Download Strategic Chipotle Case Analysis

Jonathan Igo, John Butler, Corey Weathers
Strategic Management
17 January, 2015
Case Analysis: Chipotle
Strategic Profile
Chipotle, a company since 1993, has focused largely on using high quality farm produced
products to serve quality food “with integrity”. According to their 2013 annual report, Chipotle
had a net income of $327 million, coupled with revenues of $3.2 billion. In just twenty-two years
of becoming a business, Chipotle now has restaurants in Canada, the United Kingdom, France,
Germany, and over 1500 others in the United States. To operate all of these restaurants, Chipotle
has nearly 30,000 hourly employees and 2,750 salaried employees. During 2014, Chipotle even
opened nearly 200 new locations bringing the 2013 total of 1500 up to 1700 total worldwide
locations.
Overall, the restaurant industry has been soaring since the early 90’s. In 1990, sales for
the industry peaked at $239.3 billion. In 2012 however, they reached an astounding $631.8
billion. This industry creates jobs for 12.9 million employees with over 970,000 locations within
the United States, accounting for around 10% of our countries total workforce. The industry can
be looked at even closer through its three largest segments: full service restaurants, quick service
restaurants, and fast casual restaurants. Chipotle represents the fast casual segment, along with
other similar restaurant chains such as Qdoba, Panera, and Five Guys Burgers and Fries.
Although the fast casual segment is seen as the smallest of the three segments, it is growing at a
good pace. At these types of restaurants, prices usually sandwich those of full service (higher
prices) and quick service (lower prices). The menus are usually flexible and customizable to a
customer’s wants and needs, are convenient, and in Chipotle’s case, focus on ingredients of a
higher standard than those of quick service restaurants.
Chipotle has been a vastly successful business and has been growing steadily since its
opening over twenty years ago. Not only has it been successful financially, but it has also made
tremendous strides within communities and with corporate social responsibility as a whole. One
example in particular is that as of 2010 more than 40% of Chipotle’s black beans are certified as
organic. Chipotle focuses highly on having such a high level of corporate social responsibility.
Chipotle uses green initiatives, proper ranching techniques to properly produce the products they
serve on a daily basis, and provides community outreach that gives back to the communities they
serve. The job of this case however, is to not only recognize the company’s success, but to also
understand how the company can improve in the coming years.
Situational Analysis
General Environment Analysis
Demographic Analysis:
Chipotle focuses the majority of its sales on individuals between 18 and 24 years old. This may
be a direct correlation to the fast paced nature of people within that age demographic. Chipotle
offers fast service that is customizable, which appeals to young individuals on the go who don’t
have the financial flexibility to buy food from traditional sit-down restaurants. Chipotle focuses
its marketing strategies towards these younger individuals as most of their advertising is down
via social media platforms. Also, during Chipotles first years of service, they were based mostly
out of Denver, Colorado where Mexican styled food is more prevalent. They later exposed
different areas of the United States, and other countries to its services. “Chipotle has locations
located at various location types such as end of row shops, shops within a row, free-standing
units, and those in urban locations. This puts them in various locations making it easy for people
to visit.”
Economic AnalysisChipotle like any other restaurant chain is very dependent on the global economy and the trends
of food prices. With decreases in global prices, Chipotle would have the ability to lower their
prices on their menus. Since 1990, the restaurant industry has gone from sales of $239 billion to
$631 billion. Just as the industry has succeeded, so has Chipotle. The demand for food in general
will always remain high because of its necessity. Negotiation with wholesalers and farms that
Chipotle buys from also helps control costs of their own inputs and allows Chipotle to hold
competitive prices with quality food being served.
Political/Legal AnalysisPolitical and legal factors play a major role in the running of any restaurant. There are many
factors that come into play when opening new restaurants within the United States. Between
zoning laws (which vary depending on the zip code or state), insurance, licenses/permits, and
other government regulations, it is not a simple process to open business across the globe.
Chipotle like any other restaurant is tethered to these restrictions and guidelines. “Most of the
companies involved in the meat business, including the big meatpackers, are represented by one
or more of the powerful meat trade and lobbying organizations: the American Meat Institute, the
National Meat Association, and the National Cattlemen's Beef Association.” Political and legal
restrictions and regulations can definitively alter the processes by which Chipotle and other
companies operate on a daily basis.
Sociocultural AnalysisSteve Ells, the founder and CEO of Chipotle, has always had a focus on having the highest
quality farm produced products for his restaurants. Chipotle’s mission statement stresses “to
serve high quality, delicious food quickly with an experience that not only exceeded, but
redefined the fast food experience.” Having tasty food is not the only objective. Local products
from local farmers are used to produce the highest quality products with the healthiest
ingredients. This motivation for Chipotle starts at the top with Steve Ells. In fact, in 2009, Ells
