Chipotle (CMG) is a Mexican grill restaurant with a limited menu and high degree of meal customization. The restaurant first opened in 1993 and currently has over 1700 stores in the U.S. and abroad. McDonald’s (MCD) had a controlling interest in the restaurant in the early 2000s but divested after Chipotle’s IPO in 2006. Since the IPO, Chipotle’s stock has risen from $42 to over $650 and is still considered to be a long-term investment opportunity.
“Food with Integrity”
Chipotle’s motto of “food with integrity” was inspired by what founder Steve Ells learned about American food production. Ells became committed to serving food that was ethically and naturally produced, which Chipotle claims results in meat that is tastier than what other restaurants serve. In 2013, Chipotle instituted a no-GMO policy for its ingredients.
Consumers agreed. Despite higher food costs that caused Chipotle to raise its prices in 2014, same-store sales grew by 16.8 percent, store margins rose to 27.2 percent and net income increased by 36 percent. Chipotle opened 192 new stores in 2014 and hopes to open another 200 in 2015.
Why? As books and documentaries exposing the negative sides of the fast food industry became popular, Chipotle’s sales and profits grew. Consumers who wanted healthy food weren’t ordering salads at McDonald’s and Wendy’s (WEN), looking instead for naturally-raised or organically-produced food. (For more, see: Feed Your Appetite For Chipotle Stock with Options.)
Small Menu, Big Choice
One of the keys to Chipotle’s success is its small menu. A smaller menu has three benefits. First, since Chipotle only stocks fresh ingredients, there is always a chance of food spoilage. The small menu reduces the number of ingredients needed on-hand, thus reducing the likelihood of waste.
Second, small menus mean quick service. At other fast food restaurants, the kitchen can get overwhelmed by the orders and can make mistakes. At Chipotle, mistakes are almost impossible: order a soft taco, choose the fillings and pay. If the employee forgets to add beans, the consumer is watching and can point out the omission. It’s easy and fast and consumers love it.
Finally, a small menu also means that customers know exactly what’s for sale each time they visit the restaurant. Chipotle doesn’t need to develop new products or create flashy advertisements to let consumers know its offerings, and consumers aren’t disappointed by the disappearance of a product after a trial or promotion period.
It may be thought that small menus are bad: why would consumers want to have their choices limited? Chipotle has thought of that, and its policy is to make anything the consumer wants if the materials are available. This policy has led to the creation of the Quesarito, Chipotle Nachos and many more secret menu items.
Since Chipotle has no franchises, the company is able to maintain tight control over all aspects of its operations. Although Chipotle could grow faster with franchises, it would risk losing control over its suppliers, taste and culture.
It’s not a secret that franchisees sometimes cheat by buying ingredients from a cheaper supplier or by trying to cut employment costs, making it difficult to hire excellent workers. By owning all the Chipotle stores, the company can ensure that from location to location, the design, taste and price are identical, more so than they would be if the restaurants were run by franchisees.
The Bottom Line
Steve Ells admits that he did everything wrong when he opened Chipotle: his design was minimal, his food too expensive, his portions too large. Twenty years later, the company has a market cap of $20.33 billion and reported $4.11 billion in revenue in 2014. By doing “wrong” by the fast food world and “wrong” by the sit-down restaurant world, Chipotle has become a hybrid restaurant that serves quick and delicious food at good prices.