1st Prize A BURRITO WITHOUT INTEGRITY:
IS THIS CHIPOTLE FOR ME?
Vijaya (Narapareddy) Zinnoury, PhD.,
(Daniels College of Business
University of Denver, USA)
Inspection Copy This is an Online Inspection Copy. Protected under Copyright Law. Reproduction
Forbidden unless Authorized. Questions relating to permission should be directed to the author.
Copyright © 2017 by the author. This case was prepared as a basis for class discussion rather
than to illustrate the effective or ineffective handling of an administrative situation.
oikos Case Writing Competition 2017 Sustainable Finance Track
oikos case competition http://www.oikos-international.org/cases
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ABURRITOWITHOUTINTEGRITY:ISTHISCHIPOTLEFORME?
AbstractThiscase,developedprimarilyfromsecondarysources,describesthefoundingofChipotleMexicanGrill(Chipotle,hereafter)in1993bySteveEllsanditsrapidascenttopopularityasafast-casualrestaurantbasedonitsuniquesociallyresponsibleFoodwithIntegritystrategy.Undertheleadershipoffounder-CEOSteveEllsandco-CEOMontgomeryMoran,ChipotleoutperformedtheS&P500aswellasitsrivalssinceitsIPOin2006.However,in2015,themultiplefoodcontaminationoutbreaksreverseditscourse,plungingitsstockpricetoanall-timelow.InspiteofthepromptactionstakenbyChipotle’sleadership,thecompany’sstockpricedidnotregainitspre-scandalhighsinthestockmarket.However,onSeptember6,2016,newsofactivistinvestor,BillAckman’spurchaseof9.9%ofChipotle’sstockgaveamuch-neededboosttoChipotle’sdepressedstock.Thiscasegivesstudentstheopportunitytostepintotheshoesofayoungindividualinvestor,MichaelJacobs,toassessthepotentialimpactofAckman’sinvestmentonthecompany’sstrategyandperformanceanddecidewhetherornotheshoulddivesthisChipotleholdings.
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Case
ChipotleMexicanGrill(Chipotle,hereafter)wasinthenewsagain.OnNovember18,2016CNBC’sNightlyBusinessReportreportedthatactivistinvestorBillAckmanofPershingCapitalandChipotlehadsignedaconfidentialityagreementthatwouldgiveAckmanaseatonChipotle’sBoard.1
Ackmaninvested$1.2billiononSeptember6,2016.Thispurchaseofabout2.88millionshares,or9.9%ofChipotle’sstockbyAckman’sPershingSquareCapital,gaveanemphaticboosttoChipotle’sstock,ignitingitsrisebyapproximately5.8%to$438.27theverynextday.Thus,mediaanalystsandinvestorsbeganthedebateaboutChipotle’sfuture.
Amongthemwas35-yearoldMichaelJacobswhowasaself-madeentrepreneurandadiligentinvestorbentonmakingmillionsbeforeretiringin15years.HehadinvestedinChipotle’sstocknotonlybecauseofitsuniquepositioningduetoitssociallyresponsiblestrategy,butalsobecauseofthehighgrowthithaddemonstrated.But,Ackman’sinvestmentinChipotleraisedquestions.HowwouldthisnewinvestmentimpactChipotle’sstrategyandrevival?WouldAckmanpressureChipotle’sleadershiptoseverelycutcostsintheshorttermandjeopardizethecompany’slong-termperformance,aspunditshadpostulated?AsanentrepreneurwithbusinessexperienceintherestaurantindustryinCalifornia,USA,JacobswonderedtowhatextentAckmanwouldinfluenceChipotle’sstrategyandbusinessmodelwhichwasbuiltuponastrongfoundationofenvironmentalstewardship.
CHIPOTLE’SHISTORYANDDEVELOPMENT
Chipotlewasnostrangertobeinginthelimelight.Undertheleadershipoffounder-CEO-Chairman,SteveElls,andhisco-CEO,MontgomeryMoran,theChipotlebrandgrewintoahighlyattractivefastcasualrestaurantchain.ItsenviablepositionintheU.S.wastheresultofitsuniquestrategyknownasFoodwithIntegrity,whichreflectedElls’passion2forsustainablesourcingofqualityfoodsupplieslocally.Atatimewhentheterm“sustainability”waslittleknown,positioningtherestaurantusingthisdistinctivestrategygaveChipotlesignificantfirst-moveradvantages.Saleshadgrownto$5billionin2015from$820millionsinceitsInitialPublicOffering(IPO)in2006.Theoverwhelmingdemandforthecompany’ssharesonthefirstdayofits2006IPOresultedinthedoublingofthestock’svaluethatday,makingitthemostlucrativeIPOsince2000.StevenElls,agraduateoftheUniversityofColorado,Boulder,andtheCulinaryInstituteofAmericainHydePark,N.Y.,foundedChipotlein1993afterworkingataSanFrancisco 1http://nbr.com/2016/11/18/bill-ackman-could-soon-have-a-say-in-chipotles-boardroom/2See "Back to the Start" (2:19 minutes) https://www.youtube.com/watch?v=aMfSGt6rHos&nohtml5=False
ThisshortvideoclipcapturesthecontextbehindSteveElls’passionforenvironmentalstewardshipandhis“FoodwithIntegrity”strategy.
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restaurant.Asalinecookearning$12anhour,Ellsfoundhimselfregularly“dining[on]giantburritosatTaqueriasintheMissionDistrict.”3Duringhislunchhours,thelonglineofcustomerswaitingforMexicanfoodday-in[and]day-outsparkedtheideaofstartinghisownMexican-themedrestaurant.ItwasnotuntilJuly13,1993thatEllswasabletoopenhisfirstrestaurant.Armedwithaloanof$75,000fromhisfather,EllsleasedaspacepreviouslyoccupiedbytheDollyMadisonicecreamshopneartheUniversityofDenvercampusinDenver,Colorado,madetherenovationshimselftotheproperty,andopenedhisfirstrestaurant.Therestaurantwasaninstantsuccessgenerating$450onopeningday,$800thenextday,and$1000onadayshortlythereafter.Withinsixmonths,salesperdaygrewto$3,000.4ThishighgrowthfueledbyElls’novelconceptattractedtheattentionofMcDonald’swhichtookaminoritystakeinChipotlein1998,followedbyamajoritystakein2001.ThecapitalinfusionfromMcDonald’sallowedEllstoexpandfromsixteenrestaurantsin1998toover500byOctober2006,whenMcDonald’sliquidateditsequityinthecompany.McDonald’swasrumoredtohavereapedover416%returnonits$360millioninvestmentinChipotle.SociallyResponsibleStrategyEllsenteredthehighlycompetitiveandfragmentedquickservicediningindustrywithasociallyresponsiblestrategythathenamed,FoodwithIntegrity.Hewasthefirstintheindustrytocommittoonlyservingmeatsfromanimalsthatwerenotraisedusingnon-therapeuticantibioticsandgrowthhormones.Dairyproducts,likecheeseandsourcream,wereobtainedfrommilkproducedbypasture-raisedcows.PurchasingingredientsfromfarmersusingsustainablefarmingpracticesreflectedElls’loveforpromotinganimalwelfareandenvironmentalsustainability.SimilarhighstandardswereenforcedwhenChipotlepurchasedmostlyorganically-grownproducefromfarmerswithinaradiusof350milesfromtherestaurantwheretheproducewasserved.Thiscombinationofservingtraditionallycookedfoodwithhighqualitylocally-growningredientsinaquickserviceenvironmentwhileprovidinganinteractivediningexperienceblazedthepathtoChipotle’ssuccess.Therestaurantchain,whichexpandedthroughthestrategyofcompany-ownedstores,attractedcelebritiesanddignitaries,includingPresidentObama.Usingthesamequickserviceconcept,ChipotleopenedthirteenChopHouseSoutheastAsianKitchenrestaurantsservingAsiancuisine,aswellasthreePizzeriaLocalerestaurantsspecializinginpizzaandItalianfoods.Products AkeyadvantagethatChipotlehadovercompetitionwasitsfreshingredients,localsourcing,healthycookingpractices,andeaseofordering.Chipotleofferedavarietyofmenuchoicesfromwhichcustomerscouldchoose.Whenorderingfood,patronscouldcreatetheirownburritowiththeirchoiceofmeats,vegetables,beans,rice,salsa,guacamole,cheeseorsourcreamwrappedinsideaMexican-stylewholewheattortilla(aflatbread)richinfiber.Alternatively,customerswhopreferredagluten-freedietcouldhavetheirfoodservedinabowlwithoutthetortillaandstillreceiveingredientsoftheirchoice.Othermenuchoicesincludedcrispycorntacos,softcorntacos,softflourtacosorsalads.Allingredientswere
3https://web.archive.org/web/20080403013733/http://rockymountainnews.com/news/2006/dec/23/chipotle-founder-had-big-dreams/;retrievedonMarch17,2016.4Ibid.
