CHIPOTLE: Fast Casual Dining Industry

Spring 2017Zachary Chien, Federica Cusumano, Cody Hall, Kim Chi Hoang, Kathleen Huang,

Michael Luiza, Sean Sugimoto

I. Executive Summary

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Executive Summary

Chipotle Mexican Grill is a restaurant chain that produces a healthy alternative to Mexican-style

fast-food. Since its establishment in 1993, Chipotle has demonstrated that it can fulfill a specific

niche in the market: the offering of sustainable ingredients that can be streamlined into a high-

traffic environment. During its growth under McDonald’s investment, the brand transitioned to

the fast-casual industry with the addition of items such as transparent, food-ready displays and a

production-line method of delivering the final product to the end user. Chipotle continues to

satisfy customers by offering a more gourmet version of Mexican eatery at fast-food speed.

Provided that Chipotle’s core competency revolves around the control and consistency of its

sourcing, its business model is one of simplicity. In order to live up to its slogan of “Food with

Integrity”, Chipotle includes a basic menu that demonstrates their reliance on the highest quality

of ingredients that are strictly farm-fresh, free-range, and bovine-free. Furthermore, Chipotle

differentiates itself by serving “the most naturally-raised meat of any restaurant”, and utilizes

chicken and pork that are raised in humane conditions without growth hormones. Given these

commitments, Chipotle has been successful in branding itself as health-conscious company in

the fast-casual industry.

The vision and focused market strategy of the firm is responsible for its explosive growth.

Despite being relatively new to the Mexican-style, fast-casual scene, Chipotle skyrocketed past

the competition and stole the largest portion of market share at approximately 40%. Currently,

Chipotle operates over 2,250 stores in 47 states in the U.S., with locations in the UK, Canada,

Germany, and France. In 2015, Chipotle recorded a net income of just under half a billion and a

staffing base of more than 46,000 employees. Its direct competitors include other fast-casual

options such as Qdoba and Panera Bread1. Indirectly, Chipotle loses marginal market share to its

major substitute Taco Bell, though remains rather insulated in its positioning due to superior

ingredients.

1 Investopedia. "Who are Chipotle's (CMG) main competitors?" Investopedia. May 20, 2015. Accessed June 07, 2017. http://www.investopedia.com/ask/answers/052015/who-are-chipotles-cmg-main-competitors.asp.

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In 2016, Chipotle witnessed their net profit shrink 95% as an E. coli and norovirus outbreak

originating from compromised Australian beef tarnished their sourcing reputation2. Prior to the

presence of contaminated products, Chipotle had recorded its largest profits yet and was in the

process of expanding its geo-location nationally and abroad. But, the firm took an extraordinary

risk in sourcing ingredients from an increasingly number of diversified small farms to fulfill the

rising demand. The firm lost the ability to supervise its supply chain integrity, and the result was

catastrophic. In the future, Chipotle will need to work on gaining back the trust of their lost

consumers as data has shown that many still have not returned to the once-booming business.

Most prominently, Chipotle must continue to do everything in its power to secure its ingredients

in the interim, as another mistake in sourcing or handling could push the company into financial

jeopardy. This means making the necessary improvements to daily operations such as increased

testing on incoming food quality, improved employee sanitation, and refinement of safety

protocols. Consequential to sourcing, Chipotle must also find a rate of growth that allows it to

maintain its sourcing confidently. Chipotle faces the challenge of gaining back the trust and

revenues it once enjoyed without extending its losses too significantly.

Additionally, Chipotle must continue to build upon its core competency of cost-effective, high-

quality fast food by growing its network of sustainable and responsible farms, continuously

improving the integrity of its ingredients, and enhancing the internal dining experience. Through

a careful understanding of the role of its competitors, Chipotle must introduce these

improvements slowly to ensure that its positioning relative to its substitutes does not lose its

foothold.

Table of Contents

Section Page

I. Executive Summary 2-3II. External Analysis 5-18

2 Center for Food Safety and Applied Nutrition, FDA. "Outbreaks - FDA Investigates Multistate Outbreak of E. coli O26 Infections Linked to Chipotle Mexican Grill Restaurants." U S Food and Drug Administration Home Page. February 1, 2016. Accessed June 07, 2017. https://www.fda.gov/food/recallsoutbreaksemergencies/outbreaks/ucm470410.html

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A. Industry Definition 5B. Five Forces Analysis 5

C. PESTEL Analysis 9D. Competitor Analysis 13E. Intra-Industry Analysis 17F. Summary of External Analysis 18

III. Internal Analysis 19-31A. Strategy Statement 19B. Corporate Level 19C. Business Level 21D. Resources and Capability Level 23E. Customer Retention 26F. Product Life Cycle 27G. Financial Analysis 28

IV. Strategic Move 32-40A. Challenges Go Beyond Safety 31B. Internal Challenges 32C. Corporate Culture Challenges 33

V. Recommendations 37-40A. Short Term 37B. Long Term 39

VI. Appendix: Exhibits and Tables 41-45VII. Bibliography 46-49

II. External Analysis

Industry Definition

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Fast casual dining is a restaurant concept that falls in between fast food and casual dining. It

offers the convenience of fast food eating, but with a more friendly sit-down environment.

Because of this, the fast casual dining industry has been increasing in market share and

popularity in recent years. Popular fast casual dining restaurants include Panera Bread, Panda

Express, and Five Guys, and Subway. In more recent years though, Chipotle has been taking the

market lead in Mexican styled food fast casual dining. To understand the ever evolving market

dynamics of Chipotle, it is imperative to understand their external analysis and the fast casual

dining industry they are involved in.

Five Forces Analysis

Threat of Rivalry

Chipotle Mexican Grill, being a fast casual dining restaurant already puts itself in the direct line

of fire among several strong competitors. These include Qdoba Restaurant Corporation, YUM

Brands, and Fresh Enterprises, LLC. Qdoba, owned by Jack in the Box, is a Mexican fast casual

chain that operates in the United States and Canada, is Chipotle’s number one rivalry. YUM

Brands own Taco Bell, the biggest Mexican fast food franchise in the world. Fresh Enterprises

owns Baja Fresh Mexican Grill and oversees Salsa Fresh Mexican Grill. These smaller scaled

Mexican fast casual restaurants are located more on the West Coast.3

With the fast casual dining industry growing, customers have many options of where to eat, let

alone which Mexican fast casual restaurant to go to. When it comes to market share, as of late

2014, Taco Bell beat Chipotle with more locations and franchises. Although this can be seen as a

threat, Chipotle is not trying to compete in the area that Taco Bell is thriving in. Chipotle prides

themselves on “The Business of Good Food”.4 They want to create an eating experience that is

not like eating at just another “fast food” chain. Their mission is to provide high quality

ingredients, ethical cooking, and a casual but comfortable interior environment. Consumers are

drawn to this healthier and simpler eating experience. With Taco Bell being seeing as a lower

scaled restaurant, let’s consider Chipotle’s number one rival, Qdoba.

3 Investopedia. "Who are Chipotle's (CMG) main competitors?" Investopedia. May 20, 2015. Accessed June 06, 2017. http://www.investopedia.com/ask/answers/052015/who-are-chipotles-cmg-main-competitors.asp.4 "Our Company." Chipotle. Accessed June 06, 2017. https://www.chipotle.com/company.

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Qdoba offers the same Mexican fast casual dining experience as Chipotle priding themselves on

their flavor, employees, and dining ambiance. The main difference between these two restaurants

is that there are far less Qdoba restaurants than Chipotle restaurants in the nation. Each of these

fast casual restaurants strives to differentiate and beat one another through unique taste,

experience, quality, service, or presentation. Especially with Chipotle’s recent health scare, only

time can predict how well Chipotle can handle their battles and serve their customers.

