October 21 14Chipotle Mexican Grill Caroline Burke, Mary Harris, Stuart Hooks, Jacob McCanless & William VaughanA complete strategic analysis of the Chipotle restaurant chain from its founding in 1993 through the fiscal year 2012.M G T4 1 5 0 :B u s i n e s sS t r a t e g y T e a mEC a s eA n a l y s i sTable of ContentsIntroduction3I. Core Competencies3II. SWOT Analysis3 Internal Analysis: Strengths & WeaknessesExternal Analysis: Opportunities & Threats Future ProspectsIII. Value Chain Analysis5 Primary ActivitiesSupport ActivitiesIV. Generic Competitive Strategy6 Chipotles Strategy for SuccessV. Financial & Operating Performance6VI. Analysis of Competition6 Rival with Strongest Resources & CapabilitiesChief Differences Between Chipotles & Moes Strategies Can Chipotle Compete Effectively Against Taco Bell?VII. Recommendations7VIII. Appendix8Works Cited13In 2012, an analyst on Wall Street referred to Chipotle Mexican Grill as the perfect stock, while another suggested it could become the next McDonalds (Thompson C-114). Since its founding in 1993, Chipotle has utilized founder Steve Ells leadership and culinary expertise to execute its vision of changing the way people think about and eat fast food (Thompson, C-114). From the day Chipotles first restaurant opened its doors to now running 1230 restaurants in three countries, it has become a huge success and has caught the attention of leaders in the industry. One fascinating element of Chipotles strategy that has allowed it to differentiate itself from rivals is that it never tried to compete directly against front-runners such as its previous owner, McDonalds, nor expand too quickly. Under the effective leadership of Ells, Chipotle has grown at a sustainable rate and has developed numerous capabilities that set it apart in the increasingly competitive restaurant industry.I.Core CompetenciesChipotles limited, focused menu is one of their core competencies because it is central to its operations and provides a unique value to the customer. Chipotles competitors have a difficult time competing against or imitating this competency because the times on Chipotles menu are tested and proven. Competitors dont have the time or ability to test this concept or perfect their menu items. Chipotle on the other hand has been able to apply this limited menu style to the other ventures such as their two Shop House locations in Washington D.C.Another core competency, shown in Figure 1, is their dedication to high quality ingredients such as the organic cultivation of produce and naturally raised meat. Chipotle meets high customer expectations with their Food with Integrity campaign. None of Chipotles competitors have taken as strong of a stance, nor have they moved as quickly to increase their efforts for sustainable, humane cultivation of their ingredients. Chipotle has and continues to lead the way in this area of fast-casual dining.Another key factor to the success of Chipotle is the speed and effectiveness at which their friendly and multi-skilled crewmembers serve customers. Crewmembers are trained at every position so they are able to jump in and help any other member at any time during preparation or service. The crewmembers, along with the serving style maximize efficiency because the crew is energized and motivated to move customers through the line while working as a team. Competitors have a difficult time imitating this largely in part due to the distance between their associates.II.SWOT Analysisa. Internal Analysis i. StrengthsAs shown in Figure 2, Chipotles commitment to creating an experience sets it apart from competitors. The Chipotle experience includes friendly employees welcoming customers to its restaurants with upscale exteriors and sleek, modern interior designs. These simple designs have lowered development and construction costs while positioning Chipotle as a restaurant in consumers minds. Chipotles limited menu requires minimal employee training and advertising expenses while increasing efficiency in preparation and throughput. In addition, customers can customize their meals by interacting with enthusiastic crewmembers and selecting natural, fresh ingredients to add to their meal. Byusing organic ingredients, cage free animals, and fully committing to its Food With Integrity campaign, Chipotle can attract consumers with similar values.Lastly, Chipotle has differentiated itself through its marketing initiatives including the use of print, online, outdoor, transit, theatre, and radio advertisements. Chipotle has also been involved in various community events where stores have opened and even started its own food and music festival called Cultivate to educate attendees about sustainability and cooking. It has stayed up to date with technological advancements, allowing customers to place orders by phone, fax, online, or on an iPhone. It has also been mentioned in articles and on television, generating positive publicity and increasing brand awareness amongst consumers.ii. WeaknessesThe limited nature of Chipotles menu may drive customers to competitors. Also, there are few promotions for frequent customers to enjoy. Chipotles brand loyalty program, Farm Team, is an exclusive offering that sends invitations to customers based on their passion not on frequency of purchases (Thompson C-121). Users can receive deals on meals once they gain access to the website and participate in games and surveys. Since these rewards require more