testified before Congress in hopes to eliminate the use of antibiotics in ranching. This dedication
to health benefits and proper practices stretches to the employees at Chipotle and is part of the
reason for the company’s outstanding corporate social responsibility.
Technological AnalysisIn a world where technology is a dominant force in everyday life, Chipotle has upped the ante
and gone all in with several technological advancements to improve their business model. About
a year ago, Chipotle invested “$10 million to redesign its technology network and add mobile
payments to its ordering app, among other improvements.” This payment style would just
improve upon the already speedy order and payment ability for customers at Chipotle. On the
other side of the spectrum, Chipotle has added tortilla grills that reduce warming time by over
100% (from around 2 minutes down to 35 seconds). This shows that Chipotle has clearly focused
on its operational proficiency.
Global Analysis
Since Chipotle has expanded its business into several other countries besides the U.S, it is
important to consider the different global issues that could possibly affect Chipotle’s business.
The cost of importing and exporting goods to and from global locations can play a large role in
the operations of Chipotle. Best practices training for employees of foreign locations are also
something to consider when opening or sustaining commitment at a pre-existing business.
Although Chipotle doesn’t have an overwhelming global presence it is important for them to still
be conscious if and when they choose to further expand.
Physical Analysis
Chipotle’s products served are naturally raised and are being improved upon every year.
Chipotle’s black beans are becoming more and more organically produced, and even the cheese
and sour cream used at Chipotle’s restaurants no longer contain rGBH (which is a genetically
engineered hormone injected into cows to produce milk production). Chipotle’s other
innovations have included their naturally raised campaign for their chicken, beef, and pork.
Industry Analysis
Within the restaurant industry, there are many factors directly influencing a firm and its
competitive actions and competitive responses. These factors include the threat of new entrants,
power of suppliers, power of buyers, the threat of product substitutes, and the intensity of rivalry
among competitors. Since Chipotle was opened in 1990, they have already become a wellestablished company within the industry. Companies like Boloco which has more recently
entered into the Mexican food industry, pose a threat to the Chipotle locations more closely
found in their respective areas. For example, Boloco is a Boston based company, therefore they
will compete with Chipotle most aggressively in this area. The power of buyers is so vital to a
business like Chipotle because they have many options. In order for Chipotle to maintain a
competitive edge in the market, they must compete strongly with companies or restaurants such
as Qdoba that offer a wider variety of menu options for lower prices. Chipotle only directly
negotiates with suppliers, usually in local areas, in order to warrant more competitive prices to
buy their products. Since Chipotle focuses so greatly on product quality, the supplier’s power
plays an enormous role in Chipotle’s ability to obtain their raw ingredients.
Substitutes always pose problems for any type of product in any industry. Customers may
be looking for either a cheaper type of fast food other than Chipotle, for example, Taco Bell, and
McDonalds. Additionally, they may be looking for fast food in a segment in segments equal to or
above Chipotle such as Panera Bread, Five Guys Burgers and Fries, or sit-down chain
restaurants. With that being said, it is necessary for Chipotle to continue differentiating from
these other businesses using their already impressive initiatives for social responsibility and
brand image. Although the food industry is very competitive as a whole, Chipotle has done a fine
job in setting themselves apart from rival companies. Their products and ingredients are of
superior quality to others within the fast-casual segment. With that being said however, the
entrance of new competitors and the ability of other existing companies to modify their business
strategies to compete using a similar high quality approach could cause segment rivalries to
intensify.
Competitor Analysis
Qdoba
Strengths
Weaknesses
Vision
Pricing
Financial Info
(2014)
-Wide variety of
menu options
-Serves
Breakfast &
some 24 hour
locations
-Lower menu
prices
- Strong internet
Presence (Can
order online)
-Fewer locations
& stores
-Is a franchise
(lowers
flexibility &
Originality)
- Located Strictly
in the USA
- High Quality
Mexican Cuisine
served quickly
- Fresh
ingredients
-Average Menu
Price approx.
$8.00
-Changed pricing
Strategy in 2014
using bundling
options for main
dishes
-Company
Restaurant Sales:
$82.6 M
- Same store
Sales expected to
increase 8-10%
this year
- Announced 50 60 new locations
expected this
year
Strengths
Weaknesses
Vision
Pricing
Financial Info
-Quality of
Ingredients
-Social Media
Presence
-Dietary Menu
Options (Gluten
Free, vegan, etc.)
- Localized
Presence in
Boston
-Green Initiatives
-Few Store
Locations
-Weak Brand
Awareness
-Small menu
variety
-Wholesome &
socially
responsible
ingredients
-Provide
Delicious
burritos to fit the
dietary needs of
the customer
- Average menu
price approx.
$7.00
-Net Revenue
(2013) $25M
-56% Growth in
the past 3 years
Boloco
Internal Analysis
Chipotle (in thousands)
Net Revenue (2013)
$3,214,591
Net Income (2013)
$327,438
Operating Costs (Food, Beverage, and
$1,073,514
Packaging Costs) (2013)
Income from Operations (2013)
$532,720
Quick Ratio (2013)
3.28
Net Profit Margin (2013)
9.43%
Current Ratio (2013)
3.34
Debt to Equity Ratio (2013)
.31
SWOT Analysis
Strengths
Weaknesses