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openlydisplayed.Severalstaffmembersstandingontheoppositesideofthedisplaycounterfilledtheordersinrealtimeascustomerschosethemainandsideitemswhilemovingdownthelinetowardsthecashregister.Thisopen-kitchenconceptnotonlyshortenedthewaittime,butalsogavecustomersthechancetofeastontheattractivedisplayofthefreshingredientswhiletheirtastebudsreceivedstimulationfromtheexcitingflavorsthatdriftedfromthefreshlymademenuitems.ComparedtootherAmericanquickservicechains,suchasKentuckyFriedChicken(KFC)andMcDonald’s,thefoodChipotleofferedwasfreshlypreparedintherestaurant,nutritious,wholesome,andobtainedfromsustainablesources.ThisnovelmenuconceptbecameChipotle’ssourceofcompetitiveadvantageasbusyyoungprofessionalsandmillennialsweredrawntotheconvenienceofhome-style,high-qualityfoodwhichofferedarangeofchoicesatcompetitivepriceswithoutlongwaittimes.EmployeesBytheendof2015,Chipotlehadatotal59,330non-unionizedemployees,5,100ofwhomweresalariedemployees.Theremaining54,230werehourlyworkers.Thecompanyhiredonlyhigh-performingemployeesandpromotedgeneralmanagersfromwithintheorganizationtoensurethatemployeesembracedthecorporateculture,passion,andvisionwhileworkinginahigh-performanceworkenvironment.ConsistentwithElls’passionforsustainabilityandsocialresponsibility,ChipotleenteredintopartnershipwithLoomsdale,asustainableclothingcompanythatalsoengagedinsociallyresponsibleproductionmethods.Chipotle’semployeesworeorganiccottontee-shirtsandhatsmadebyLoomsdale,whichalsomadeChipotlemerchandise(graphictees,polos,andwovenshirts)whichwassoldonlineandinthestores.PerformanceIn2014,Chipotlerankedfifthinworldwidesales,behindMcDonald’s,Subway,andYumBrands(seeExhibit1).Withsalesof$27.44billion,McDonald’swasthelargestplayerintheindustry.Subwayrankedaclearsecondwith$20billion,whereasYumBrandsandChick-fil-Arankedthirdandfourth,respectively.Chipotle,whichcameinfifthinthiscompetitivesegmenthadsalesof$4.11billionin2014–approximately15%ofMcDonald’srevenues.Chipotlewasalsorankedfifthamongthetoptenmostvaluablequickservicebrandsin2015(seeExhibit2).ThisbrandrecognitionwasconsistentwithitsmarketshareintheUnitedStates.Statista5reportedthatwithamarketshareof2.2%intheU.S.,Chipotlerankedfifthin2015,onlybehindMcDonals’s,YumBrands,Subway,andWendy’srespectively.ThisisnoteworthyasthereweresignificantdifferencesbetweenChipotleanditskeycompetitorsinstrategyandsupplychainpractices.Additionally,whileChipotleexpandedthroughcompany-ownedstores,companieslikeMcDonald’sandBurgerKingbecameglobalbrandsthroughfranchising.
5http://www.statista.com/statistics/196611/market-share-of-fast-food-restaurant-corporations-in-the-us/
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Exhibit1:GlobalSalesOfTop10QuickServiceRestaurantChains
(Source:Statista)
Rankin2014 RestaurantChainNameSales(BillionsOfUS$) Sales
Growth2014 2015
1 McDonald's 27.44 25.41 -2.03
2 Subway 20.00 19.20 -0.80
3 YumBrands 13.28 13.11 -0.17
4 Chick-fil-A 6.00 5.70 -0.30
5 ChipotleMexicanGrill 4.10 4.50 0.40
6 TimHortons 3.16 2.96 -0.20
7 Wendy's 2.06 1.87 -0.19
8 Domino'sPizza 1.99 2.22 0.23
9 PapaJohns 1.75 1.64 -0.11
10 JackintheBox 1.45 1.54 0.09
Exhibit2:MostValuableQuickServiceBrandsWorldwidein2015(Source:Statista)
Chipotlestoodoutfromitscompetitorsbecauseofitsstrongcommitmenttoenvironmentalsustainabilityandsocialresponsibility.FounderElls’culinarybackgroundinfluencedthewayfoodwaspreparedattheChipotlerestaurants.Itwaspreparedinthekitchenusinghighqualityfreshingredientsandtraditionalcookingmethods.Despitethehighcostsofobtainingtheseingredientsfromlocalfarmerswhousedsustainablepracticesaswellasusingorganicingredientswhereverpossible,Chipotleachievedstrongprofitperformance.Thecompany’sindexedperformance(seeExhibit3)indicatedthatitoutperformedtheS&P500IndexandtheS&P500RestaurantsIndexfrom2010through2015.Chipotle’sDebt-Equityprofile(seeExhibit4)revealedthat,asof2013,ithadraisedallthecapitalneededbyissuingstockratherthanthroughdebt.Thiszero-debtstrategywasmaintainedin2015,aswell.ThevalueChipotlehadcreatedforitsshareholderswasalsoevidentfromtheBalanceSheetdata(seeExhibit5).ThisexhibitshowedthatChipotle’sshareholderequitygrew203.7%,fromapproximately$1.04billionin2011to$2.13billionin2015.Thecompany’s
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Profit&Lossstatement(seeExhibit6)indicatedthatcostofrevenue(i.e.,costoffoodanddirectlabor)wereoneofthemajorexpendituresinoperations.Yet,Chipotle’sprofits(i.e.,NetIncome)morethandoubledbetween2011and2015.Exhibit3:ComparisonofCumulativeTotalReturns,2010-2015(Source:Chipotle’sSEC10-Kfilings)
Exhibit4:Chipotle’sDebt-Equityin2013(Source:MorningstarInvestmentResearchCenter)
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Exhibit5:Chipotle’sConsolidatedBalanceSheet,2011-2015Source:MorningstarFiscalyearendsinDecember.USDinmillionsexceptpersharedata. 2011 2012 2013 2014 2015Assets Currentassets Cash Cashandcashequivalents 401 323 323 419 248Short-terminvestments 55 150 255 339 415Totalcash 456 473 578 758 663Receivables 8 17 24 35 38Inventories 9 11 13 15 15Deferredincometaxes 6 9 13 19 Prepaidexpenses 21 27 34 35 40Othercurrentassets 10 4 16 58Totalcurrentassets 501 547 666 878 815Non-currentassets Property,plantandequipment Grossproperty,plantandequipment 1122 1312 1491 1721 1938AccumulatedDepreciation -370 -445 -527 -614 -721Netproperty,plantandequipment 752 867 963 1107 1217Equityandotherinvestments 128 191 314 496 623Goodwill 22 22 22 22 22Otherlong-termassets 22 43 44 43 48Totalnon-currentassets 924 1122 1343 1668 1910Totalassets 1425 1669 2009 2546 2725Liabilitiesandstockholders'equity Liabilities Currentliabilities Capitalleases 0 0 Accountspayable 46 59 59 70 86Taxespayable 16 18 23 16Accruedliabilities 77 128 91 105 179Othercurrentliabilities 18 32 48 Totalcurrentliabilities 157 187 199 246 280Non-currentliabilities Capitalleases 3 Deferredtaxesliabilities 64 49 55 41 32Deferredrevenues 143 Otherlong-termliabilities 16 184 216 248 285Totalnon-currentliabilities 224 236 272 288 317Totalliabilities 381 423 471 534 597Stockholders'equity Commonstock 0 0 0 0 0Additionalpaid-incapital 677 817 920 1039 1173Retainedearnings 671 949 1277 1722 2198Treasurystock -304 -522 -660 -749 -1235Accumulatedothercomprehensiveincome 0 1 2 0 -8Totalstockholders'equity 1044 1246 1538 2012 2128Totalliabilities&stockholders'equity 1425 1669 2009 2546 2725
(1) DataadjustedtoconformtotheFinancialAccountingStandardsBoardAccounting(FASBA)standardsthatrequireddeferredtaxliabilitiesandassetstobeclassifiedasnon-current.