effort to receive, customers may prefer a competitor who has cheaper prices or provides more opportunities to save money. Lastly, Chipotles marketing department creates short films instead of commercials for television. This limits their reach and effectiveness because consumers have short attention spans and many will not go out of their way to find these films online.b. External Analysisi. OpportunitiesChipotle is at an advantage because its food offerings already cater to health conscious consumers. As the trend of consuming natural, organic foods continues to grow domestically and abroad, Chipotles target market and profits will do the same. Western Europe could provide substantial business considering American fast food chains such as McDonalds and Kentucky Fried Chicken have penetrated those markets and succeeded. It is also possible that as suppliers become aware of this trend, they will use environmentally friendly and sustainable methods for their crops, therefore increasing the number of potential suppliers for Chipotle.As mentioned in Figure 2, Chipotles new chain, Shop House Southeast Asian Kitchen is another tremendous opportunity. By providing the same simple-structured menu, layout, and ambiance as Chipotle, consumers can easily understand how the restaurant works and the upscale dining image it is promoting. Testing Shop House in DC was a strategically intelligent decision because now Chipotle executives can learn about consumer preferences and what it will take for this chain to be as successful as Chipotle.ii. ThreatsOne major threat Chipotle faces is the volatility of crop yields and their prices. This risk is heightened by the fact that health conscious consumers and other chefs are also purchasing these limited natural and organic goods. This has made is difficult for suppliers to meet their growing demand. As a result, some Chipotle restaurants have returned to using conventionally raised meats in 2011 and 2012, which could hurt their image (Thompson, C-118). In addition, consumer demand for meals at restaurants fluctuates due to macro-environmental forces such as the economy and technology. During an economic downturn consumers are extremely cautious of their money and arehesitant to spend on items that are not necessities. With technology, there are no limits to the information that is shared with consumers online including the ingredients and recipes Chipotle uses. This could motivate people to stay home and prepare a dish themselves, causing the restaurant to lose business.c. Future ProspectsThis SWOT analysis, summarized in Figure 1, shows that Chipotles future looks more promising than daunting. If Chipotle executives and managers continue to maintain its strengths and develop its opportunities while combating its weaknesses and eliminating its threats, the sky is the limit for this growing chain. If they apply these changes in their business model to Shop House Southeast Asian Kitchen, it could very well be the next big fast-casual restaurant in the United States and abroad.III.Value Chain Analysis a. Primary ActivitiesSupply Chain Management: Rather than purchasing food products from farmers or restaurant supplies from manufacturers, Chipotle has built up strong long-term relationships with reliable food industry suppliers. Chipotle keeps a list of approved suppliers, which contains ones that can meat their quality specifications and guidelines. Operations: Chipotle has employed a Quality Assurance department that monitors quality and food safety. This department sets Chipotles standards for everything from the suppliers they buy from, the distribution centers they control, and the food they serve. Distribution: Chipotle uses distribution centers to make purchases from suppliers. There are twenty-two distribution centers that are independently owned and operated in different regions that supply ingredients and other supplies to all Chipotle restaurants. Chipotle is planning to add more distribution centers as they expand.Sales and Marketing: In February 2012, Chipotle ran its first commercial on television during the Grammys, which was a short film called Back to the Start. Chipotle also gains publicity from favorable articles about their food and service. Chipotle has been trying to connect with the public through social media to facilitate direct communication with its customers. One part of their marketing strategy involves the use of promotional activities in newly opened restaurants to raise awareness about the new store opening. Service: Chipotles biggest goal with service is to have a customers order ready as quickly as possible. They do this by using a service line that the employee and customer can move through efficiently as the customer tells the employee what they want. This not only helps the customer have an easy and quick experience with ordering food, but it also lets the customer see the fresh food and ingredients that are used to create it.b. Support ActivitiesProduct R&D, Technology, and Systems Development: In 2003 and 2004, Chipotle started their Food With Integrity campaign. This campaign involves Chipotle researching ways to use organically grown ingredients. They researched farming companies who practiced animal ethics and cared about the environment. This effort was to ensure that they receive fresh and pure products that are healthy for their customers. Human Resources Management: In each of its stores, Chipotle employs a general