the END of the line, when the order is complete and the lid is placed on the bowl, do they write the order on top of the foil lid for the cashier. I’m curious why they don’t use the pen earlier in the assembly line to mark the bowl as it is being passed through the line. I have a hunch that it would reduce mistakes with minimal incremental cost.

    -Anshul

  13. Great to read about Chipotle (one of my personal favorites for fast food ). As some people have commented let’s see what are the next steps in maintaining quality and hygiene, will it require price hikes? Or is it a one time issue?

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