Barriers to Entry

The concept of fast casual dining is a concept that is relatively new but recently gaining

popularity. Chipotle, having been in the industry for quite sometime makes up for a lot of the

market share and profit. Operating over 3,000 restaurants as of 2017 it is hard to come in as a

newcomer and beat Chipotle’s brand loyalty and real estate throughout the nation. Similar

restaurants are growing immensely, but none that serves Mexican styled food. Chipotle has been

in the industry for more than 15 years, but it was not until recently when consumers decided to

be more health conscious and switch to a healthier eating lifestyle.

On the opposition, this industry is rapidly increasing and it is not hard to come up with a new

concept and design for a new franchise. The FDA, government and local regulations only have to

allow these newcomers. As mentioned above, the demand for this new lifestyle is only increasing

and Chipotle will have to continue to pose a threat to many new entrants.

Supplier Power

Chipotle has an extreme power when it comes to dealing with their suppliers and producers

because of their unique supply chains. At a huge company like Chipotle, suppliers want those

contracts that deal with hundreds to thousands of Chipotle restaurants. Chipotle does not

vertically integrate their suppliers or produce their own food. So finding the right, ethical, and

reliable suppliers is what is most important to Chipotle. Their platform is to provide healthier

food than that of most fast casual restaurants. As a result, supplier power is weak.

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“Supporting local farmers close to Chipotle restaurants has been an important part of our

commitment to Food With Integrity for many years. Last year, for example, Chipotle restaurants

served more than 30 million pounds of produce sourced from local farmers around the country,

including tomatoes, romaine lettuce, bell peppers, red onions, avocados, and more.”5 This

initiative to take on local farmers and suppliers have been a challenge for Chipotle recently.

This initiative may seem great, but local and smaller farmer do not have the technology and

resources to match up to Chipotle’s safety standards, especially with the recent E. Coli

outbreaks.

With the cost of living and price hikes in water, organic produce, and raw materials, Chipotle

will only have to be more selective in which suppliers they choose and how reevaluate their price

margins on their food.

Threat of Substitutes

When it comes to other substitutes, the threat is quite high. Chipotle’s brand segment falls

between fast food and casual dining. On both ends of the scale, profits and market shares are

very different. When it comes to families looking for a place to eat, casual restaurants are the

place to go. They make the most revenues and have the highest competition for customer’s

money. And then with the other half of dining habits and the population, there is the general fast

food industry. These fast food chains include McDonald’s, Burger King, Jack in the Box, and

Taco Bell. Depending on the demographic, age group, and environment, the threats are going to

be different. There is definitely a high switching cost in comparison to Taco Bell and Chipotle.

Being food, it is a necessity but it all depends on what the consumer wants. Are these customers

willing to pay more for healthier food and and sit down somewhere.

The top substitutes would be the fast food chains such as McDonald’s and those mentioned

above. They are cheap, very fast, and there are numerous of them. According to Business Insider,

in 2015, McDonald’s takes the cake in the most successful fast food chain in America. Their

profit was nearly over $35 billion dollars, where as Chipotle’s was only $4 billion. That is a huge

5 "Chipotle – Local Grower Support Initiative." Chipotle. Accessed June 06, 2017. https://www.chipotle.com/localgrowersupport.

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difference when it comes to market share. We also have to take into consideration all the fast

food restaurants that fall in between Chipotle and McDonald’s.

As consumers push through the twenty first century and with health conscious and healthy

minded millennials, the fast casual food dining concept will only increase. As the years progress,

Chipotle seems to have a good standout when it comes to its competitors due to its due diligence

because of their health and safety standards. They are perceived as “higher end” compared to

Taco Bell, but cheaper compared against other casual Mexican restaurants.

Power of Buyers

For Chipotle, the power of buyers is relatively low. There are thousands of restaurants, fast food

to upscale dining to choose from, but Chipotle stands out in the fast casual industry. Consumers

have so many options to choose from and they do have differentiated products. Chipotle has to

make decisions that benefits the entire nation, taking into account every single one of their

consumers they are trying to target. They also have to realize that consumers also may not be

willing to eat out as much. Because millennials are becoming more health conscious, cooking at

home is a great and healthy option too.

As touched upon under Power of Suppliers, Chipotle chooses their raw ingredients and suppliers

very selectively. They want to deliver the best experience for their customers. For suppliers,

supplying to Chipotle is huge but vice versa, Chipotle can switch its suppliers at a minimal price.

Overall Attractiveness of the Industry

Refer to diagrams in the Appendix.

Based on the five forces analysis, Chipotle is considered to be very attractive in the fast casual

dining industry. (Exhibits 1-5)

PESTEL Analysis

Global Demographics and Economic Growth Trajectories

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Chipotle is in the industry of fast casual dining and caters to anyone from any background.

Although only predominantly in the United States, Chipotle lies within a fast growing restaurant

industry. Customers are those who belong in the upper middle class or those who have

disposable income to spend on eating out. Millennials today are obsessed with fast casual dining

concept. And with the rise of millennials and future generations, Chipotle has potential for

massive growth in an already growing industry. Since the recession, the restaurant industry has

been slowly recovering and coming out. Although the industry is not booming, Chipotle still tries

to grow at a small percentage each year and cater to more customers.

Social/Demographic

Chipotle targets a lot of regular consumers like college aged students. But that is not all, they

want to promote a healthier eating lifestyle for millennials and the future generations. With a lot

of citizens making self conscious decisions to lead a better and healthier lifestyle, this will only

work in Chipotle’s favor. But, just like with any lifestyle fads, some will fade and some will

precede. For now, Chipotle’s target demographic seems right in line with what they stand for.

The fast casual dining experience is a concept that is relatively new and on the rise. With

Chipotle vouching to provide Mexican styled food that is made with the best raw ingredients and

ethical preparation, the customer base can be anyone. Although eating out is associated with

those with disposable income, having a cheaper and healthier option will always work. Chipotle

stands healthier than fast food like Taco Bell, but not as expensive as other casual restaurants.

Their target demographic ranges from people in the lower to higher social class. Race, religion,

ethnicity has no affect on choosing to eat at Chipotle.

Technological

Chipotle is in an industry that provides food and service for their customers. It relies on in-

person experiences, face to face customer service, and providing the best quality food for its

consumers. On the technological side, Chipotle does not have a lot to work with. Customers go

to Chipotle because they enjoy the service and ambiance of this fast casual dining restaurant.

When it comes to delivery services and convenience, Chipotle does have room for improvement

in the near future. With a lot of restaurants expanding into segments that provide delivery,

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Chipotle is a little behind. Chipotle only has third party companies delivery for them. Online

marketing and advertising is also an area of the market that Chipotle can tackle. Because

Chipotle is not vertically integrated, automation in packaging and preparing the raw ingredients

is hard to produce. They only provide the service of providing great tasting healthy Mexican

food for this customers.

Government/Political/Legal

Food and safety regulation in the United States is run very tightly by the government and the

FDA. Restaurants that serve food or any type of consumable substances, have to pass health and

safety codes. Depending on where restaurants get their food and produce from, the USDA

regulates those products. Those are federal laws and regulations that everyone has to follow. But

there are also different health standards and codes that vary depending on each state and its

government.

Restaurants strive to provide the cleanest, most healthy foods for its customers. It is a

restaurant’s worst nightmare to go through a disease breakout or health scare. Restaurants, like

Panera, has a clean track record and one that many strive to be. Chipotle on the other hand, went

through an E. coli, salmonella, and norovirus outbreak that thoroughly harmed their business.

Problems began to rise during the summer of 2015. Hundreds of people were infected, and even

the Centers of Disease Control was involved with this outbreak.6

Although hundreds of customers were affected by this outbreak, Chipotle also had to deal with

its falling stock prices and sales, food safety, and brand image. Chipotle’s food and health safety

had to be criminally investigated by the United States government. This E. Coli outbreak that

Chipotle phased opened the eyes of many other restaurants including themselves. For several

days, numerous Chipotle stores were closed. They had to come up with a new strategy to

reorganize and come back from this accident. For a couple months, people were very cautious

about eating there. But then once Chipotle regrouped and came up with a new strategy, they

decided to hand out coupons and other free burritos. They did a great job at targeting college

6 In a video posted Wednesday to the Chipotle (CMG) website. "Chipotle founder touts improvements to food safety." CNNMoney. Accessed June 06, 2017. http://money.cnn.com/2016/09/21/news/companies/chipotle-food-safety/.