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Exhibit6:ChipotleMexicanGrillConsolidatedProfit&LossStatement,2011–2015
FiscalyearendsinDecember.USDinmillionsexceptpersharedata. 2011 2012 2013 2014 2015Revenue 2270 2731 3215 4108 4501
Costofrevenue 1680 1991 2360 2991 3327
Grossprofit 589 740 855 1118 1174
Operatingexpenses
Sales,Generalandadministrative 158 195 219 290 267
Otheroperatingexpenses 81 89 103 117 144
Totaloperatingexpenses 239 284 322 407 411
Operatingincome 351 456 533 711 764
InterestExpense 3
Otherincome(expense) 2 2 2 4 6
Incomebeforetaxes 350 458 534 714 770
Provisionforincometaxes 135 180 207 269 294Netincomefromcontinuingoperations 215 278 327 445 476
Netincome 215 278 327 445 476Netincomeavailabletocommonshareholders 215 278 327 445 476
Earningspershare
Basic 6.89 8.82 10.58 14.35 15.3
Diluted 6.76 8.75 10.47 14.13 15.1Weightedaveragesharesoutstanding
Basic 31 32 31 31 31
Diluted 32 32 31 32 31
EBITDA 428 540 629 821 894Source:Morningstar
Inspiteofthehighlycompetitivenatureoftheindustry,industrystatistics(seeExhibit7)indicatedthatrevenuesofthequickserviceindustryintheU.S.grewfrom$159.2billionin2002to$198.9billionin2014.This$40billionrevenuegrowthintheindustrymayhavehelpedChipotlebecomeahouseholdname,butthecompany’sstrategicsiteselectionalsocontributedtoitssuccess.Chipotlerestaurantswerelocatedinornearseveraltypesoflocationsincluding:collegesanduniversities,stripmalls,localandregionalmalls,downtownbusinesscenters,free-standingbuildings,foodcourts,trainstations,militarybases,andairports.Thesiteselectionprocesswasmanagedbyaninternalteamwiththehelpoflocalrealestatebrokers.On-sitevisitsweresupplementedbyrigorousanalysesoftrade,business,anddemographicdataaswellasthepresenceofdirectandindirectcompetitorsalreadylocatedinthearea.
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Exhibit7:RevenuesoftheU.S.Quickserviceindustry,2002-2014(Source:Statista)
Chipotledemonstratedstrongvaluetoitsinvestors.The10-yeargrowthof$10,000investedinChipotlebetween2006andmid-2016outpacedgrowthratesintherestaurantindustryaswelltheS&P500(seeExhibit8).Exhibit8:Growthof$10,000investmentfrom2006toNov31,2016
CMG=Chipotle.Source:MorningstarInvestmentResearchCenterChipotle’sstockpricehadoutperformedcompetitorslikeMcDonald’sandYumBrands(seeExhibit9).
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Exhibit9:StockPriceTrendsofChipotleandCompetitors,Dec1,2006–Dec.1,2016Source:MorningstarInvestmentResearchCenter
CMG:Chipotle;MCD:McDonald’sCorp;YUM:YumBrands,Inc.;SBUX:StarbucksCorp
FOODCONTAMINATION
Inlate2015,Chipotleencounteredmajorfood-borneillnesses,includingE-coliandSalmonellaoutbreaksinitsmultiplerestaurantsintheU.S.ThefirstcontaminationoccurredonAugust20,2015inaChipotlerestaurantinCalifornia.Onthefirstday,17employeesatthatrestaurantwerereportedtohavebecomeillfromthenorovirus,whichwasidentifiedasthesource.AccordingtotheEnvironmentalHealthDivisionofVenturaCountyinCalifornia,atotalof234individualswereaffectedbythefoodcontaminationoutbreakthatsurfacedataChipotleRestaurantinSimiValley,Californiaeventhoughthenumberreportedbythenewsmediawasconsiderablyless.HealthofficialswhohadinspectedtherestaurantonAugust24foundmultipleviolationswhichledto“morestringenthand-washingpolicies”attherestaurant.Similaroutbreaksoccurredinotherstates,includingMassachusettsontheeastcoast.Thenewsofthecontaminationsentreverberationsthroughthestockmarket.Chipotle’sstockpriceplungedfrom$757to$475.Thesuddenlossof$8billioninvaluepromptedclassactionlawsuitsfrominvestorsinJune2016,claimingthatChipotlehadfailedtorevealthatitsqualitycontrolswereinsufficienttosafeguardconsumerand employeehealth.Chipotle’sResponseChipotle’sleadershiprespondedswiftlytothefoodcontaminationcrisisfollowingthereceiptofthefirste-mailfromtheill-fatedCaliforniarestaurantonAugust20,2015.Chipotle’sco-CEOsEllsandMoranfranticallytriedtoturnthecrisisaroundthroughavarietyofmeasuresfromsendingreplacementstocoversickemployeestorestaurantclosures,newtrainingproceduresimplementingstricterhandwashing,andfoodsafetyproceduresatallrestaurants.Employeeswerenolongerallowedtobringpersonalitems,includingcellphones,nearfoodpreparationandhandlingareasinrestaurants.Newtrainingmanualswerepreparedforemployeesassociatedwithfoodpreparationandserving.Co-CEOEllswastednotime.Therestaurantchainranadvertisementsinmajornewspapersapologizingforthefoodcontaminationthatsickenedscoresofcustomersandemployeesinsomestates.Ellsalsoapologizedtothosedirectlyaffectedbythefood-borneillness.Inhismessage,henoted:“Fromthebeginning,allofourfoodsafetyprogramshavemetor
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exceededindustrystandards…Butrecentincidents,anE.colioutbreakthatsickened52peopleandanorovirusoutbreakthat sickenedapproximately140peopleatasingleChipotlerestaurantinBoston,haveshownusthatweneed todobetter,muchbetter.”Inanattempttoregaintheconfidenceofitsconsumersandthepublic,Chipotleissuedcouponsforfreefoodandalsosuppliedfreefoodtovolunteersoflocalpublicradiostationsduringthestations’funddrives.Followingthewatershedin2015,thetopleadershipteamconsistingoftheco-CEOsEllsandMoran,CFOJohnHartung,andtheChiefCreativeandDevelopmentOfficerMarkCrumpacker,tooksubstantialpaycuts(seeExhibit10).Exhibit10:Chipotle’sKeyExecutiveCompensation(Source:Morningstar)
THENEWINVESTOR
PershingCapitalManagement
ThefastfoodindustrywasafamiliarscenetoAckman,whogrewPershingCapital’swealththroughinvestmentsinlargefoodchainslikeBurgerKing,McDonald’s,andTimHortons.However,anewsreport6indicatedthatPershingCapitalManagementwasrecoveringaftera20.5%lossinvaluein2015andalossof14.3%inthefirsteightmonthsof2016.AckmanhadscaleddownhisinvestmentsinZoetis,7MondelezInternational,8andCanadianPacific.9Furthermore,hisrecentfailuresincludedJ.C.Penney,Herbalife,andValeantPharmaceuticalsallofwhichweremiredinhighprofilescandals.
TheSECfilinginSeptemberrevealedthatinadditiontothepurchaseofChipotle’sstock,PershingCapitalhadobtainedtheoptiontoacquireapproximatelyanadditional2.3million
6http://www.nytimes.com/2016/09/07/business/dealbook/bill-ackman-chipotle.html?_r=27ZoetiswastheformeranimalhealthdivisionofPfizer,aglobalpharmaceuticalcompany.8MondelezmakesthepopularOreos.9ItwasreportedthatAckmanresignedfromhismembershiponCanadianPacific’sBoardfollowingdivestitureofhisstockholdingsofCanadianPacific.
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sharesforapriceofabout$974.3million10.ThehedgefundviewedChipotleasanundervaluedcompanywitha“strongbrand,differentiatedoffering,enormousgrowthopportunity,andvisionaryleadership.”11
Chipotle’sFuture
Followingthestockpurchase,PershingSquareindicatedthatitwouldholddiscussionsabout“thegovernanceandboardcomposition,business,operations,coststructure,management,assets,capitalization,financialcondition,strategicplans,andthefuture.”12PershingCapitalwasfollowinguponitspromiseasAckmanobtainedaseatonChipotle’sBoard.
InvestorMichaelJacobswonderedwhatthefutureofChipotleandhispersonalinvestmentwouldbe.Hewasaself-madeentrepreneur,andattheageof35,Jacobswassingle,co-ownedtwobusinesses,andobsessivelyworkedtowardshisambitionof“becomingamillionaire,buyinganisland,andretiringattheageof50.“Hetookprideinhisabilitytoachievehisgoals.Inhisownwords,“Ifocus,makemoney,wakeup,andrepeat[italloveragain].”Andhealsoproclaimedtobe“people-oriented.”
