Chipotle Strategic

Analysis Competitive Position, Analysis, and Recommendations

David James

Table of Contents

I. Executive Summary ............................................................................................... 2

Introduction

Competitive Analysis

Environmental Trends Influencing the Industry

Industry Structure and Dynamics

Organizational Capabilities

Sustainability of Competitive Position

II. Recommendations ................................................................................................. 5

III. Appendix ................................................................................................................ 6

Exhibit 1: Growth Comparisons

Exhibit 2: SWOT Analysis

Exhibit 3: Strategic Groups

Exhibit 4: Competitor Financials

References

CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 2

Executive Summary

Introduction

Chipotle Mexican Grill is a restaurant chain in the fast-casual sector, focusing on serving food sourced from

sustainable farming practices—including meat product that is responsibly raised in humane ways without

antibiotics or hormones. “Food With Integrity” is the phrase that captures the firm’s philosophy.[1]

Research firm Technomic Information Services defines "fast-casual restaurants" as meeting the following

criteria:

Limited-service or self-service format

Average meal price between $8 and $15

Made-to-order food with more complex flavors than fast food restaurants

Upscale, unique or highly developed decor

Most often will not have a drive thru

The fast-casual sector is positioned between fast food restaurants like McDonalds and table-service casual

dining experiences like Denny’s or IHOP. The sector aims to provide a higher quality experience than fast

food and more convenience than a table dining service.[2]

Competitive Analysis

Exhibit 2’s SWOT Analysis reveals that among Chipotle’s strengths are strong brand image and a loyal

customer following that Chipotle leverages to spread word-of-mouth viral marketing campaigns, such as

“The Scarecrow” video, with its associated mobile game. Chipotle’s marketing expertise gives it a distinct

competitive advantage—in less than a week after the campaign release, the video had attracted 3.1 million

views on YouTube, almost 20,000 likes, and more than 4,000 comments. It was picked up by countless media

sources (Slate, the Christian Science Monitor, NPR).[3]

Strategic Groups—as depicted in Exhibit 3—show that the fast-casual dining sector has found a niche that

overlaps some established table-service diners like Denny’s and IHOP. Chipotle offers a similar quality for

about the same price, but with a much higher convenience factor both in terms of throughput time and menu

personalization options.

Exhibit 4 shows a list of competitors from the fast-casual space as determined by Google Finance and shows

that Chipotle has significantly higher market capitalization, revenues and income than rivals. It also has zero

debt, meaning that unlike most competitors, earnings are not used to service interest on debt.

Environmental Trends Influencing the Industry

According to one NRA (National Restaurant Association) survey, 43% of American adults report that they

are not using restaurants as much as they would like in their daily lifestyle. This translates into three key

trends that Chipotle can exploit:

1. Consumers are showing a growing interest in the origins of their food and how it is raised. Based on

its own research, Chipotle believes that as consumer awareness of ethical farming practices and

CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 3

responsible animal welfare rises, it will nurture higher long-term demand for sustainably grown

foods.[4]

2. The US Census Bureau states that 25% of the US population is of Hispanic descent, amounting to

over $600B purchasing power. Restaurants like Chipotle that offer Southwestern cuisine are well

positioned to extract value from this strong demographic.[5]

3. The target “Generation-Y” demographic has entered the workforce at a challenging economic time

and many will rely on dual income. Time-saving, healthy and ethically sourced convenience foods are

proving an attractive option.[6]

Industry Structure and Dynamics

The NRA forecasts 2014 restaurant industry sales will be $683.4B, up 3.6% from 2013. According to research

firm Technomic, the fast-casual segment leads growth within the US restaurant industry with an 11% increase

over 2013. With efficient service, attractive atmosphere and fresh, "made for you" appeal, fast-casual

restaurants cater to the needs of today's consumer. Exhibit 1 shows that Chipotle enjoys the highest growth

rate among peer leaders.

Consideration of Porter’s Five Forces, as applied to the fast-casual industry, reveals that the limited number

of suppliers for Chipotle’s ethically raised food gives suppliers more pricing power than those servicing other

restaurants. This places a higher cost burden on Chipotle. However, as the recent menu price hike shows,

customers are willing to pay higher prices for Chipotle’s offerings without complaint, suggesting buyers have

low bargaining power.[7] The threat of entry into the market is high, since no specialized expertise is required,

sunk costs are low, and startup capital is modest compared to other industries. However, Chipotle’s first-

mover advantage has helped it build close relationships with ethical suppliers and gain control of resources

that presents a barrier to imitators. Threat of substitution exists from other types of fast-casual restaurant that

offer specialty baking, like “Panera Bread”, or special-order burgers like “Smashburger”, but neither offers

the unique combination of healthy, ethically-made food that Chipotle’s customers crave.

Organizational Capabilities

Chipotle has a carefully crafted people culture that emphasizes hiring and training the right employees for

performance. The hands-on training and promotion from within, develops strong, empowered teams. Food is

prepared fresh and in small batches throughout the day and the focused menu provides preparation time

efficiencies.[8]

The “Four Pillars of Great Throughput”[9] is an internal process that helps manage order transaction time

and provides Chipotle with operational efficiencies that are difficult for competitors to match:

Aces in their places—top servers on the front lines

The linebacker—replenishes food and supports the Aces

The expediter—bundles orders, prepares chips and drinks

Mise en place—“everything in its place” (French), meaning all ingredients and utensils are ready to

hand.

CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 4

Sustainability of Competitive Position

Chipotle uses a Differentiation Strategy that generates rents from higher consumer willingness to pay—as

evidenced by the recent price rise that did not impact record earnings. Other evidence suggests the

competitive position for Chipotle is sustainable:

Differentiated product positioning

Operational efficiencies

People culture based on performance

Growth that far outpaces the fast-casual sector and the restaurant industry in general

Growing sector with large target audience

CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 5

Recommendations

Chipotle should focus on the following areas to improve its competitive position:

Continue strengthening relationships, and defining long-term contracts with existing suppliers of

ethically grown and raised product. This will raise barriers to entry, making it more challenging for

followers to enter Chipotle’s differentiated niche.

Source new ethical suppliers, so that as Chipotle continues to grow, it can meet demand and ensure

the entire menu is ethically sourced.

Raise the bar for what the market expects a sustainable restaurant to offer, for example:

- Ramp up the use of recycled and green materials in store construction, and focus on

recycling store waste to produce compost for locally grown herbs, for example.

- Consider ways of recycling water used in cleaning processes and repurposed for restroom

flushing.

Changes such as these will raise expectations of what a restaurant must do to be trusted as a provider

of sustainable ideals and values. It will deepen customer loyalty and align even closer with the values

of the target customers—making it much more unlikely that customers will seek alternatives since the

emotional bond will be strengthened.

Leverage the success of the Scarecrow campaign and work on more innovative content marketing

projects. As a media publishing empire, Red Bull used its content marketing prowess to help it sell

over 5.3 billion cans of energy drink in 2013[9]. Chipotle can follow their lead by opening a media

division to focus on targeted content to change perceptions about sustainable living.

Use the “Food With Integrity” philosophy to diversify into other food segments such as chicken and

bakery-café.

Home delivery is an area worth considering for Chipotle, especially with giants like Amazon getting

involved in the space, and having the potential to influence mainstream perceptions about

convenience of service.

CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 6

Appendix

Exhibit 1: Growth Comparisons

Exhibit 2: SWOT Analysis

Strengths Weaknesses

Brand loyalty

High margins

Menu personalization options

Social & content marketing mastery

Performance based culture

Career incentives

Close supplier relationships

Limited menu

Not authentic Mexican food

Higher costs associated with sustainable ingredients

Opportunities Threats

Capitalize on “Fast-Casual” sector growth

Home delivery

Menu diversification

New restaurant categories

Media powerhouse

Raise the bar to bolster a stronger “green” message

Insufficient sustainable suppliers to cover demand

Relatively low barriers to entry for new entrants with strong stories

Bad PR e.g. 2010 audit revealed illegal workers

Loss of trust if “Integrity” message is violated

0

2

4

6

8

10

12

14

16

18

US Restaurants Fast-casualSegment

Panda Express Panera Bread Chipotle

2012 - 2013 Growth Comparisons (%)

CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 7

Exhibit 3: Strategic Groups

Exhibit 4: Competitor Financials

Valuation

Financial ratios

Operating metrics

Margins Income statement

Company name Earnings per share

Mkt Cap Total debt to equity

Return on avg equity

Operating margin

Revenue Net income

CMG Chipotle Mexican ... 11.34 20.89B 0 23.52 16.57 3,214.59 327.44

FRGI Fiesta Restaurant... 0.53 1.19B 46.77 10.65 5.64 551.34 9.26

JACK Jack in the Box Inc. 2.1 2.29B 78.45 18.69 9.28 1,489.87 82.61

DENN Denny's Corporation 0.26 547.77M 2,052.82 1,237.57 10.03 462.59 24.57

DPZ Domino's Pizza, Inc. 2.69 4.09B 17.41 1,802.22 142.98

COSI Cosi Inc -0.66 22.79M 0 -136.61 -13.35 86.33 -11.44

PZZI Pizza Inn, Inc. -0.22 65.32M 41.6 -18.11 -3.93 41.86 -1.12

PZZA Papa John's Int'l... 1.57 1.82B 119.79 42.92 7.4 1,439.02 72.98

NROM Noble Roman's, Inc. 0.04 31.88M 32.91 6.64 37.85 7.53 0.87

FRSH Papa Murphy's Hol... -0.12 150.33M 501.11 11.06 80.5 -2.59

MRFD Morgan's Foods, Inc. -0.28 20.21M 3.56 86.87 -0.14

CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 8

References

[1] Chipotle 2013 Annual Report pg 3.

[2] Wikipedia: http://en.wikipedia.org/wiki/Fast_casual_restaurant.

[3] Anne Handley: www.linkedin.com/today/post/article/20130915181453-6474349-the-biggest-marketing-

lesson-from-chipotle-s-scarecrow-video-and-it-s-not-to-start-with-a-billion-dollars-and-fiona-apple.

[4] Annual Report pg 4.

[5] http://www.wikinvest.com/stock/Chipotle_Mexican_Grill_(CMG).

[6] http://www.nydailynews.com/life-style/eats/chipotle-wendy-burger-king-popular-generation-y-

consumers-article-1.950366.

[7] http://www.huffingtonpost.com/2014/07/21/chipotle-earnings_n_5607268.html.

[8] Annual Report pg 6.

[9] http://en.wikipedia.org/wiki/Red_Bull