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students and millennials to regain their brand image and loyalty. Since then, Chipotle has not had

an outbreak and continues to grow.

Environmental

Caring about the environment or trying to be “sustainable” has only been a more popular concept

in recent years. Whether it is sustainable farming, recycling, or composting, people are starting to

care more about our world. When it comes to the food industry, citizens have been taking an

extra precaution to make sure that the food they consume are either made or grown ethically and

organically.

Chipotle runs a program called “Food with Integrity”. This program strives to provide

sustainability and the best possible food for their customers. They provide food that is made with

the best quality ingredients. This means that they take initiates to respect the environment,

animals, and farmers. When customers realize that their food and ingredients that they are

consuming are coming from a place where the environment is being cared about, they are more

willing to be loyal to a company.

Economic

The food industry is very volatile in the United States. The pricing and availability of the

ingredients that Chipotle uses all affect Chipotle’s pricing and margins. When it comes to natural

organic meat, the price will only increase. As the economy is coming out of a recession, people

care more about their money. Factors that came with the recession, unemployment and interest

rate all play a huge part in Chipotle’s stability.

According to Business Insider, all though out of a recession, the restaurant industry is not

growing nor stable. Restaurants have so much competition, internally and externally. Customers

are relying on food delivery services, meal kit services, and eating healthier and more frugal at

home. As mentioned before, the fast casual dining industry is growing but there are so many

companies that fall under this category. Everyone wants to win over customers. so restaurants

need to come up with new strategies to lure those customers. 2016 was a tough year for the

restaurant industry, and as the economy slowly recovers, people hope that it will only benefit the

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restaurant industry as time goes on.7 Although Chipotle battled an E. Coli outbreak in 2015, they

continue to open new stores and cater to new customers.

Demographic Trends

Chipotle targets a wide range of customers. From families with children to young professionals,

Chipotle stands out as a fast casual Mexican restaurant to many. Millennials are the group of

individuals that restaurants such as Chipotle should target. These are the kids that are willing to

spend money on eating healthier and leading a better lifestyle. Health and the idea of eating clean

is only gaining popularity. And with Chipotle striving to provide organic and quality driven food,

their customer base will only expand.

Implications

Chipotle stands out in being a sole fast casual Mexican restaurant. They started off in the

industry as a strong competing company, but there were several setbacks. Chipotle battled E.

Coli, salmonella, and norovirus outbreaks. This set their profits, brand image, and customers

back a lot. With a company that strives on providing healthy and great food for the environment,

some customers lost trust. But, Chipotle bounced back and is doing a great job at advertising to

millennials. Chipotle’s strategy is to provide the best food possible to those who can afford and

pay for this type of food. Chipotle is doing a great job and working with local farmers to find the

best and organic foods, providing great customer service, and trying to grow at a consistent rate

to expand their customer base. Business Insider concluded, “Even Chipotle, struggling to recover

following an E. coli scandal in late 2015, they opened 240 new restaurants last year.”8

Competitor Analysis: Casual Dining/Fast Food Industry

7 Taylor, Kate. "The restaurant industry is in the depths of a recession - and chains are only making the problem worse." Business Insider. May 13, 2017. Accessed June 06, 2017. http://www.businessinsider.com/too-many-restaurants-sparks-industry-slump-2017-5.8 Taylor, Kate. "The restaurant industry is in the depths of a recession - and chains are only making the problem worse." Business Insider. May 13, 2017. Accessed June 06, 2017. http://www.businessinsider.com/too-many-restaurants-sparks-industry-slump-2017-5.

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The casual dining/fast food industry has a few key metrics that are useful when comparing

different competitors. Undoubtedly the most useful metric is Same Stores Sales Growth (SSSG).

SSSG is useful because it strips away the effects new store openings have on sales. Often new

stores experience higher foot traffic and overall sales than their established counterparts. SSSG is

also helpful when determining the effectiveness and stability of existing store. Declining SSSG

can be worrisome for companies because it indicates a decline in market share and influence of

the brand.

SSSG is calculated by looking at all stores that have been opened for more than one year. The

overall sales of the stores are then compared the overall sales of the year before. SSSG can be

increased by more foot traffic entering the store and making purchases, or by customers making

larger average purchases. A popular method many companies use to increase SSSG is to try and

attract new customers and additional purchases through new product offerings.

Competitors

Chipotle has four main competitors within the casual dining/fast food industry. Applying

Porter’s generic business level strategies, Chipotle and its competitors all have a focused scope

and specific targeted consumers. However, Chipotle and its competitors choose between either

charging low prices or use product differentiation to charge a premium.

Chipotle

Chipotle is one of the largest companies within the casual dining/fast food market. Chipotle has

2,250 locations, including 26 international locations. Chipotle believes in using great ingredients,

cooking food in a traditional and authentic manner, and serving food quickly. This follows

Chipotle’s mission of “Food with Integrity”. In 2016 Chipotle reported annual sales of $3.9

billion, the largest of any burrito-serving restaurant in the world.

Chipotle has been been attempting to adapt to the quickly evolving casual dining/fast food

market. In the future Chipotle will focus on improving the customer experience within their

stores. They will monitor customer’s experiences at their stores and correlate them into employee

incentives. As they continue to grow, they will focus on increasing efficiency and making

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operations simpler. Finally, Chipotle is also focused on innovation, both to attract customers into

the store as well as using innovative techniques to provide high quality food to their customers.

Chipotle rarely makes changes to their menu. After a massive food safety crisis in 2015 however,

Chipotles made their first major menu change with the addition of Chorizo, a blend a spicy

chicken and pork. Chipotle is also developing new desserts to win back customers as well as

increase the average check price. The new dessert, Bunuelos, can already be made with existing

equipment currently found in Chipotle’s kitchens. Chipotle will simply need to purchase a few

additional ingredients. Chipotle reported same store sales of 17.8% for the first quarter of 2017,

up from a 30% decline during the first quarter of 2016.

Taco Bell

Taco Bell is one of Chipotle’s main direct competitors. Not only is it within the fast food

industry, but it also serves Mexican-style food. Taco Bell is owned by Yum Brands and operates

over 7,000 stores domestically and 250 internationally, with plans to add 2,000 international

stores by the end of the decade. Taco Bell focuses on their “Live Mas” slogan, encouraging

consumers to live exciting lives while Taco Bell focuses on delivering an original, delicious

product. Taco Bell recently reported annual sales of over $10 billion in 2016.

Taco Bell focuses on a high-low value strategy, meaning they offer a wide variety of products

for a low price. Taco Bell also emphasizes innovation and is often adding new items to their

menu. The recent addition of the Naked Chicken Chalupas sold 25 million units in the first

quarter of 2017 and helped same store sales increase by 8% during the first quarter of 2017. Taco

Bell has also gone head to head with other fast food giants, like McDonalds, by offering a

breakfast menu, with the possibility of offering breakfast all day on the horizon.

Taco Bell recently began focusing on entering urban markets, such as San Francisco and

Chicago, with the introduction of Taco Bell Cantinas. Cantinas are meant to appeal to millennials

through their physical appearance, utilization of technology, and menu offerings. Cantinas are

the only Taco Bell restaurants to serve alcohol. They also offer shareable appetizers and allow

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consumers to order food through their mobile devices. There are currently six Taco Bell Cantinas

nationwide, with plans to expand in the future.

Panera Bread

Panera is another competitor of Chipotle that competes directly within the casual dining/fast food

niche. Panera operates 2,024 stores in the United States and Canada. Panera has positioned itself

to provide customers with a quality product using quality ingredients, but for a slightly higher

price than found at traditional fast food restaurants. Panera also provides a casual coffee

shop/bakery feel, inviting customers to relax and spend time in their restaurants. Panera reported

annual sales of $4.5 billion in 2016.