manager, an apprentice manager, one or two hourly service and kitchen managers, and an average of twenty full and part time crewmembers. The general managers hire andmaintain crewmembers with a strong work ethic. Chipotle seeks to hire individuals who are very enthusiastic and team oriented to ensure a very positive work environment. General Administration: Internally, Chipotle has a team of real estate managers who research potential locations for new restaurants. A lot of time and thought is dedicated to this process for things such as projected sales in an area and targeted return on investment. In 2011 alone Chipotle opened 150 restaurants. Chipotle is also looking to expand globally by opening stores in places such as Paris, France. Chipotle has started a new project by opening Shop House, which serves Southeast Asian cuisine.IV. Generic Competitive Strategy a. Porters Five ForcesFigures 3 and 4 highlight how Porters Five Forces affects Chipotles success. Competition Among Existing Rivals is moderate due to the low number of true competitors, increasing consumer demand for healthy, quick meals, and their product is differentiated by quality and most importantly, experience. The Threat of New Entrants is low because it takes a significant amount of time and a great product to develop the brand loyalty that Chipotle has. There are high barriers to entry considering the suppliers they use as well their presence domestically and abroad. The threat of substitutes is moderate because there are a variety of Mexican food options available and customer-switching costs are low. However, this does not include the experience Chipotle offers. Power Among Buyers is low because there are few large buyers, increasing consumer demand, and variable substitute availability depending on location. Power Among Suppliers is high because there are few that offer natural, organic ingredients and Chipotle has a number of requirements they look for potential suppliers to possess.b. Chipotles Strategy for SuccessConsidering the elements of Porters Five Forces, Chipotle has employed a differentiation strategy that is proving to be successful in their industry. From their unique ingredients and meals, to the distinctive experience they provide and commitment to Food With Integrity, Chipotle will continue to stand out from other fast-casual chains and attract customers.V.Financial & Operating PerformanceChipotles outstanding financial and operating performance, displayed in Figure 5, has made it one of the restaurant industrys leading companies. It has shown consistent growth trends and impressive operational data. Since 2007, Chipotle has shown revenue growth at an average rate of 20.2% with net income also growing at a compound rate of 32.1%. Between 2007 and 2011, average sales grew by $928,000. In 2006, Chipotle went public with the initial offering price set at $22 per share. As of late 2012, Chipotles stock has traded in the upper ranges of $380 to $385 per share.In the 2011 fiscal year, Chipotles financial power became more evident, starting with an impressive Operating Profit Margin of 15.45%, which climbed by 5.49% since 2007. Chipotles Earnings per Share in 2011 was $6.89, which grew by $4.73 since 2007. These financial gains can be attributed to operating efficiency and increased market share. Because of CEO, Steve Ells goal to maximize customer throughput, Chipotle was able to expand and now serves over 800,000 customers per day with the average customer tab being around $9.Chipotle has also shown consistent expenses since 2007. The reasons for this are because of its increased operations around the world. Chipotle has operations in over 40 states in the United States and also holds operations in British Columbia, Canada, and the United Kingdom. With this international expansion, Chipotle showed increased: Food, Beverage, and Packaging costs of $738,720 in 2011 compared to $346,393 in 2007, Labor costs of $543,119 compared to $289,417 in 2007, and Other Operating costs of $251,208 which also increased from $131,512 in 2007. With revenue consistently growing faster than expenses, Chipotle has shown net income growth of 20% in the most recent year. With Chipotles basic five-element strategy proven to be one of integrity and competitive uniqueness, the idea behind the company will continue to drive financial and operational success.VI.Analysis of Competitiona. Rival with Strongest Resources & CapabilitiesOf all Chipotles competitors, Moes poses the largest threat. Although Moes is newer and has a smaller presence, specifically 420 restaurants in 26 states, it does offer a larger menu. For example, it provides quesadillas, fajitas, nachos, rice bowls, and desserts in addition to the same items Chipotle offers. It also has a kids menu and a variety of vegetarian, gluten free, low calorie, and side dishes. Food quality, efficiency and customer service is most comparable as well.b. Chief Differences Between Chipotles & Moes StrategiesA chief difference between these competitors strategies is that Moes franchises its restaurants, whereas Chipotle does not. As stated earlier, Moes has a larger menu, however this can result in a longer working line and often times a separate kitchen. These expanded distances result in degraded communication and ultimately decreaseefficiency. However, because Moes provides chips and salsa with meals, unlike Chipotle, some consumers may view Moes as the best-cost