WasChipotlewithAckmanon-boardgoingtoremainagoodopportunityforhim?JacobsspeculatedaboutwhatwasgoingtohappenwithChipotle’sFoodwithIntegritystrategy,thecornerstoneofthecompany’scorporatesocialresponsibilityinitiative.AfoodconsumeradvocacygroupgaveChipotleandPaneraBreadhighmarksfortheuseofantibiotic-freemeatswhilegivingafailinggradetootherrestaurantchainslikeWendy’s,BurgerKing,Denny’s,andSubway.13WhatifAckmanpersuadedChipotletoabandonitsFoodwithIntegritystrategyinanefforttocutcostsdrastically?Thatwouldalterthecompany’sbusinessmodelsignificantly!
JacobsreminiscedaboutwhatheheardonMadMoneyinNovember,whereJackHartung,Chipotle’sCFO,inhisinterviewwithhostJimCramerhadacknowledgedthat:“thedialoguewe’vehadsofarwithPershinghastalkedaboutdrivinglong-termshareholdervalue,talksaboutrecoveringthebusinessmodelandfromwhatthey’vesaidsofar,theybelieveChipotleisaspecialbrandandwe’regoingthroughatoughtimerightnowandtheywant,justlikeeveryoneelse,toseeusrecoveroursales,recoverourbusinessandifwedothatwe’regoingtogetbacktoourpreviousstockpriceandaddshareholdervaluefromthere.”14
WhileJacobswashappytolearnaboutChipotle’seffortstoincreaseshareholdervalue,hewasunsureofChipotle’sprospectsforaquickresurgenceofitsstockprice.KnowingAckman’spropensityforseekingshorttermgain,couldheposeathreattoChipotle’sinnovative,yetcostly,supplychainstrategy?WouldChipotlesuccumbtotheinvestors’ 10https://www.sec.gov/Archives/edgar/data/1058090/000119312516702094/d233755dsc13d.htm11http://finance.yahoo.com/news/chipotle-expects-meet-soon-ackman-173522106.html12http://www.forbes.com/sites/michelinemaynard/2016/09/07/chipotle-gets-a-1-2-billion-investor-can-he-shake-up-a-stale-menu/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix&yptr=yahoo#4b7ae4e11fec13AsreportedonTheDoctorsTVshowairedinJune2016.14http://www.cnbc.com/2016/11/09/chipotle-exec-sheds-light-on-conversations-with-billionaire-bill-ackman.html
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pressuretocutcosts,boostearnings,anddrivestockpriceandmakedrasticchangestoChipotle’scoreFoodwithIntegritystrategy?Heknewthatseveralofhisfriendswerehard-coreChipotleloyalistsbecauseofthequalityoffoodthatwasassuredbyChipotle’ssupplychainstrategy.Hehimselfenjoyedthehigh-qualityburritosmadewithnon-GMOingredientsandantibiotic-freemeat.HewincedatthethoughtofaChipotleburritothatwouldbejustlikeonemadeatanyotherfastfoodrestaurantchain.WhatcouldhappenifFoodwithIntegritywasabandoned?WouldtheChipotlebrandloseitsappealamongyoungprofessionalsandmillennials?Jacobswasindecisive.HewonderedifChipotle’sdistinctivesociallyresponsiblestrategynolongersustainedtheadvantagesithadoriginallyenjoyed.WasittimeforhimtodivesttheChipotlestockheownedornot?
»Ω«
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TeachingNote
LearningObjectivesAfterreadinganddiscussingthiscaseinclass,studentswouldbeableto:
1. Examineanorganization’sstrategiesanditsperformancethroughmultiplelenses(i.e.,strategicpositioning,CorporateSocialResponsibility(CSR)performance,andfinancialperspectives);
2. EvaluatethevaluethecompanycreatedtoitsstakeholdersthroughtheTripleBottomLineapproach;and
3. Decidewhetherornotindividualinvestors(likeMichaelJacobs)shouldselltheirstakeinChipotleMexicanGrill.
CoursesThiscaseissuitableforgraduateandundergraduatecoursesin:
• SustainableFinance;• CorporateStrategy;and• CorporateSocialResponsibility
TeachingPlanAnearlierversionofthiscasewastestedinseveralcourses.--AnundergraduatecapstonecourseinahospitalitymanagementclassinSpring2016andwasreceivedwellbystudents.ThepopularityofChipotleMexicanGrillamongstudentsmakesitahighlyengagingdiscussion.--AnMBA“EnterpriseSolutions”(asecond-year)capstonecourse.--FourundergraduatecapstonestrategycoursesintwobusinessschoolsduringSummer2016intheWesternregionoftheUnitedStates.Threeofthesecoursesweretaughtasonlinehybridformat,withcasesdiscussedsynchronously.Thefourthcoursewastaughtintraditionalon-campus(face-to-face)format.Itwasreceivedwellinallfourcourses,includingtwothatweregearedtoworking/non-traditionalundergraduatestudents.FeedbackreceivedindicatedthatstudentsenjoyedreadingthecaseastheywerefamiliarwithChipotleMexicanGrillandthechallengesitfacedfollowingthefoodcontaminationepisodes.Studentsassertedthatthecasesparkedtheircuriosityandthediscussionthatensuedwasengagingtothem.Theyalsoindicatedthatthewritingstyle,includingtheopeningparagraph,piquedtheirinterest.So,theythoroughlyenjoyedreadinganddiscussingthecase.Thiscaseisintendedforadiscussionof90-110minutes.Itlendsitselfwelltogrouppresentations,wherepre-assignedgroupsmaybeaskedtopresenttheiranalysisandrecommendations.Instructorsmayalsouseitasafinalexamcase.ThecaseauthoruseditasafinalexamcaseinoneMBAcoursetaughtinFall2016andthreeoftheaboveundergraduatecapstoneStrategycoursestaughtinSummer2016.MaximumbenefitcanalsobeobtainedifthiscasewaspairedwithacaseonMcDonalds’orBurgerKingasstudentswillhavetheopportunitytocompareandcontrasttherespectivebusinessmodelsofcompetitorswithChipotleandtheoverallvaluecreatedbyeachofthem.Insummary,thiscaselendsitselfwelltoallformats,i.e.,instructor-facilitatedcasediscussioninbothtraditionalandonlineformats,studentpresentations,andafinalexamcase.Thefollowingdiscussionwascraftedforaninstructor-facilitatedopendiscussionofthecaseinclass.VideoResources:InstructorsmaywishtoshowoneorbothofthefollowingYouTubevideosbeforediscussingthecaseinclass.1. "BacktotheStart"(2:19minutes)
https://www.youtube.com/watch?v=aMfSGt6rHos&nohtml5=False
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ThisshortvideoclipcapturesthecontextbehindSteveElls’“FoodwithIntegrity”strategy,thebackboneofChipotle’sbusinessmodel.
2."ChipotleStory-HowItAllStarted"(5:11minutes)https://www.youtube.com/watch?v=wmH73Diqf5QThisfive-minutevideoprovidesthebackgroundstoryofhowSteveEllscreatedChipotleMexicanGrill.Thestory,narratedbythefounderhimself,givesanoverviewofthecompanyanditsstrategy.Italsotakesviewersbehindthescenestoshowhowthecompanywasrun.ResearchMethodologyThecasewasdevelopedprimarilyfrompubliclyavailablesecondarysources,includingnewspaperarticles,mediareports,SECfilingsbythecompany,andtheVenturaCounty’sEnvironmentalHealthDivisioninSimiValley,California.Nonamesinthecasehavebeendisguised,includingMichaelJacobs,themillennialinvestorfeaturedinthecase.Theauthorhasnorelationshipwiththecompany.TheoreticalFrameworksLeadership&CorporateGovernance:1. Cremer&H.Bettignies,“PragmaticBusinessEthics,”BusinessStrategyReview,vol.24,no.2,2013,
pp. 64-67. Also in in Thompson A.A. et al., Crafting and Executing Strategy: The Quest forCompetitiveAdvantage.NewYork,NY:McGrawHillEducation,2016(20thEd),ppR-114-116.
2. Hamel, G., “Leaders as Stewards,” Leadership Excellence, vol.29, no. 8, 2012, p. 5. Also inThompsonA.A.etal.,CraftingandExecutingStrategy:TheQuestforCompetitiveAdvantage.NewYork,NY:McGrawHillEducation,2016(20e),ppR-117-118).