Not a Franchise Corporation

Small Business units

All food is organic or naturally raised

High cost of product (meat &
meat (No GMO / pesticides)

ingredients)
Use of “green” initiatives for each

Predominately located in the USA
restaurant

Highly priced compared to

Different / Innovative Advertising

Positive brand image

Menu / food options extremely limited

Brand loyalty

Limited advertising
competitors’ menus
Opportunities
Threats

Menu item expansion

Cost of competitors ‘ menu items

Growing “health food” popularity

High competition in the restaurant

Franchise possibilities

International expansion

Digital adoption / online market
industry

Change in market demand for food
variety / type

(online ordering, possible delivery)

Change in industry’s economic climate
Social Responsibility initiatives

Price fluctuation on raw food product

Decreased demand on limited menu
options or if food quality decreases
Chipotle’s primary strengths lie in their brand image and initiatives of social responsibility. One
aspect that sets chipotle apart from many other fast food or “fast casual” restaurants is their use
of organic and / or non GMO foods. This shows the customer that Chipotle cares about using
high quality and socially responsible products. Another commendable aspect of Chipotle’s social
responsibility lies in their use of “green” technologies in each of their restaurants in order to
reduce waste and use energy more efficiently. These factors greatly contribute to Chipotle’s
extremely positive brand image. Additionally, Chipotle takes advantage of different and
innovative marketing and advertising strategies. For example, Chipotle prides itself on their
absence of TV advertising. According to Jim Edwards of Business Insider, It is important to
Chipotle to build their brand image on customer experience. They do not believe in building
brand image through high budgeted marketing campaigns. This means however, that Chipotle
relies on a “word of mouth” marketing strategy. This can pose as both a strength and weakness.
It can be strength because it increases brand loyalty and image, but negatively because it may
decrease the overall brand exposure to the potential market.
Weaknesses for Chipotle are also prevalent. As with any company, there is always plenty
of room for improvement. For example, because Chipotle wants to remain un-franchised, this
gives them a weakness of having many individual “small business” units that must adhere to
equivalent quality and performance standards. Also, comparatively, Chipotle has a high cost for
their superior raw product against competitors such as Q’doba. Chipotle is also primarily located
in the United States with few restaurants internationally. Additionally, in comparison to
competition, Chipotle’s menu prices are both expensive and limited. Chipotle does not offer a
wide variety of items which could put them at a disadvantage to competitors.
Opportunities for Chipotle to capitalize on some of their weaknesses are also plentiful.
With a few simple steps Chipotle could expand their menu to include more variety using their
already superior products. Popularity of health foods and superior ingredients are very
opportunistic for Chipotle to attain even more popularity in the market. Also, Chipotle could
franchise if they decide it will be a more responsible option than remaining un-franchised with
some strategic planning and responsible decision making. This may also make it easier for
Chipotle to expand their business and open more restaurants internationally. Also, there is
always more room for a company to increase their social responsibility initiatives and with
Chipotle’s rising popularity and already strong brand image for social responsibility, even more
initiatives could be very beneficial for them. Chipotle could also benefit from an increase in their
digital presence. They have a very user friendly and responsive website already, so if they added
features such as online ordering or even delivery, they may see an increase in product sales.
Factors that pose as threats to Chipotle are largely to do with competition and market
fluctuation. For example, the lower cost of their competitors’ menu items and raw materials may
decrease Chipotle’s sales and demand. This may allow competitors to take an advantage in the
market if they take advantage of cheaper production costs and higher menu varieties. The food
industry is highly competitive as it is which means economic fluctuation and raw material price
fluctuations have the potential to hurt Chipotle financially. In order for Chipotle to keep an edge
in differentiation in the market, they must take advantage of their opportunities and strengths and
also upkeep their current quality of food and social responsibility. This will maintain their
successful brand image and keep demand for their food high.
Strategy Formulation
Option 1: Increased Menu Variety
Chipotle could benefit from increasing their menu variety because it will give their customers
more food items to choose from. Consumers enjoy many customizable options when ordering
their meals and this will help them gain a competitive advantage in the market.
Pros:
1. Menu variety/flexibility
2. Can help increase sales volume by satisfying different demographics