Panera, a publically traded company, was purchased in April of 2017 by JAB Holdings for $7.5

billion. This purchase price represents a 30% premium over Panera’s average trading price prior

to the announcement.

Panera’s main business focus is on maintaining their competitive advantage. They believe being

innovative and forward thinking sets them apart from their competitors. Panera was one of the

first restaurants to use in-store kiosks to order food directly to the customers table. Now

customers can even use their smartphones to order food to their table. Panera is now

concentrating on the rapidly growing industry of food delivery service.

Panera plans to add 10,000 new jobs by the end of the year directly related to their in-house food

delivery service. Panera’s service is different from other competitors because the delivery service

will be owned and operated by Panera, not a third party vendor. Panera estimates the new

delivery service will add on average $250,000 to each stores annual revenue. During 2016

Panera reported same store sales increased by 2.4%

Shake Shack

Shake Shack is a new up and coming competitor of Chipotle within the casual dining industry.

Founded in 2004 Shake Shack operates 80 domestic and 43 international locations. Shake Shack

prides itself on using high quality ingredients and cooking every meal made-to-order.

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In 2016 Shake Shack reported annual sales of $260 million. In 2016 Shake Shack reported same

stores sales decreased by 2.5%. However, it is worth considering that Shake Shack calculates this

percentage differently than most competitors by only including stores that have been open for

more than 2 years.

Shake Shack has plans to add 10 additional domestic stores every year until they reach 450

domestic stores total. Shake Shack also has a focus on growing internationally. They believe in

expanding across the globe instead of focusing only on the already saturated American market.

This is in alignment with their “go slow approach”. Shake Shack enjoys having each restaurant

feel unique, and keeping their product somewhat of a novelty for the consumer.

Qdoba Mexican Eats

Qdoba Mexican Eats is Chipotle’s most direct competitor. Qdoba operates in both the casual

dining/fast food industry as well as offering a burrito almost identical to Chipotle’s. Qdoba is

owned by Jack in the Box and currently has 641 stores nationwide. In 2016 Qdoba reported sales

of $415 million.

Qdoba has a pricing structure that differentiates them from Chipotle. Instead of charging

additional prices for items added to the meal, Qdoba charges one flat price based off the base

protein selected. This means extras, such as guacamole, are provided to consumers at no

additional expense. Qdoba has also differentiated itself from Chipotle by adding additional

offerings to their menu, such as revamped and healthier taco options.

Qdoba has been focusing on their ideal, imaginary customer “Quentessa”. With Quentessa in

mind, Qdoba has been changing the physical appearance of their restaurants as well as their

menu. However, same store sales increased by only 1.2% in 2016, and during the second quarter

of 2017 same store sales decreased by 3.2%. Citing two different business models, Jack in the

Box hired Morgan Stanley in May of 2017 to begin the initial process of preparing to sell Qdoba.

Intra-industry Analysis

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The casual dining/fast food industry in currently in the growth stage, specifically with respect to

the casual dining niche. In this stage the market is expanding as new competitors are entering the

market. There is also a strong drive of process innovation.

Many competitors are making changes to their menus in order to attract a larger market share.

Taco Bell has considered adding all day breakfast, Qdoba has added healthier tacos, and Chipotle

is in the process of adding desserts. These additions suggest these companies believe the casual

dining market will continue to expand and that customers are willing to spend more per average

check than they currently do.

There have also been process innovations taking place among competitors in the casual dining

niche. Panera has began expanding their own delivery service, giving them complete control

over the quality of food delivered, as well as increasing revenue for their stores. This gives them

a competitive advantage over other companies that must rely on third party vendors to deliver

their food to consumers. Almost all casual dining/fast food restaurants are moving towards some

method of delivery service, indicating this will be the way customers consume food in the future.

There has also been the rise in upscale casual dining establishments. Shake Shack identified an

underserved section of the market and created a novelty fast food restaurant that appeals to

millennials and baby boomers alike. Taco Bell has created Cantinas to appeal to urban crowds

where drive thru restaurants are not possible. However, the Cantinas are more upscale than

existing Taco Bells, possibly signifying Taco Bell may soon operate two separate business

models.

Summary of External Analysis

The casual dining/fast food industry is in a very exciting and rapidly growing phase. Competitors

are relying heavily on product differentiation in order to obtain market share. Consumers are

demanding healthier options, and they are in turn willing to sacrifice the cheaper prices they once

paid for fast food. Consumers are also looking for casual spots where they can get quick bites

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and hangout with friends. Additionally consumers, especially millennials, want technology

integrated into their experiences at restaurants. Finally, the trend towards food delivery means

casual dining/fast food restaurants will need to strategically and imaginatively think of ways to

deliver their product directly to customers who do not want to dine in their physical restaurants.

III. Internal Environment

Strategy Statement

Chipotle’s strategy is to be a pioneer in the fast-casual restaurant sector, focusing on serving food

responsibly sourced from humane and sustainable farming practices. By strictly serving meat

that is raised without hormones or antibiotics, Chipotle’s emphasis on providing quick, healthy,

and high quality dining options puts them in a different class than typical fast-food and

traditional table-service restaurants. Chipotle’s goal is to be the leading fast-casual brand by

capitalizing on consumers’ higher willingness to pay for a perceived superior dining experience.

Through competitive advantages of differentiated product positioning, operational efficiencies, a

people-focused culture, and continued growth in their large target audience, Chipotle is in a good

position to reach their goal and sustain their positioning.

Corporate Level

Chipotle’s Business Portfolio

Chipotle’s business portfolio is strictly limited to the fast-casual restaurant industry. They

provide both a good and a service, coming in the form of burritos, tacos, and bowls and the

making of the food, respectively. As with the nature of the industry, Chipotle provides a want

rather than a need. With over $4.4B in domestic sales in 2015, Chipotle is second only to Panera

Bread in fast-casual industry sales. At the beginning of 2017, Chipotle had 3,010 locations

spread throughout the US, Canada, England, France, and Germany. While the US is their top

market, they are also finding success internationally. Their core competencies help build their

brand, and their clear and focused vision allows them consistent success and flexibility in the

face of obstacles.

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Rumelt

Chipotle utilizes a single business diversification strategy by directing all business activities to

those that support their restaurant endeavors. The primary focus of the current business is to

provide healthy, fast, and environmentally responsible food that caters towards the quickly

growing market desire of conscious eating.

Core Competencies

Chipotle’s core competencies are about their complete focus on providing the highest quality

ingredients for their food. Their motto is “Food with Integrity” and this is their written

commitment to serving the most delicious ingredients that they can, which is quite different from

what their competitors in the fast food industry are doing. All of their food is sourced from

responsible farms, where animals and plants are not fed antibiotics and pesticides or any other

GMO induced foods. In addition to ensuring that their farms provide proper care of the animals,

their pigs are raised on pastures instead of cramped pens, these are practices that have not made

it to other fast food companies as of now.

Another factor that contributes to the success of Chipotle is their style of food service that has

started to be gain some recognition in the “fast casual” food industry. With an open kitchen and

freshly prepped and cooked food displayed right in front of the customers to choose from,

Chipotle has shown some transparency in an industry that is not always honest with consumers.

The customer has the experience of watching food get prepped and cooked, while they are

performing their order at the restaurant. In addition, the average Chipotle order takes around 2-3

minutes depending on additional amenities that the customer may desire. After their order is

complete, the customer is able to pay for their food and take it with them immediately after that.

The transparency that is demonstrated to the customers, and the fast service that each location

provides, is another factor that has contributed to the success of Chipotle.

Mergers & Acquisition/Investments/Divestments

In 1998, McDonalds had invested in Chipotle and helped it grow from 14 locations to 500

locations in 2005. At this point in time, McDonalds owned around 90% of Chipotle and helped it

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become a Nationally known burrito chain. Without the help of McDonalds during the early years

of Chipotle, it might not have been possible for the expansion of 1800 Chipotle locations that

exist today. In 2006, McDonalds divested all of its shares in Chipotle for a total amount of $1.5

billion, when they only invested around $360 million into Chipotle throughout the years.