3. Knights,J.,“EthicalLeadership:HowtoDevelopEthicalLeaders.”http://tandf.msgfocus.com/files/tfinf_tandf/project_662/WP-TL1V2-2016_Transpersonal_Leadership_WP_1_r4.pdf;downloadedonMay30,2016@1:15pm.
Strategy&FinancialAnalysis
1. Porter,M.E.,CompetitiveStrategy.NewYork,NY:TheFreePress,1980,pp.34-41.2. Wheelan,T.,etal.,ConceptsinStrategicManagementandBusinessPolicy:Globalization,
Innovation,andSustainability.PearsonEducation,NJ.,20153. Evans,M.H.,“EvaluatingFinancialPerformance,“downloadedfrom
www.exinfm.com/training/pdfiles/course01.pdf
TEACHINGPLAN
Videos(10min)(optional)DiscussionQuestions 1. HowdidChipotlesucceedintheUnitedStates?(10min)2. EvaluateChipotle’ssuccesspriortothefoodcontaminationsinDecember2015.(15-20min)3. WhatactionsdidChipotle’sleadershiptakeafterthewidespreadfoodcontaminationsoccurred
inCalifornia,Massachusetts,andotherStates?(10-15min)4. EvaluateChipotle’sleadershipandCorporateGovernance.(15min)(OnlyforStrategycourses)5. WhataretheStrengthsandWeaknessesofChipotle?(15min)6. ConductathoroughanalysisofChipotle’sfinancialstatements.Howwouldyouratethe
company’sperformance?(30min)(OptionalquestionforcoursesinCorporateSocialResponsibilityaswellasHospitalityManagement)
7. ShouldMichaelJacobsselloffhisstakeinChipotleornot?(10min)
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ThetablebelowaresuggestedquestionsforthevariouscoursesincludedaboveFinance Strategy CorpSocialResponsibilityQuestions1/2/3/6/7 Allquestions(1through7) Questions1/2/3/5/7
TeachingTip1:PosttheabovediscussionquestionsatleastaweekinadvanceandrequirestudentstogenerateanswerstoQuestion#6.Askthemtodoathoroughfinancialratioanalysisandpreparethecommon-sizestatementsforChipotle’sIncomestatementandBalanceSheetinpreparationforthediscussionofthecaseinclass.Thisstrategyalsoworkswellwhenthiscaseisusedinonlineclasses.TeachingTip2(optional):Letstudentsknowthatyouwouldgivebonuspointsforthosewhosubmittheresultsbeforethecaseisdiscussed.Thebonuspointscouldbebasedonthedepthandbreadthofthedata,analysis,andsynthesisofresultssubmittedbystudents.
DiscussionQuestionswithAnswers:Q1.HowdidChipotlesucceedintheUnitedStates?Chipotlesucceededinthehighlycompetitiverestaurantindustrythroughastrategyofdifferentiation.MichaelPorterinhisseminalbook15proposeddifferentiationasoneofthethreegenericcompetitivestrategiescompaniesusedtocompeteagainstrivals.Accordingtohim,differentiationistheabilityofacompanytoprovideuniqueandsuperiorvaluetothebuyersintermsofproductquality,specialfeatures,orafter-salesservice.Wheelenetal.,(2015:170)statethat“Differentiationisaimedatthebroadmassmarketandinvolvesthecreationofaproductorservicethatisperceivedthroughoutitsindustryasunique...Differentiationisaviablestrategyforearningabove-averagereturnsinaspecificbusinessbecausetheresultingbrandloyaltylowerscustomers’sensitivitytoprice.“FounderJeffEllsimplementedthisdifferentiationstrategybypositioningthecompanywithauniqueconcept(freshMexicanfood,withtheoptionforcustomerstochoosetheirowningredients),acommitmenttoenvironmentallysustainablesourcingpractices,andservinghighqualitywholesomefoodthatwasfreshlypreparedonpremisesusingtraditionalcookingmethods.Additionally,Chipotledelighteditscustomersbyprovidinganinteractivediningexperienceforitscustomers.ThefourpillarsthatbecamethefoundationsuponwhichChipotlebuiltitssuccessintheU.S.marketarecapturedbelow.Instructorsmaychoosetoprintthisexhibitorprojectitontothescreenintheclassroom.PowerPointslidesareavailableforinstructorswishingtoadoptthiscase
15 Porter, M.E., Competitive Strategy. New York, NY: The Free Press, 1980, pp. 34-41.
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Q2.EvaluateChipotle’ssuccesspriortothefoodcontaminationsinDecember2015.Eachofthefourpillars(displayedabove)werepracticesthatdidnotexistintheindustryuntilChipotleopeneditsfirstrestaurantinDenver,ColoradoonJuly13,1993.Assuch,Chipotlewasabletogarnersignificantfirst-moveradvantages,whichresultedinitshighsuccess,asmeasuredbythefollowingmetrics.
A. SalesgrowthB. ProfitgrowthC. NumberofrestaurantsD. OverseasexpansionE. NumberofemployeesF. BrandrecognitionandMarketshareG. IPOsuccessH. Valuecreatedtoitsone-timeinvestor(McDonald’s)I. ValuecreatedtoitsshareholderssinceitsIPO
A. SalesGrowth:ThecasenotedthatChipotlewasahitfromdayone.Onthefirstdayofitsopening,itssaleswere$450,followedbysalesof$800thenextday,reaching$1000adaymarkshortlythereafter.Furthermore,withinsixmonthsofitsopening,salesperdaygrewto$3,000.Salesgrowthcontinuedwellinto2015.• CaseExhibit1showedthatby2014,Chipotle’sworldwidesalesgrewto$4.11billionmakingit
thefifthlargestU.Squickservicerestaurantchainsintheworld.• CaseExhibit6supportsthistrend.Seeannualgrowthratesgiveninthetablebelow.
2011 2012 2013 2014 2015
Sales 2270 2731 3215 4108 4501AnnualGrowth -- 20% 18% 28% 10%
B. Profitgrowth:
Inspiteofthehighfoodcostsstemmingfromitssustainabilitystrategy,knownas“FoodwithIntegrity,”andcookingpractices,Chipotleremainedprofitable.
UniqueConcept
•FastcasualMexicanfood
SustainabilityStrategy
•Pricedtoreflectqualityinsteadoflowcost/valueapproaches•Company-ownedrestaurantsinsteadoffranchises•SustainableFinancialStrategy
QualityWholesomeFood
•Highquality(mostlyorganic)ingredients•Fresh locallysourcedsupplies•Non-GMO&antibiotic-freemeats•Traditionalcookingmethods
InteractiveExperience
•Menuitemsdisplayedinbuffetstyle•Servicestaffpreparingtheorderascustomerselectsmainandsideitemsfromfooditemsondisplay
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• CaseExhibit6showsthatthecompany’sprofitsincreasedfrom$215millionin2011to$476millionin2015,a2.2xgrowthinprofitsinfiveyears.Annualgrowthratesgivenbelowareequallyimpressive,exceptfor2015(theyearinwhichthefoodcontaminationcrisisoccurred).
2011 2012 2013 2014 2015NetIncome
215 278 327 445 476AnnualGrowth -- 29% 18% 36% 7%
C. NumberofRestaurants:
ChipotlegrewintheU.S.throughcompany-ownedrestaurantsinsteadoffranchises.Asof2015,Chipotlehadatotalof2010operatingrestaurants,excludingthe13Shophouse-SoutheastAsianKitchenrestaurantsservingAsiancuisine,and3PizzeriaLocalerestaurantsservingpizzaandItalianfoodthatitowned.
D. OverseasExpansion:ThecasestatedthatChipotleopeneditsfirstforeignrestaurantinToronto,Canada,in2008.In2010,itexpandedtotheU.K.,toFrancein2012,andtoGermanyin2013.Bytheendof2015,Chipotleownedatotalof23restaurantsoverseas.
E. NumberofEmployees:Employmentdatagiveninthecaseindicatedthatbytheendof2015,Chipotlehadatotalof59,330employeesonitspayroll.Detailsareasfollows.
Employmenttype NumberSalariedEmployees 5,100HourlyEmployees 54,230Total 59,330
F. BrandRecognitionandMarketShare:
AsadifferentiatorinahighlycompetitivesegmentoccupiedbyglobalgiantslikeMcDonald’s,Subway,andYumBrands,Chipotleachievedtheimpossible.CaseExhibit1showsthatChipotlerankedfifthbyglobalsalesamongquickseviceresturantswhileCaseExhibit2showsthatChipotlerankedfifthworldwideamongthemostvaluablebrandsintheindustry,behindMcDonald’s,Starbucks,Subway,andKFC.Furthermore,salesgrowthdatadisplayedinCaseExhibit1indicatesthatChipotle’ssalesincreasedfrom$4.1billionin2014to$4.5billionin2015inspiteofthefoodcontaminationcrisiswhereassalesfor8ofthetop10,includingMcDonald’sexperienceddeclineinsalesinthesameyear.Thecasealsoindicatesthatin2015,ChipotlerankedfifthinmarketshareinthefastfoodindustryintheUnitedStates.