3. Larger flexibility for menu pricing (i.e.: value menu, lower priced options for existing entrees)
Cons:
1. Adding more menu items will increase costs of ingredients/materials
2. Potential to lose the image of a “signature” product (i.e.: the Chipotle burrito)
3. Slower service from production to plate
Option 2: Increasing Advertising/Marketing Budget
Chipotle currently operates by “word of mouth” advertising strategy. They pride themselves on
having no mass media marketing campaigns on outlets such as television. They have only a
small social media marketing presence.
Pros:
1. Will reach a much larger audience in advertising
2. May increase sales through more traffic due to advertising
3. Educates more people on emphasis of social responsibility (i.e.: organic and low GMO and
green initiatives)
Cons:
1. May damage brand image
2. High cost of advertising
3. May spark more intense competition in the market
Option 3: International Expansion
Currently Chipotle has a very limited international presence. They reside mostly in North
America with only a few stores in European countries. International expansion may help the
company continue to grow.
Pros:
1. More stores globally will create higher revenues
2. The possibility of breaking into a brand new market in some countries
3. An increase in brand recognition
Cons:
1. May be difficult to do without franchising
2. High costs and governmental regulations from country to country
3. It is difficult to predict success in foreign countries
Option Choice: Increased Menu Variety
It would be most feasible for Chipotle to increase their menu variety as a strategic option. This
options risk to reward ratio will seem to yield the most benefit as a whole. Their expansion in
recent years has led them to enough success to tackle the costs of adding different items and food
varieties to the menu. Option 2 would make more sense to implement if the business were more
globalized, and Chipotle takes pride in their word of mouth advertising strategy. Option 3 would
be difficult to obtain without each store location being independently owned. It would be
difficult to localize service to a respective demographic in a different country without it being
franchised.
Strategic Alternative Implementation
The fast food industry is a constant growing market. One of the larger corporations, Chipotle is
constantly growing, in order to continue growing they must work on enhancing their menu.
Chipotle should begin by having consumers take surveys in order to determine what the
customer desires. By doing this they will be able to use the feedback to enhance their menu,
which will allow them to increase their sales. Chipotle also must determine the consumer’s price
ranges. Understanding the price range of their consumers will allow chipotle to better understand
what they can and cannot include on their menu. After determining the new items that Chipotle
is going to include on the menu they will need to train the staff to give them the necessary skills
to produce the new items. Chipotle also has the opportunity to offer healthier items to their
consumers. By offering healthier items chipotle will be breaking into a completely new market
allowing them to increase sales. Chipotle’s main focus should be working on lowering their
prices, adding new items to the menu and creating healthier alternatives in order to attract
customers from every demographic.
Works Cited
Beesley, C. (n.d.). Opening and Running a Restaurant – A Legal and Regulatory Checklist. Retrieved
February 17, 2015, from https://www.sba.gov/blogs/opening-and-running-restaurant-legal-andregulatory-checklist
Beesley, C. (n.d.). Opening and Running a Restaurant – A Legal and Regulatory Checklist. Retrieved
February 17, 2015, from https://www.sba.gov/blogs/opening-and-running-restaurant-legal-andregulatory-checklist
Chipotle Burrito Bowl Campaign. (n.d.). Retrieved February 17, 2015, from
http://chipotleburritobowl.blogspot.com/p/sv
Chipotle Mexican Grill: Gourmet Burritos and Tacos. (n.d.). Retrieved February 17, 2015, from
http://chipotle.com/
Edwards, J. (2012, March 16). How Chipotle's Business Model Depends On NEVER Running TV Ads.
Retrieved February 17, 2015, from http://www.businessinsider.com/how-chipotles-business-model-relieson-never-doing-tv-advertising-2012-3
Hitt, M., & Ireland, R. (1999). Strategic management: Competitiveness and globalization (3rd ed.).
Cincinnati: South-Western College Pub.
Johnson, S. (n.d.). The Politics of Meat. Retrieved February 17, 2015, from
http://www.pbs.org/wgbh/pages/frontline/sh
Pen, Q. (n.d.). Chipotle Mexican Grill Delivers Another Quarter of Outstanding Growth. Retrieved
February 17, 2015, from http://www.gurufocus.com/news/314493/chipotle-mexican-grill-deliversanother-quarter-of-outstanding-growth
Wong, V. (n.d.). Chipotle Wants to Speed Transactions With Mobile Payments. Retrieved February 17,
2015, from http://www.bloomberg.com/bw/articles/2014-02-03/chipotle-wants-to-speed-up-with-mobilepayments
Wong, V. (n.d.). Panera, Chipotle, and the Fast-Casual Upstarts Eat Into Food Giants. Retrieved February
17, 2015, from http://www.bloomberg.com/bw/articles/2014-07-30/panera-chipotle-and-the-fast-casualupstarts-eat-into-food-giants