Strategic Alliances

In 2011, Chipotle Mexican Grill partnered with FamilyFarmed.org, a non-profit organization

with the focus of expanding the production and distribution of locally grown and responsibly

produced food. This partnership was for a national fundraiser in order to support a continued

effort by both companies to help sustainable farmers. For a few years before, FamilyFarmed.org

has partnered with Chipotle on projects that align with Chipotle’s “Food with Integrity” motto.

The fundraiser that they have partnered together for will help FamilyFarmed.org fund future

endeavors and further expand their annual trade show and conference for farmers and food

producers. It is important to note that Chipotle is the largest server of naturally raised meat, and

locally sourced food in the country, which is about 100 million pounds in just 2011.

Business Level

Focus

Chipotle’s mission of “Food With Integrity” encapsulates their commitment to “finding the very

best ingredients raised with respect for the animals, the environment, and the farmers”

(Chipotle). By promoting a healthy and responsible farm-to-table dining experience, they strive

to provide customers with the best possible product as well as add a level of transparency that

traditional fast-food and fast-casual restaurants don’t have. As they’ve grown, their focus has

expanded to ensuring that “better food is accessible to everyone” (Chipotle).

History

When Chipotle opened their first restaurant in 1993 in Denver, Colorado, their vision was to

show that food served quickly didn’t have to mean the typical fast-food experience. Through the

use of high-quality raw ingredients, classic cooking techniques, and upscale interior design,

Chipotle has successfully brought a fine dining experience to fast-food, positioning themselves

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as pioneers in the fast-casual industry. Founder Steve Ellis’ original goal was to sell at least 107

burritos per day, but within a month of opening they were consistently selling more than 1,000

per day. To help scale and facilitate this rapid growth, McDonald’s became a minor investor in

Chipotle in 1998 and later become their largest investor in 2001. In 2006, McDonald’s fully

divested, which allowed Chipotle to buy back the few franchises they previously sold and once

again become fully company-owned. They went public in 2007, and have since continued to

grow into one of the world’s giants in the fast-casual restaurant industry while maintaining their

same original vision. However, their expansion hasn’t come without struggle.

In 2015, a series of E. Coli outbreaks killed their profits and caused the company to take heavy

measures to ensure the safety of their restaurants and their ingredients.

Business Strategy

The focal point of Chipotle’s business strategy is product differentiation. This manifests itself in

the company’s food quality/taste, customer service, and restaurant cleanliness. When Chipotle

first opened its doors, they hoped to fill a void in the restaurant industry by creating a hybrid

between fast-food and dine-in options. The novelty of the fast-casual industry quickly attracted a

large consumer base by being accessible to people with a wide range of incomes, being great

tasting, and catering to the often hectic schedules of many Americans. With the market absence

of healthy and fast dining options, Chipotle was able to take advantage of a huge opportunity.

This restaurant appeals to those who want a fast-casual dining experience for a competitive price.

Their strategic approach doesn’t necessarily target a specific audience, which actually helps the

company. By not aiming to satisfy the needs of a certain demographic, Chipotle was able to

instead identify their target market as those who want timely service combined with tasty food

made from environmentally responsible, all-natural ingredients. They’ve been able to ride the

wave of the constantly growing health-conscious community who want all-natural and locally

sourced ingredients and uniquely differentiate themselves from competitors by providing a

quicker dining experience than traditional sit-down restaurants and higher quality meals than

standard fast-food restaurants.

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One key way that Chipotle was able to differentiate themselves was to offer meal customization.

Instead of having customers order off of a menu, like traditional restaurants, having the option

for customization allows Chipotle’s customers to create meals unique to their individual tastes

and preferences (with vegetarian and vegan options available as well), and it also gives Chipotle

an opportunity to show off their product and process versatility and act upon their customer-

driven mission.

Staying consistent to their roots and original vision, Chipotle’s business strategy reflects founder

Steve Ell’s ideals. Their differentiation strategy and how it’s executed is the same as when

Chipotle first opened their doors in 1993. Chipotle’s business level strategy has helped the

company grow into a giant in the fast-casual industry, leading all except Panera Bread in sales.

Their business level strategy fits perfectly with their corporate level strategy, as they stay

consistent in their vision and focus on developing the appropriate core competencies to create

products and processes that keep them ahead of the competition and serve their enormous

customer base to their satisfaction.

Resources and Capabilities Level

Capability Priorities

Quality:

The first and foremost competitive capability priority for Chipotle is their food quality. It’s their

commitment to quality and belief that they offer a superior dining experience that sets them apart

from the competition. This can be seen in the company’s dedication to using animal products that

are raised humanely and environmentally responsibly. They are transparent with customers about

where their naturally-raised meat products come from, as they believe that it’s the customer’s

right to know where their food is coming from. In addition to using the best possible ingredients,

Chipotle prides themselves on their unbreakably high standards for recipes and cooking

processes. They really try to put substance behind their mission of “food with integrity.”

Time:

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Serving fresh food in a timely manner is just as important to Chipotle as the quality of the food

they are putting out. Time is important not only because it’s what separates them from traditional

dine-in restaurants, but it also is important in regards to the freshness of their products. All

cooked chicken, beef, or pork will never sit for more than 24 hours, and all animal meat products

are served within 72 hours of slaughter. Their vision to change the fast-food industry stems from

the quality of their food, but they keep the same speed as typical fast-food. Each and every

employee is trained to expedite customer orders, and customers should rarely ever wait more

than three minutes to receive their order after the first step in the ordering process.

Cost:

A key to Chipotle’s success is their ability to minimize their costs. Using daily fresh ingredients

can become an expensive logistical headache, but Chipotle structured their operations so that

each individual restaurant finds farmers within a 350 mile radius in order to minimize

transportation. Cutting out transportation costs not only saves money, but it also reduces

greenhouse emissions and supports local family-owned farms by supplying them with a steady

demand of orders. By doing this, Chipotle is able to guarantee their customers fresh ingredients

and provide healthier and organic foods. But the high quality of their ingredients is reflected in

higher costs. But because other costs are minimized, Chipotle is still able to pay a premium for

the best ingredients and offer competitive prices that customers are still willing to pay.

Customers have no problem paying a competitive price since it keeps the foods at the best

possible quality.

Flexibility:

Chipotle’s customizable menu offers customers a range of different options and allows everyone

to make orders that fit their preferences. All burritos, bowls, and tacos are fully customizable,

and everything is assembled right in front of the customer to ensure that they are getting exactly

what they want.

VRIO Framework

Value:

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Chipotle’s greatest value stems from their focus on serving healthy, organic, GMO-free, and

environmentally friendly products. Their portion sizes are generous, yet appropriate, and a

customizable menu adds value to the overall customer service and experience. Chipotle has done

a good job identifying and acting upon market opportunities, specifically the trend towards

healthy, quick dining options and environmental responsibility.

But due to the E. Coli outbreaks in 2015, Chipotle has had to operate on their heels and take a

reactive instead of proactive approach to environmental threats. Not getting sick from a

restaurant’s food is an obvious imperative for all food providers, and serving tainted food went

against their entire business model of “food with integrity.” When claiming to have superior

quality than typical fast-food options, it’s extremely damaging to have people fall ill from eating

at their restaurants.

In response, Chipotle has the options to lower their food standards, but that would drive away

customers since the perception of higher quality is the single biggest sales stimulator. They could

also look to contract other suppliers or internally produce some of their ingredients. For the past

few years, Chipotle has been on the defensive and managing threats.

Rarity:

From a general food perspective, there isn’t anything too different about Chipotle’s products and

services. There are a handful of other fast-casual competitors who offer healthy food, which are

detailed in the External Analysis section, but Chipotle’s sole differentiator is that they provide

Mexican cuisine.