G. IPOSuccess:Accordingtothecase,Chipotle’sIPO(initialpublicoffering)in2006washailedasthe“bestIPOsince2000.”Theoverwhelmingdemandforthecompany’ssharesonthefirstdayofitsIPOonJanuary25,2006sentthestockpricesoaring.Ineffect,thestockpriceonthedayoftheIPOdoubledindicatingtheenthusiasmandoptimisminvestorshadforChipotle’sbrandandthecompany’sdistinctivepositioning.
H. ValueCreatedtoItsOne-TimeInvestor,McDonald’s:McDonald’sinvestmentinChipotlesignaledtheconfidenceMcDonald’shadinSteveElls’leadershipandthemeritofChipotle’suniquebusinessmodelintheindustry.McDonald’swouldhavenotinvestedintheyoungcompanyunlessitsawhighpotentialforreturnsonitsinvestment.EventhoughthepartnershipbetweenMcDonald’sandChipotlelastedonlyfrom
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1998toOctober2006,therewasmutualvaluecreated.ChipotlegainedthecapitalneededforrapidexpansionwhileMcDonald’sinitialinvestmentof$360millionreapedanimpressive416%return.
I. ValueCreatedtoItsShareholdersSinceitsIPOin2006,Chipotlecreatedstellarreturnstoitsshareholders.AccordingtocaseExhibit3,evenwiththedeclinesexperiencedfrom2014to2015,Chipotle’scumulativestockreturnsexceededboththeS&P500andtheS&PRestaurantsreturns.CaseExhibit5showedthatthevaluecreatedbyChipotletoitsshareholderswassuperior.EarningsperSharerosefrom$6.89in2011to$15.3in2015.TheannualgrowthratesofChipotle’sShareholders’Equityaredisplayedbelow.
2011 2012 2013 2014 2015
TotalShareholders'Equity 1044 1246 1538 2012 2128AnnualGrowthrates -- 19% 23% 31% 6%
Q3.WhatactionsdidChipotle’sleadershiptakeafterthewidespreadfoodcontaminationsoccurredinCalifornia,Massachusetts,andotherStates?Inresponsetothefoodcontaminationcrisis,Chipotle’sleadersengagedinoperationalandstrategicactionstoavertthecarnage.OperationalResponsestotheCrisis:Chipotletookimmediateactionafterthefoodcontaminationsoccurredinthevariouslocations.Itsentemployeestoreplacethosethatweresick,closeddownrestaurantsuntiltheywereclearedbylocalhealthofficials,compliedwitheverythingtheywereaskedtodo,quicklyinstitutedadditionalfoodsafetypoliciesandprocedurestobefollowedbyitsemployeesinanattempttoavertmoreproblems.Italsodevelopedstringenttrainingmanualsandrequiredadditionaltrainingforallitsemployees.Newpoliciesprohibitedemployeesfromhavingpersonalitems,suchascellphones,inclosecontactwhilepreparingorhandlingfood.StrategicResponsestotheCrisis:Inadditiontoinstitutingnewandstricterinternalpoliciesandprocedures,FounderCEOEllssentapologyletterstothoseaffectedbythefoodcontaminationassuringthemofhigherstandardsinplace.Thecompanyalsoranadvertisementsinthelocalnewspapersadmittingtheirmistakeandengagedinavertingapublicrelationscrisis.Inall,thecompany’smanagementdemonstratedgoodleadershipincrisisandpromptlymadeeveryattempttocorrecttheirmistakesandkeepthepublicinformedofchangesbeingmade.TheyalsotriedtoregaintheconfidenceoftheconsumersbyissuingcouponsforfreeburritosandprovidingfreefoodforvolunteersoflocalpublicTVstationsduringtheirfundraisingdrives.Furthermore,asCaseExhibit10showsthatChipotle’sexecutivestookpaycutsamountingto$34.95millionin2015.ThissignalshighintegrityonthepartofChipotle’sleadersastheytakeresponsibilityforthewidespreadfoodcontaminationproblemthatoccurredin2015.Q4.EvaluateChipotle’sleadershipandCorporateGovernance.StudentswouldhavenohesitationingivinghighmarkstoChipotle’sFounder-CEO,SteveEllsandhismanagementteamfortheirsuccessinthefollowingareas.
A. PositioningChipotleinahighlycompetitivefast-casualdiningindustryusingasociallyconsciousandenvironmentallysustainableFoodwithIntegritystrategybysourcingfromlocalfarmerswhopracticedorganicandsustainablefarmingpracticeslongbeforeenvironmentalsustainabilitybecameabuzzwordinthebusinessenvironment.
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B. Growingthecompanythroughstrongbrandmanagementpracticesandsuccessfullycompetingintheindustrythroughcompany-ownedrestaurantsinsteadoffranchisingaswasthenormintheindustry.
C. OutperformingthepeersintheindustryandS&P500instockreturnsandoverallshareholdervaluecreated.
D. Controllingtheeconomicrisksbyholdinglittleornodebtinitscapitalstructure.E. Institutingahigh-performanceculturethroughcarefulselectionandtraininghuman
resourcepractices.F. Creatinghighvaluetoallitsstakeholdersandlocalcommunities.
Thus,Chipotle’stopmanagementteamembodiedpositiveleadershipasnotedbyleadershipandstrategyscholarslikeKnights(2016)16,Hamel(2012)17,andCremer&Bettignies(2013)18,whocallforarevolutioninthevaluesdemonstratedbycorporateleaders.Inacapitalisticworldwhereshareholdervaluecreationreignssupremeinallcorporatedecisionsevenattheexpenseofthegeneralwell-beingofhumanityandtheenvironment,itisrefreshingtoseehowSteveEllsbuiltasuccessfulcorporateempireonthefoundationsofsocialresponsibilityandenvironmentalstewardship.Furthermore,thetransparencyandcrisismanagementoperationsalsocommandhighmarksincorporategovernance.Thefactthatthetopleadershiptookasignificantpay-cutthetuneof48.1%followingthefoodcontaminationcrisisin2015istestamenttothestrongpositivecorporategovernanceandvaluesthatformthebedrockoftheleadershipcultureatChipotle.
Q5.WhataretheStrengthsandWeaknessesofChipotle?Strengths:
• Clearandconsistentbusinessconceptwithauniquestrategy.• HighpositionasapopularandsustainableU.S.chainbrand(seecaseExhibit1).• Strongbrandimage(seecaseExhibit2).• Strongbrandmanagementpractices.• Non-franchisedmodelensureshighercustomerexperiencewithgreatermanagerialcontrols.• SolidSalesandprofitperformance(seecaseExhibits4&6,anddiscussionpresentedearlier).• Goodreturnstoinvestorsalongwithhighstockperformancemadethiscompanyattractive
toinvestors(seecaseExhibits3,4,6,8&9anddiscussionpresentedabove).• Strongtrackrecordofattractingcapitalfrominvestorsandthestockmarket.• Nodebtinitscapitalstructure(seecaseExhibit5).• Management’sabilitytocreateasupplychainusinglocalandsustainablesourcingpractices• Leadershipexpertiseindealingwithuncertaintiesinthesupplychainassociatedwithdealing
withlocalsmallfarmersusingorganicand/orsustainablefarmingpractices.• Creatingvalueinlocalcommunities.• Uniquecultureofpromotingahigh-performancecultureaswellasenvironmental
stewardshipandsocialresponsibility.• Stronghumanresourcepractices,includinghiring,training,andpromotionfromwithinthe
organization.• Maturerestaurantchainoperations.• ConvenientfoodservicesystemsthatmeetstheemergingneedsoftheurbanChina
16Knights,J.,“EthicalLeadership:HowtoDevelopEthicalLeaders.”
http://tandf.msgfocus.com/files/tfinf_tandf/project_662/WP-TL1V2-2016_Transpersonal_Leadership_WP_1_r4.pdf;downloadedonMay30,2016@1:15pm.
17Hamel,G.,“LeadersasStewards,”LeadershipExcellence,vol.29,no.8,2012,p.5.18Cremer&H.Bettignies,“PragmaticBusinessEthics,”BusinessStrategyReview,vol.24,no.2,2013,pp.64-67.