option. Lastly, although Moes utilizes natural ingredients and cooking methods, it does not market this aspect as much as Chipotle. Rather, it offers frequent promotions including the weekly Moes Monday deal on burritos.c. Can Chipotle Compete Effectively Against Taco Bell?Recently, Taco Bell introduced the Cantina Bell menu, which consists of new ingredients such as black beans, cilantro rice, and corn salsa. These new items seem to mimic more upscale chains including Chipotle, Moes, and Qdoba. With that being said, Taco Bell has not come close to being a true competitor of Chipotle. In September 2011, a survey found that it had the lowest score in terms of food quality and atmosphere. It has also experienced a decline in the amount of restaurants due to underperforming, which could be a result of people seeking a better alternative in Chipotle. Despite Taco Bells recent breakthroughs in their menu including the Doritos Locos Taco and their new breakfast menu, it seems that consumers now prefer the healthier and better quality option of Chipotle.VII.RecommendationsThere are a number of recommendations Chipotle can apply to have continued growth and success. First, they need to gain power over supplies rather than vice versa. They could achieve this by integrating backwards. Specifically, they can invest in theirown farms to cultivate products and raise meat to their specifications. Another option is to find more local suppliers by utilizing a team to conduct regional searches. Second, Chipotle could experience tremendous success in Western European countries such as France and Germany considering companies such as McDonalds and KFC have already penetrated those markets. Third, Chipotle should consider selling breakfast burritos or other meals that are quick and simple to make. By offering this at similar prices and on weekends, consumers may be more enticed to try it. Fourth, Chipotle can apply its business model to creating restaurants of other cuisines, like Shop House, at a time thats best suited for the company. This could greatly increase net profits and revenues in the long term. Last, Chipotle should continue to reach out to communities in restaurant locations. Specifically, they could partner with agricultural schools to provide student scholarships, and planting gardens in schools.VIII. AppendixSmall, Focused MenuHigh Quality Ingredients Such As Naturally Raised Meat and Organic ProduceCreate Efficient and Appealing Method of ServiceValuableAllows for fast serviceUniqueMost restaurants bombard you with options and a large menuex) Moes huge board with many entree, add on, and combo options.Hard to imitateThese items on the menu are tested and proven- competitors dont have the time or ability to test this concept and perfect the menuApplied to moreShop House- 2 successful locations in D.C. than 1 businessValuableThe Chipotle customer places a high value on quality of the ingredients in their products. They have high expectations, but Chipotle meats them with their Food with Integrity cultivation campaign.UniqueNone of Chipotles competitors have taken as strong of a stance nor have they moved as quickly to increase their efforts for sustainable, humane cultivation of their ingredients. Chipotle had and continues to lead the way in this area of fast-casual dining.Hard to imitateChipotle started with local farmers and has kept those long-term relationships to ensure that their competitors cannot gain an advantage in this area. This conversely gives Chipotles suppliers more power than some of our competitors, but that give Chipotle even more of a reason to continue to make moves that are in the best interest of everyone involved with the production and consumption of their products.Applied to moreShop House- 2 successful locations in D.C. than 1 businessValuableCustomers enjoy being able to walk through the line and watch their food being made. This ensures customer satisfaction; from the guy who hates cheese, to the woman who is a germaphobe, everyone can specify exactly what they want at Chipotle and the multi-skilled crew workers are prepared to handle it.UniqueMoes Southwest Grill offers a similar style of service to Chipotle, but they do not offer the same experience that Chipotle offers with their minimalistic approach to dining and preparation areas. This setting provides an experience that is unique to Chipotle.Hard to imitateMany of the large chain restaurants are moving towards a minimalist, chic design when they are constructing new establishments or renovating old ones. Often times, this change in decor or food style drives away long time customers who were happy prior to all the changes.This is something that Chipotle has made central to their image from the get go, so they do not have to worry about this.Figure 1: Core CompetenciesFriendly, Multi-Skilled Crew MembersApplied to moreShop House- 2 successful locations in D.C. than 1 businessValuableEveryone values being served quickly, thats a fact. But, Chipotle crewmembers not only serve their customers as efficiently as possible, they also do it with a smile.Chipotle crewmembers are trained at every position in the store so that they are able to jump in and help any other member at any time during prep or service.UniqueThe crew members paired with the serving style maximizes efficiency because the crew is energized and motivated to move customers through the line while working as a team.Hard to imitateCompetitors have a