Imitability:

There is nothing proprietary about Chipotle’s business. Nothing is stopping other companies

from entering the market and copying the same business model as them. While there would be a

cost in trying to compete with an already established firm, it still can be done regardless, and

newcomers have the potential to steal market share while Chipotle is still recovering from the E.

Coli events.

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Organization:

Chipotle’s management style is interesting in the sense that it takes into account the potential

difference between the goals of executive management and how store-level management feel that

they should be carried out. This dual approach led to Chipotle’s creating a new position called

“restauranteurs,” which are responsible for creating/training general managers for all the store

locations. This training system allows anyone from kitchen staff to cashiers to become world-

class level managers that can sustain a thriving store. The restauranteurs do a good job of

eliminating politics in the organizational hierarchy and staying true to the company’s mission.

As a result, Chipotle’s organizational system and policies have a positive influence in generating

customer loyalty and employee engagement.

Exhibit 6 summarizes Chipotle’s VRIO Framework.

Customer Retention

After the most recent E. Coli outbreak of 2015, Chipotle has implemented new plans in order to

retain current customers and to win back past customers. Since the outbreak, Steve Ells has said

that preventing a future outbreak is of the utmost importance, and to ensure that promise, has

sought tighter control over where raw materials are sourced, and in the future will probably

endure higher costs as a result of such additional actions.

Chipotle has also implemented new marketing programs to maintain customer retention rates,

but at additional costs. Since the outbreak, Chipotle has saw a decrease in revenue, and with the

new program, will see margins in the short term to be even smaller than ever. Chipotle has

implemented many different marketing tactics in the summer of 2016 to retain customers and to

ensure that there are more repeat customers in the span of a year. The most recent program that

the offered was called Chiptopia, and it rewards customers who purchase 4 burritos with a fifth

one. These are the most basic levels of rewards that are offered at Chipotle, and the more often a

customer visits and spends money, the higher on the rewards pyramid they will be positioned.

This plan is meant to retain and reward loyal customers, who may have been discouraged of

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coming from the E. coli outbreak in the previous year. Although Chipotle does a great job at

pleasing loyal and repeat customers, it needs to be able to accommodate the less frequent

customers also.

Product Life Cycle

The product life cycle of Chipotle is very unique just because the business has only one main

product which is their burrito or bowl. Having a simple menu is not necessarily a problem, as

customers continue to remain loyal to the business. The model of the company is simple that it is

seen as a core competency for their business. In addition to the simple product that they have,

there is enough variety around so that customers are not bored of the choices that are available

for their burrito. With different types of meats, vegetables, salsas, and toppings to include with

your meal each time, it makes a trip to Chipotle as similar or different as you want it to be.

Chipotle has experienced tremendous growth in the past twenty years and would still see itself

positioned in the end stage growth spectrum. Soon after, growth will start to decline and the

restaurant will find itself in its maturity stage, but as of now, there is still room for Chipotle to

expand internationally.

Financial Analysis

Since Chipotle has positioned themselves in the fast casual business with the model of food with

integrity, they have assumed costs to their business that are on the higher end of the restaurant

industry. The industry standard for food and labor costs in the restaurant industry are usually

around 25-35%, of total operating costs for a business. Chipotle sits at an average of 35.29%

food costs percentage out of their total costs. Compared to their competitors, Chipote is actually

positioned slightly better because fast food giants, Jack in the Box and Qdoba currently have

food costs that are equal to around 39% of their total costs. Only Shake Shack is in a more

advantageous cost position with their total food costs at around 30%. Chipotle has made it their

mission to source their ingredients from sustainable locations and thus by ensuring that they only

purchase the freshest ingredients, have to endure higher costs as a result.

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In addition to food costs, resteraunts look at the labor costs as a percentage of their total costs

also. Just like food costs earlier, a healthy labor percentage should hover within the ranges of 25-

35%. Chipotle performs much better in this metric as on average over a three year period, they

have around 28.55% of their total cost. One of their biggest competitors in the fast casual

restaurant industry, Panera, has a much higher labor costs percentage at 38%. Shake Shack is still

the only company that is more efficient with their food and labor costs, and average around 26%

labor costs of their total costs. If compared to the industry as a whole, Chipotle is doing very well

with handling their costs as their value of 28.55% sits at the lower end of the range.

Gross Margin is essentially the portion of a dollar of revenue that a company gets to keep after

the cost of goods sold is calculated out of the equation. When looking at Chipotle and their

competitors, it is important to note that they have the lowest amount out of the four companies at

0.367, this goes to show that after the cost of goods are factored out of the equation, Chipotle is

only left with 0.367 dollars for every dollar of revenue. This is not necessarily hurtful for their

company, but when it is compared to competitors, Chipotle should address the higher cost of

goods that they

There are other metrics that help to recognize performance in the fast food and restaurant

industry, and can be seen through means like weekly sales, average orders per customer,

employee turnover, and how often a customer will come back within a sixth month period. These

are important metrics for a company to be able to identify how they are positioned in comparison

to competitors. Unfortunately these numbers are not easily available to the general public, which

is why they are used more for internal assessment of performance. Competitors to Chipotle know

that Chipotle has on average a generally high employee turnover rate for their industry, but they

are unsure of the exact degree.

Operating Ratios

The operating ratio is the operating expense over the net sales, and a smaller number means the

greater the company is able to generate revenue if profits are to decrease. The size of the number

is usually dependent on the industry that the company might be in. Chipotle has a similar

operating ratio to both Panera and Shake Shack, which are all in the fast casual restaurant

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industry at around 11-12. Jack in the Box is the only company that has the smallest ratio with

0.07977, and that can be equated to the sheer size of jack in the box and how they are in a

slightly different business of fast food and not fast casual. Chipotle is about equal to its

competitors in the fast casual department and that is just about where they should be around.

The total debt/total assets is a measure of a company’s total debt over the total amount of assets

that they have. It is a good measure to see how leveraged the company is, and if they are able to

pay off their debts with their current capital. Chipotle has the lowest number out of all of the four

companies, with a total debt/asset ratio of 0.3078, this just shows that Chipotle does not take on

massive amounts of debt, and that they are to have unprofitable years then they will not be too

affected by it. In the past two years, Chipotle has had E. Coli problems and that is seen through

their decreased sales and profits, it is important to note though that Chipotle still maintained their

position through this whole situation. They are still able to keep themselves afloat with their debt

being significantly less than what they have in total assets.

Internal Ratios

Inventory turnover is the amount of time it takes for a company to flip their average inventory,

and it varies depending on the industry. Chipotle has the lowest amount of inventory turnover

compared to its competitors at 52.75 and that means that it takes only 52.75 days to go through a

whole set of inventory, which is important in the restaurant industry just because of how long

ingredients last. Chipotle is always looking for the freshest and cleanest ingredients, so it makes

sense that they would have the lowest inventory turnover compared to competitors.

The current ratio is the current assets over the current liabilities, and if the ratio is above 1 then it

indicates how liquid a company is and if their current assets are able to cover their current

liabilities that they have on hand. Chipotle has a ratio of 1.85 and this means that as a company

they have almost double their current liabilities in current assets. If there was a problem that

affected Chipotle in the short term, they would have the current assets to be able support their

liabilities if they need to pay them off.

Performance Metrics

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Return on Equity is not only a measure of profit, but it is a measure of efficiency also. A higher

number symbolizes that more profit is generated from a single dollar of shareholder investment.

Chipotle has an ROE of 0.17 and that means that in order for Chipotle to generate $0.17 of

profit, it would need to invest a whole dollar of shareholder’s equity. It has a significantly lower

of a number compared to Shake Shack, who has almost an ROE of 0.9996, which is almost a

dollar of generated revenue for every dollar invested from shareholders. Jack in the Box reported

a negative ROE with -1.599, but this does not necessarily mean that it is a bad investment. There

are other factors that are involved in identifying how successful a business has been, and a

negative ROE, can mean different things during that period. It is also important to note the free

cash flows of your company that year, especially if there was a negative ROE for that particular

time.