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• Affordablepricingstrategyofquickcasualrestaurantalongwithhighqualitylocalnon-GMO,organic,andantibiotic-freemeatsisattractivetoyoungprofessionalsandmillennials.
• Themenuvarietyprovideswidechoicesforcustomerswithdifferenttastes.• Effectiveorderlinecanservemorecustomersduringthebusyrushhours.• Quickresponsebyexecutivestothefoodcontaminationcrisisandsignificantexecutivepay
cutsdemonstratesresponsibleleadership.Weaknesses:
• Thepresenceoftwo(co-)CEOsincreasescosts,duplication,bureaucracy,andconstrainsthecompany’sabilitytoreactquicklytochangingmarkettrends.
• Highlaborcosts(asapercentageofsales):rangingfrom22%to24%.Takeninthecontextofthelargeproportionofhourlyemployees(91.4%)incomparisontosalariedemployees(8.6%),itsignalstheexistenceofapotentiallaborproblemsintheformofhighlaborturnover.
• Thehigh-performancecultureintheorganizationmayincreasestresslevelsatwork,thuspotentiallyleadingtotheriskofhighlaborturnover.
• Promotingfromwithintheranksoftheorganizationconstrainstheabilityofthecompanytohirethestaffandtalentrequiredtopursuehighgrowthaswellashiringmanagerialstaffwiththenecessaryexpertiseandexperiencetoseekaggressiveexpansion.
• Non-franchisedmodelinhibitsgrowth.Q6.ConductathoroughanalysisofChipotle’sfinancialstatements.Howwouldyouratethecompany’sperformance?Assignthisquestioninadvancetostudentsandconsidergivingbonuspointstoelicitathoroughpreparation.SeeTeachingTipsincludedearlier.Irequiremystudentstoanswerthisquestioninthreesteps.Instep1,IaskthemtotranslatethefinancialstatementsintoCommon-sizestatementsandanalyzetheresultsbasedonthedatatrends.Instep2,Iaskthemtogenerateacompletesetofratiosforallthefiveyearsofdataincludedinthefinancialexhibitsandevaluatethetrendsinthedata2.Ineachofthetwosteps,Irequirethemtosystematicallypresenttheirconclusionsforeachratioorgroupofratios.Step1:AnalysisofCMG’sCommon-sizestatementsCHIPOTLE'SCOMMONSIZE(INCOME)STATEMENT(Source:MorningStar)FiscalyearendsinDecember.Datafor12months. 2011 2012 2013 2014 2015Revenue 100.00% 100.00% 100.00% 100.00% 100.00%Costofrevenue 74.04% 72.89% 73.41% 72.79% 73.91%Grossprofit 25.96% 27.11% 26.59% 27.21% 26.09%Operatingexpenses Sales,Generalandadministrative 6.96% 7.15% 6.82% 7.05% 5.93%Otheroperatingexpenses 3.56% 3.26% 3.20% 2.86% 3.19%Totaloperatingexpenses 10.52% 10.42% 10.02% 9.91% 9.12%Operatingincome 15.45% 16.69% 16.57% 17.30% 16.96%InterestExpense 0.13% Otherincome(expense) 0.09% 0.07% 0.05% 0.09% 0.14%
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Incomebeforetaxes 15.41% 16.76% 16.63% 17.39% 17.10%Provisionforincometaxes 5.94% 6.58% 6.44% 6.55% 6.54%Netincomefromcontinuingoperations 9.47% 10.18% 10.19% 10.84% 10.57%Netincome 9.47% 10.18% 10.19% 10.84% 10.57%Netincomeavailabletocommonshareholders 9.47% 10.18% 10.19% 10.84% 10.57%Earningspershare(EP Basic 6.89 8.82 10.58 14.35 15.3Diluted 6.76 8.75 10.47 14.13 15.1Weightedaveragesharesoutstanding Basic 31 32 31 31 31Diluted 32 32 31 32 31EBITDA 18.84% 19.77% 19.56% 19.99% 19.86%
CommentsandConclusions:1. Inspiteofsomevolatility,thecostofrevenuehastrendeddownwardfrom74.04%in2011to
73.91%in2015.2. Thisdecliningtrendisevidentinalloperatingexpenditures,includingSG&A.3. Grossprofit,operatingincome,netincome,andEBITDAshowanincreasingtrendbetween2011
and2015despitethesmalldipfrom2014to2015resultingfromthecontaminationcrisis.4. Thetwoitemsthatarenoteworthyaretheabsenceofinterestexpensesince2012andthe
consistentriseinEPS,year-after-year.
CHIPOTLE’SBALANCESHEETINCOMMONSIZEFORMATFiscalyearendsinDecember.Datafor12months. 2011 2012 2013 2014 2015ASSETS Currentassets Cash Cashandcashequivalents 28.15% 19.33% 16.09% 16.47% 9.10%Short-terminvestments 3.86% 9.01% 12.69% 13.30% 15.24%Totalcash 32.01% 28.34% 28.78% 29.77% 24.34%Receivables 0.59% 1.01% 1.20% 1.37% 1.40%Inventories 0.63% 0.66% 0.65% 0.60% 0.55%Deferredincometaxes 0.44% 0.53% 0.66% 0.74% Prepaidexpenses 1.50% 1.64% 1.70% 1.37% 1.47%Othercurrentassets 0.58% 0.18% 0.65% 2.13%Totalcurrentassets 35.16% 32.76% 33.16% 34.50% 29.89%Non-currentassets Property,plantandequipment Grossproperty,plantandequipment 78.73% 78.60% 74.19% 67.58% 71.12%AccumulatedDepreciation -25.97% -26.66% -26.25% -24.10% -26.45%Netproperty,plantandequipment 52.76% 51.94% 47.94% 43.47% 44.67%
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Equityandotherinvestments 9.00% 11.44% 15.62% 19.48% 22.86%Goodwill 1.54% 1.31% 1.09% 0.86% 0.81%Intangibleassets Otherlong-termassets 1.54% 2.55% 2.19% 1.68% 1.77%Totalnon-currentassets 64.84% 67.24% 66.84% 65.50% 70.11%Totalassets 100.00% 100.00% 100.00% 100.00% 100.00%
CommentsandConclusions:1.Cashandcashequivalentsdeclinedsignificantlyfrom28.15%ofTotalAssetsin2011to9.1%in2015.Thisisnotbadinlightofthefactthatshort-terminvestmentsrosedramatically3.86%to15.24%duringthesameperiod.However,TotalCashdeclinedapproximately24%infiveyears,from32.01%in2011to24.34%in2015.ThismaybecauseforsomeconcernasReceivablesmorethandoubled,from0.59%in2011to1.4%in2015.However,overallthedeclineofTotalCurrentAssetsisonlyapproximately15%between2011and2015.ThesetrendsdoraisesomeredflagsandChipotle’sliquiditywouldneedfurtherscrutiny.2.WhileChipotle’sFixedAssetbase(NetProperty,Plant,andEquipment)hasdecreasedfrom52.76%ofTotalAssetsin2011to44.67%in2015,thecompany’sequityandOtherInvestmentsasapercentageofTotalAssetsrosesharply,from9%in2011to22.86%in2015.Thisincreasehasbeensteady,alsooccurringin2015.Overall,datashowsagradualshiftfrominvestmentsincurrentassetstonon-currentassetsfrom2011to2015.CHIPOTLE’SBALANCESHEETINCOMMONSIZEFORMAT(continued) 2011 2012 2013 2014 2015LIABILITIES&STOCKHOLDERS'EQUITY Liabilities Currentliabilities Capitalleases 0.01% 0.01% Accountspayable 3.25% 3.52% 2.94% 2.73% 3.15%Taxespayable 1.15% 0.87% 0.90% 0.57%Accruedliabilities 5.37% 7.67% 4.54% 4.13% 6.55%Othercurrentliabilities 1.26% 1.57% 1.89% Totalcurrentliabilities 11.05% 11.20% 9.92% 9.65% 10.27%Non-currentliabilities Capitalleases 0.20% Deferredtaxesliabilities 4.52% 2.93% 2.76% 1.59% 1.19%Deferredrevenues 10.05% Otherlong-termliabilities 1.12% 11.00% 10.77% 9.73% 10.45%Totalnon-currentliabilities 15.69% 14.14% 13.53% 11.32% 11.64%Totalliabilities 26.74% 25.33% 23.44% 20.97% 21.91%Stockholders'equity Commonstock 0.02% 0.02% 0.02% 0.01% 0.01%Additionalpaid-incapital 47.47% 48.94% 45.78% 40.80% 43.03%Retainedearnings 47.11% 56.90% 63.55% 67.64% 80.65%Treasurystock -21.36% -31.25% -32.87% -29.41% -45.31%Accumulatedothercomprehensiveincome 0.01% 0.06% 0.08% -0.02% -0.30%
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Totalstockholders'equity 73.26% 74.67% 76.56% 79.03% 78.09%Totalliabilitiesandstockholders'equity 100.00% 100.00% 100.00% 100.00% 100.00%CommentsandConclusions:1. TotalCurrentLiabilities,expressedasapercentageofTotalLiabilitiesandStockholders’Equity
showedagradualdecliningtrenduntil2014,butroseslightlyin2015,mainlyduetoasmallincreaseinAccountsPayablefrom2014to2015.TotalLiabilitiesshowasimilartrend.