difficult time imitating this largely in part due to the distance between their associates. Chipotle only offers a few items, which allows them to have a short work line and a relatively small prep kitchen. Other restaurants, such as Moes have a much larger menu, which results in a longer working line and often times a separate kitchen. These expanded distances result in degraded communication and ultimately decrease efficiency.Applied to moreShop House- 2 successful locations in D.C. than 1 businessFigure 2: SWOT AnalysisInternal AnalysisWeaknesses Creating an experience Strong company cultureo Hires friendly & enthusiastic employees Distinctive interior & exterior designsSimple menu has improved efficiency and throughputFresh, natural, organic ingredients and cooking methods as part of its Food with Integrity CampaignMarketing and Accessibility Strengths Menu too limited?Will consumers watch short films? Dont offer promotions frequentlyo Farm Teamo How do we find out about them o Moes Monday10Figure 2: SWOT Analysis (Continued)External Analysis Opportunities International Expansion Shop House Kitcheno Applying business model to other cuisines Health trend may motivate suppliers to use more sustainable farming methods Increase suppliers for Chipotle Threats Fluctuations in crop yields & prices! Ingredients hard to find in high quantities could hurt image!Demand for eating at restaurants depends on economic and technological factorsFigure 3: Porters Five ForcesPorters Five ForcesThreat of New Entrants: Low Decent brand loyaltyHigh Barriers of entry leading to small pool of candidates for entryPower among Suppliers: HighDifferentiated products required Suppliers have shortages Suppliers have environmental requirements Competition among Rivals: ModerateFew close competitors Increasing customer demandModerately differentiated products Spend little time and effort competing Threat of Substitutes: ModerateSubstitutes not considered better qualityExperience is difficult to substitutPower among Buyers: Low Many individual customers Increasing customer demandLow cost of switching11Competition among Existing RivalsThreat of New EntrantsThreat of SubstitutesPower among BuyersPower among SuppliersModerate Chipotle incurs low numbers of competitors that are operating on the same scale. They are experiencing increasing customer demand. They spend little time and effort competing due to their revolutionary business model. Their products are moderately differentiated due quality ingredients, and most of all the experience.Low Chipotle has decent brand loyalty, which is common for differentiated products. There are high barriers of entry for large-scale operations such as Chipotle, which deter new entrants and results in a small pool of candidates for entry. Chipotle does not spend much effort competing due to the fact they are thriving in a business model that they essentially created.Moderate Price is not a factor among substitutes for Chipotle. Substitutes such as the products of Taco Bell are hardly comparable to Chipotle, and those who are do not offer an experience that exceeds Chipotles. Though customers do incur low costs of switching, there are few if any real substitutes for Chipotle.Low There are many individual customers for Chipotle, rather than a few large buyers. Chipotle is experiencing increasing customer demand. Customers incur low costs of switching to substituteproducts, but they are not always available.High Suppliers have differentiated products that are central to the Chipotle mission and thus its products. Different ingredients are in short supply at various times of the year due to growing seasons, and even natural disasters. Chipotle also limits the number of their suppliers because they have a set of environmental and humanitarian requirements to ensure their mission is being met at every step of production.Figure 4: Porters Five Forces in More Detail12Figure 5: Financial & Operating RatiosRatio20112010200920082007Gross Profit MarginOperating Profit Margin15.45%15.68%13.42%9.31%9.96%Net Profit Margin9.47%9.75%8.35%5.87%6.50%Return on Assets15.29%15.98%13.23%9.84%9.81%Net ROA15.08%15.96%13.19%9.48%9.77%Return on invested capital16.95%17.92%14.76%10.45%10.88%ROE20.58%22.07%18.03%12.56%12.55%EPS (basic)6.895.733.992.392.16Current3.183.302.912.752.75Working Capital343,739283,167195,301134,284128,543Debt to assets0.270.280.270.250.22Longterm debt to capital0.180.190.180.170.13Debt to Equity0.360.380.370.330.28Times interest earned119.041070.00502.9841.32365.48Internal cash flow289,883247,902188,153130,972114,158Financial Statement InfoRevenue22695481835922151841713319681085782Operating Expenses1918986154809113147121207929977599Operating Income350562287831203705124039108183Interest expense29452694053002296Income before taxes349705289061204225127206114002Provision for income taxes134760110080773804900443439Net income2149451789811268457820270563Total current assets501192406221297454211072201844Total assets14253081121605961505824985722115Current Liabilities1574531230541021537678873301Liabilities381082310732258044202395160005Equity1044226810873703461622590562110Net cash provided by oper act.411096289191260673198507146923Capital Expenditures151100113200117200152100141000Depreciation749386892161308527704359513Works CitedArthur A. Thompson, Chipotle Mexican Grill in 2012: Can It Hit A Second HomeRun? in Crafting & Executing Strategy, ed. 19 (New York: McGraw-Hill, 2012),p. C-114-121.14