Net margin is a measure of how much of the total revenue gets translated into a profit, so a

higher number would mean that more revenue made is converted into a dollar amount that the

company gets to keep as a profit. Chipotle beats all of their competitors at this amount and has a

net margin of 0.075, which is higher than the lowest value of Shake Shack at 0.04741. These

numbers are surprising, because Shack Shack performed better than Chipotle on most metrics,

and this is also all considering Chipotle’s abysmal 2015 due to E. coli. Regardless of how

Chipotle has been performing in the past year, it is turning more of its revenue than its

competitors into profit.

Valuation Multiples

The Enterprise multiple is one way used to see how a company might fare against it competitors

and if the price might be undervalue or overvalued. A lower ratio might symbolize that the

company is undervalued, while a higher ration might mean that it is overvalued. Since these

numbers include debt, it is a useful way to compare across companies and industries, which

makes it a good metric for valuations for mergers and acquisitions. The average of an enterprise

multiple in the restaurant industry is around 15 and Chipotle is around a 43.2. This means that

Chipotle is overvalued and this should be considered when making recommendations for the

future.

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IV. Strategic Move

Challenges Go Beyond Food Safety

In the last few years, Chipotle has faced different challenges that resulted not only in a decrease

in profits, but also challenged the company, its values and standards, and corporate structure.

Talented executives and managers had to step back and offer their position to more qualified

individuals who were focused on bringing the firm back to its original success. Recently, there

have been several episodes relating food quality and contamination. Many on the executive team

realized that in addition to food safety concerns, there were other shortcomings within the

company that lead to their struggles. The next section illustrates the many internal and external

issues the company faced, followed by how the executive team reacted and the strategic move

they made to ensure the same accidents will not be repeated again in the future.

Internal Challenges

Chipotle Mexican Grill reminded customers that their fresh ingredients and naturally raised meat

were superior to rivals and more sustainable for the world. It was considered having done the

impossible in making a national fast-food chain feel healthy. However, all of this hype and

enthusiasm came to a halt when several different food related issues caused customers to end up

in the hospital, often having to stay for long recovery periods. In 2015, during the month of

August, 234 customers and employees contracted norovirus at different restaurants, 64 people

were affected by salmonella, and nine had to be hospitalized. Later on, 140 college students got

sick from norovirus, the most common form of gastrointestinal illness, from a Chipotle near their

campus. In total, almost 500 people around the country became sick from consuming Chipotle

during 2015. Food safety experts say they believe the total number of people affected is at least

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10 times the reported number9. Now, fewer consumers consider Chipotle a “healthy” food option

and are weary of their products. Competitors tried to take advantage by using Chipotle’s mission

statement of having “Food With Integrity” as a false claim.The company became the target of

new attack ads from competitors, causing many consumers to purchase food elsewhere. Sales

initially dropped by 16%, and in the following year by an additional 8%.

Chipotle’s only option was to react immediately and take new preventative precautions. The

company undertook a systematic evaluation of safety procedures around each of its ingredients

and brought on a new director of food safety. It changed its supply chain, and stopped selling

certain meats because of their strict standards for how animals needed be raised and fed. Since

the outbreak, Chipotle has tried multiple techniques to try and win customers back, including

new advertisements and new rules on food safety procedures. Also, one of the leading factors for

the food contamination outbreak was sick workers continued to come into work knowing they

were sick. As a result, many of the documented outbreaks were preventable. In response,

Chipotle began strictly enforcing a new policy that prohibited sick employees from being at

work, and allows them to stay home until they are fully recovered.

Unfortunately for the company food contamination was not the only internal problem. Another

large challenge for the company included the lack of variety of new products. The company

reacted by by adding a new item, Chorizo on their menu. Increased competition from new high

quality fast food/casual dining alternatives was also drawing customers away. Chipotle reacted

by focusing on their existing customers and started a rewards programs which included an

animated cartoon video. Chipotle launched “Chiptopia”, a three-month-long loyalty program in

which customers could buy four entrees in a month and get the fifth entree free. Finally, another

internal challenge involved the menu pricing strategy used, which consumers viewed as

unexplainably high.

Corporate Culture Challenges

9 “Why Chipotle’s Challenges May Go Beyond Food Safety”, The Washington Post, accessed June 07, 2017, https://www.washingtonpost.com/news/business/wp/2016/07/08/why-chipotles-challenges-may-go-beyond-food-safety/?utm_term=.e30a4a510f59

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Chipotle has had to address issues within their corporate culture as well. Within the last few

years there has a decline in visits to fast-casual restaurants, which has affected almost all fast-

casual chains, including Chipotle. The Washington Post, writes, “fast-casual restaurants stocks

were down nine percent in the second quarter of 2016, on average”.10 Along with a strengthening

economy and growing demand for healthier food options, the restaurant industry is also

struggling with a tightening labor market. The hiring process at Chipotle was considered broken

and employee training was not a priority. With inadequate employee training many of the

restaurants were losing both profits and customers. There was also a shortage of qualified

employees at the base level within the restaurants at Chipotle. To solve this problem Chipotle

held a one-day hiring spree to hire new workers. These workers received appropriate training and

are now forming the base of a strong corporate culture within Chipotle. With the new rules and

major adjustments, Chipotle now appears to be back on the road to success once again.

Chipotle’s strategic move was to focus on better securing their position within the market fast

food/casual dining market. Here are four ways Chipotle has been working on better securing

their position:

1. Differentiation Through Marketing: -- Food with Integrity

According to Chipotle’s 2016 Annual report, (Part I, pp. 4-5) the company sustains its

competitive advantage primarily by offering a great dining experience. This lowers the cost of

advertising by allowing word-of-mouth publicity to play a larger role in marketing. However,

the company also realizes that it must differentiate itself through its paid advertising as well. In

particular, the paid advertising must differentiate Chipotle by demonstrating its commitment to

the company’s “Food with Integrity” philosophy while connecting the company to like-minded

individuals and organizations.

Using technological innovation to pioneer new avenues of branded content, Chipotle has gone

beyond the traditional marketing channels such as advertising on TV, newspapers, fliers,

brochures, etc. by connecting to customers through social media, engaging in fundraisers, and

10“Inside Chipotle's Contamination Crisis,” Bloomberg.com, accessed June 07, 2017, https://www.bloomberg.com/features/2015-chipotle-food-safety-crisis/

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sponsoring local events. These efforts are directed at attracting, connecting to, and converting

more customers into loyal, and frequent, visitors of Chipotle restaurants.

2. Overcome Substitutions and Rivalries: -- Open New Stores

Chipotle believes that the company needs to increase its customer base, expand their food

concepts and, increase its number of stores to continue to serve food with the best quality, at

easily accessible locations, and at a reasonable prices to compete within its core competences.

The company understands that it is facing extreme competition from each of the following

categories: typical fast food, casual dining, quick service upscale food purveyors, other ethnic

convenience foods, deli stores, and in-stores cafés at upscale grocery store chains.11 Moreover,

Chipotle’s store saturation is much lower than many of its competitors. Store expansion

therefore make sense for Chipotle as a next step to secure its position. Opening new stores in

high foot traffic areas would of course be ideal for Chipotle, but the rent expense is usually

extremely high at these prime locations. Therefore, finding a way to penetrate secondary markets

on a cost effective basis will be necessary to drive costs down and compete with its rivals.

3. Expand Market Segment:

Another effective way for Chipotle to expand its market share is by expanding into different

market segments. Over the last 5 years Chipotle has explored expanding into other market

segments by applying its concepts to different cuisines. They believe that the fundamental

principles on which their restaurants are based—finding better ingredients, preparing them using

authentic techniques in front of the customer, and serving them in an interactive format with

great teams—can be adapted to a number of different cuisine concepts. For example, they have

explored creating new and innovative concepts such as Tasty Made, a burger concept of making

burger in a single restaurant, as well as using strategic alliances to create Pizzeria Locale, a fast

casual pizza restaurant. The company also partners with Pizzeria Locale open stores in 4 states.

Chipotle grew to 15 stores offer ShopHouse Southeast Asian Kitchen. The company’s projection

remains focus on expanding its business and growing the Chipotle brand.