2. ItappearsthatChipotlehasincreaseditspoolofRetainedEarningsfrom47.1%ofTotalAssetsin2011to80.65%in2015whilescalingbackitsTreasuryStock.TheneteffecthasbeenasteadygrowthinTotalStockholders’Equityfrom2011to2015inspiteofaslightdeclinein2015.
Step2:FinancialRatioAnalysisProfitability 2011 2012 2013 2014 2015NetMargin% 9.47 10.18 10.19 10.84 10.57AssetTurnover(Average) 1.78 1.77 1.74 1.8 1.71ReturnonAssets% 16.88 17.97 17.81 19.55 18.04FinancialLeverage(Average) 1.36 1.34 1.31 1.27 1.28ReturnonEquity% 23.17 24.28 23.52 25.09 22.97
CommentsandConclusions:Overall,Profitabilityratioshaveshownsteadygrowthfrom2011to2015.However,thedeclineshownin2015isclearlyaresultofthefoodcontaminationcrisisexperiencedthatyear.Liquidity/FinancialHealth 2011 2012 2013 2014 2015CurrentRatio 3.18 2.93 3.34 3.58 2.91QuickRatio 2.95 2.67 3.04 3.29 2.71FinancialLeverage 1.36 1.34 1.31 1.27 1.28CommentsandConclusions:Inspiteofthefluctuationsintheliquidityratios,thesharpdeclinein2015isconsistentwiththeconclusionspresentedearlierinthediscussionofChipotle’scommon-sizestatements.However,thehighliquidityinthiscompanyisduetothezero-debtstrategyitemployed.Inotherwords,Chipotlehasfinanceditsgrowththroughinternallygeneratedfundsratherthandebtorequity.Efficiency 2011 2012 2013 2014 2015DaysSalesOutstanding 1.13 1.68 2.32 2.61 2.96DaysInventory 1.74 1.83 1.87 1.73 1.67PayablesPeriod 8.7 9.63 9.1 7.85 8.52ReceivablesTurnover 323.14 216.86 157.52 139.61 123.12InventoryTurnover 209.9 199 195.51 210.78 219.06FixedAssetsTurnover 3.18 3.37 3.51 3.97 3.87AssetTurnover 1.78 1.77 1.74 1.8 1.71
1. CommentsandConclusions:
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2. NotethattheDaysSalesOutstandinghassteadilyincreasedfrom1.13daysin2011to2.96daysin2015.Thismaybesymptomaticofincreasingcompetition,maturityofthemarketandindustryorachangeinthecustomerbasefromindividualstootherbusinesses.OveralltrendintheDaysinventoryisfavorablesinceithasdeclinedfrom2011to2015(despitesomefluctuations)indicatingefficientinventorymanagement.
3. TrendsinthePayablesperiodalsodeclinedmodestlyinspiteofthefluctuations.ThislownumberisinthesingledigitswhichindicateshowquicklyChipotlepaysitssuppliers.Thislownumberisconsistentwiththecompany’ssociallyresponsiblestrategyoftreatingitslocalsupplierswellbypayingthempromptly.Theincreasefrom7.85daysin2014to8.52daysismodestconsideringtheseverityofthefoodcrisisexperiencedbyChipotle.
4. TheReceivablesTurnoverdataandtrendsareconsistentwith“DaysSalesOutstanding.“5. ThecontinuousincreaseinFixedAssetTurnoverisconsistentwithsalesgrowthaswellasthe
declineinfixedassetsdiscussedearlier.6. Overall,thecompanyappearstobeoperatingefficiently.
Q7.ShouldMichaelJacobsselloffhisstakeinChipotleornot?ThisquestionallowstobringthediscussiontoaconclusionbyhighlightingthekeyprosandconsofdivestingChipotle’sstock.ArgumentsinFavorofDivesting:• ItisriskyforMichaelJacobstocontinueowningChipotle’sstockpendingtheJustice
Department’sprobeandclassactionlawsuitsthecompanycurrentlyfaces.• Divestingwillminimizethepotentialdownsideriskofunfavorableoutcomesfrompending
litigation.• DivestingwillfreeupJacobs’investmentdollarstoseeklessriskyinvestmentalternatives.• JacobsshoulddivestimmediatelyifChipotledecidestofocusoncuttingcostswithouttaking
appropriatestepstogrowrevenuessimultaneously.• JacobsshoulddivestifhesensesthattheFoodwithIntegritystrategywouldbediscontinuedas
thatwouldnotonlyerodeChipotle’sbrandbutdoirreparabledamagetothecompany’sfuture.Chipotle’sbusinessmodelwithoutthisuniquesupplychainstrategywouldwipeoutitsdistinctivedifferentiationadvantageinthishighlycompetitivefragmentedindustry.AChipotleburritosansIntegritywouldtantamounttoanexpensiveburritoàlaTacoBellorMcDonald’s!
ArgumentsAgainstDivesting:• Strongstockperformancefromthebeginningaswellascontinuingstrongperformanceas
indicatedinCaseExhibits8and9aswellastheothersdiscussedearlier.• Continuingstrongstockperformanceascomparedtorivalsevenafterthefoodcontamination
crisisasseenfromcaseExhibit9.• Salesincreasein2015whenmajorcompetitorslikeMcDonald’shaddeclineinsales.• Rallyinthestockmarketfollowingactivistinvestor,Ackman’sstockpurchase.Inadditiontoa
positiveimpactonChipotle’scashflow,itsignalsoptimismthatAckmancouldbringnewinsightsandbringaboutthenecessarychangesinanexpeditiousmanner.
• Thefastandappropriateresponsestothefoodcontaminationcrisisthatoccurredinlate2015demonstratesthatChipotle’sleadershiphassoundcrisismanagementskills.Additionally,thefactthatChipotle’stopmanagementtooksignificantpay-cutsspeakstotheremarkablecorporategovernancemechanismsinplaceatChipotle.
• UnderElls’leadership,thecompanycontinuestodemonstratepositiveandresponsibleleadershipthroughitssociallyresponsiblestrategyofFoodwithIntegrity,earningittherespectofconsumeradvocacygroupslikeTheConsumerUnion.TheConsumerUnion,aswastheCenterforDiseaseControl(CDC),wasconcernedwiththeadverseeffectsofelevatedlevelsofantibioticsintheAmericanfoodsupplychain.
oikos case collection
27
Belowisanexhibitsummarizingtheprosandconsdiscussedabove.
Attheendofthisdiscussion,takeavoteandrecordhowmanystudentsareinfavorofChipotlekeepingtheFoodwithIntegritystrategy.90%ofbothundergraduateandgraduatestudentsvotedinfavorofChipotlecontinuingitsFoodwithIntegritystrategyandJacobskeepinghisChipotlestockownership.However,theypointedoutthatJacobsshoulddivestChipotle’sstockifthecompanywasforcedtoabandonitsuniquesupplychainstrategy.EpilogueAsofFebruary2017,thecaseagainstChipotlewascontinuingintheCourts.TherewasnodecisionhandeddownbytheDepartmentofJustice.Chipotletriedtoengageinquickdamagecontrolthroughaggressivemarketing,spendingabout$2millioningivingcouponsandfreefoodtolurebackitscustomers,andpostednewvideosaboutthesafetyofitsfood.AsthecasepointsoutChipotle’sstockisontheupswingandAckman’sinvestmentwasseenasawelcomemove,butthereisuncertaintyaroundthefutureoftheFoodwithIntegritystrategy,whichoffueledthebirthhealth-foodconsciousnessandamovementintheUSagainsttheuseofGMOandantibioticsinthefoodsuppliesprocuredbytherestaurantindustry.
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Pros Cons
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