11 "Chipotle Mexican Grill." Chipotle Investor Relations - Annual Reports. Accessed May 17, 2017. http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-reportsAnnual.

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4. Business Forecasting: Cutting Costs by Cutting Wasteful Perishable Products

To compete effectively and efficiently, Chipotle uses a variety of applications and systems to

secure and manage its products and the flow of information within each restaurant and the

centralized corporate infrastructure. The company uses a point-of-sale system that operates

locally at the restaurant and integrates with other functions to record restaurant operations such

as recording sales transactions, receiving out of store orders via online applications, and

authorizing, batching, and transmitting credit card transactions. Other applications developed or

utilized by the company include restaurant operations, supply chain management, inventory

scheduling, training, human capital management, financial tools, and data protection services.

These information systems enable Chipotle to competes with a remarkably thin margin. By

using information technology to reduce spoilage, not only does the company save money on

inventory, but it also saves money on ordering and storage costs, and enhances the ecological

sustainability of its operations.

V. Recommendations

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Short Term

New Advertising Campaign

Chipotle had an E. coli outbreak in their products that led to a dramatic decrease in revenues.

The major issue to combat is not simply the presence and removal of the contaminated beef, but

rather correcting the residual brand image that has left consumers unsure about the safety of

Chipotle’s offerings. In order to address the brand image properly, Chipotle should attack the

negative connotations of their brand with a centered marketing campaign and with improvements

to their securitization process in food sourcing.

Foremost, a marketing campaign should be devised that states Chipotle’s actions toward

improving the safety standards of its employees and of the products it sources. We believe that it

is important for the firm to make reparations to the specific procedures that allowed the E. coli to

enter their supply chain and to let the public know they are doing it — all while respecting the

capital shortage exacerbated by such losses. Customers need to know that their safety is valued,

that Chipotle understands it has faulted in its obligations, and that corrective actions are being

taken. Instead of visualizing Chipotle’s questionable sourcing as the weak link in the firm’s

otherwise proven model, the company should strive to remove this weakness by transforming it

into a strength.

Considering these factors, Chipotle could close down its operations for a specific duration of

time depending on cost analysis and use the opportunity to retrain employees on the proper

safety protocols. Customers who have maintained their allegiance to the store will notice and

most likely be unaffected by short-term operation downtime. On the other hand, these people

will convey via word-of-mouth of the store’s actions, and positive publicity will follow suit. In

addition, it is important to emphasize that cleanliness and food safety standards are a core virtue

of the Chipotle brand. A way to maximize and share positive messages is evident through the

inspirational writings that appear on the to-go bags. Chipotle could utilize this resource in

delivering messages to the consumer without altering too much of their supply chain — while

also promoting healthy activities.

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Improved Quality Control Testing

Just before the contaminated food items caused Chipotle’s stock prices to fall dramatically, the

chain was experiencing record growth that was particularly impressive for a firm in the fast-food

industry. Chipotle occupied a niche in the market that relied on sourcing sustainable ingredients

from local farms. The result was an extraordinary product, but it led to a logistical nightmare. In

seeking to maximize its control of the market, it made sense for the chain to expand as quickly as

it could across the U.S. and abroad to grab markets with first mover advantage.

Nonetheless, doing so required utilizing an increasing diversity of small-firms to fulfill the rising

demand of Chipotle meats. Management took on considerable risk by investing in a method of

growth that lacked proper control and oversight. Thus, Chipotle’s core mission and efforts for

expansion were at adds with one another. For this reason, in the short-term, Chipotle must focus

on actions that will stabilize its domestic market. Instead of uprooting the culture that has made

the firm successful, the best course of action would be to minimize risks associated as efficiently

as possible. Given the number of small-scale farms in Chipotle’s supplier base, it would be

impractical to spend capital managing each from on an individual basis. Likewise, so long as

each supplier is compliant with Chipotle’s integrity standards, it would be too costly to regulate

the equipment at each sourcing facility. The best solution is one that Chipotle can manufacture

in-house which intercepts all incoming inputs.

Since Chipotle cannot oversee the quality control of its products on farms and much of those

processes are standardized externally, Chipotle should follow through by investing in

technologies that are capable of testing their foods on site — in a method that is accurate, quick,

clean, and reusable. Preferably, a device should be implemented that is able to pierce or probe a

portion of the firm’s food supply for potential sources of harmful substances including, but not

limited to the following: food-safe temperatures, cross-contamination, bacterial or viral organics,

and etcetera. This process should be standardized in a method that covers all incoming food

shipments and during times when cross-contamination may have been apparent.

Each farm should be monitored and tracked for quality assurance. Chipotle should expand its

management in this area of the supply chain to establish a system of grading the farm’s products.

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Once those sources are established, Chipotle can keep logs that verify the quality and

consistency of the incoming ingredients with their testing that is done on site. In the next year,

Chipotle should consider increasing their ownership and vertical integration of their most reliable

suppliers. This would extend their control over the sourcing and provide them with increased

expertise on sustainable production techniques.

Long Term

Domestic Expansion:

Chipotle was growing at a robust pace prior to its food safety and publicity challenges. It had a

“winning formula”, that allowed it to grow its revenue from $860 million to $4.5 billion in the 9-

year period from 2006 to 2015. And with only 2250 stores in the U.S. (as opposed to 7000 U.S.

stores for Taco Bell) Chipotle was not nearing the point of market saturation. However, it was

hit hard by the by negative publicity it suffered following the food poisoning outbreaks. Sales

temporarily declined by nearly 30%. However, the impact of this negative publicity will fade

over time. Given the strong track record of profitable growth Chipotle enjoyed prior to this

negative publicity, so long as Chipotle can avoid future adverse publicity, it remains a strong

company with the potential to continue the growth that it enjoyed prior to its food safety

challenges. Therefore, in the long-run Chipotle should focus on (i) strengthening its food safety

protocols and (ii) continue following the approach that allowed it to enjoy robust growth prior to

its publicity issues, and (iii) continue to secure its position by aggressively expanding its growth.

Potentially, Chipotle can double the number of outlets it has within the U.S.

International Expansion:

Given its deteriorated branding in the U.S., Chipotle has an opportunity to expand its food

concept to the international market -- a place where it can establish a new image. It is critical that

Chipotle selects markets in which its end user is able to afford its positioning as a more premium

version of Mexican-style food. This means that the firm should target industrialized nations with

a population that contains the disposable income necessary to purchase a premium fast-food

item. Thus far, the company has been experimenting with taste preferences and developing its

research in four foreign countries: France, Germany, Canada, and the U.K., with plans to enter

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Asia. Chipotle should strive to broaden its portfolio slowly as its capital shortages and

heightened financial vulnerability in the meantime require a careful crafting of the marketplace.

With that being said, Chipotle must first establish a local presence and find viable sourcing

channels in these markets before allocating its resources. Expansion should be based primarily

on creating demand through localized advertising and customized product offerings catered to

the tastes of the domestic market. However, since Mexican food is not known or readily

available in a number of markets, international expansion may be slower than it is for other U.S.

chains that move abroad with less culturally distinct offerings. Accordingly, it will be critical for

Chipotle to have a sufficient advertising budget. In addition, Chipotle must recruit top local

talent that understands the local culture, and Chipotle management in the U.S. will have to be

open to localizing the menu as much as possible without diluting the core concept of the brand to

deliver sustainable food with integrity.

VI. Appendix

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Exhibit 1: Industry Analysis

Exhibit 2: Five Forces Analysis Summary

Exhibit 3: Five Forces Analysis Level 1

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Exhibit 4: Five Forces Analysis Level 2

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41

Exhibit 5: Five Forces Analysis Level 3

Exhibit 6: VRIO Framework

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Exhibit 7: Internal Ratios

Exhibit 8: Operating Ratios

Exhibit 9: Performance Metrics

Exhibit 10: Restaurant Industry Specific Numbers

Exhibit 11: Valuation Multiples

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