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Case 10 Teaching Note Chipotle Mexican Grill in 2014
406
On the whole, most class members have very convincing reasons to conclude that CMG’s overall situation
is unusually attractive and that its future prospects are quite promising. The company has a good strategy.
It has been successful so far in differentiating itself from other Mexican-style fast-food restaurant chains.
3. What are the primary and secondary components of Chipotle’s value chain?
Chipotle’s value chain has 5 primary value chain components that students should identify:
nMarketing and brand name building
nDesigning, locating, and opening new restaurants
The secondary components of CMG’s value chain include the following:
nHiring and training employees for the company’s restaurants
4. What are the chief components of Chipotle’s strategy?
If you have not done so in a previously-assigned case, then it makes sense to spend 5–10 minutes of class
time making sure that students have become adept at identifying the key elements of a company’s strategy.
The Chief Elements of Chipotle Mexican Grill’s Strategy
nCreate an operationally efficient restaurant with an aesthetically-pleasing and distinctive interior setting.
• Pay special attention to developing and fine-tuning the serving line for customers, so as to boost
customer throughput, enable serving line employees to establish some rapport with customers, and
Case 10 Teaching Note Chipotle Mexican Grill in 2014
407
nDo all of the above with increasing awareness and respect for the environment, the use of organically-
• Top management had a very strong commitment to “Food with Integrity”
• If either or both appear to be viable and profitable, then move quickly to open more such restaurants
nMaintain high levels of food quality by acquiring high-quality, fresh ingredients and other necessary
supplies that meet company specifications
• Continue the program to shift away from ingredients grown with genetically modified seeds—
• Chipotle did not purchase ingredients for its dishes directly from farmers or purchase paper
products, plastic ware, and other restaurant supplies directly from manufacturers. Rather, over the
• Chipotle management worked with these suppliers on an ongoing basis to establish and implement a
• Chipotle officials/managers worked with these suppliers on an ongoing basis to establish and
• Instead of making purchases directly from approved suppliers, Chipotle utilized the services of 23
• As Chipotle continued to expand geographically, Chipotle management planned to add more
nEstablish and monitor quality and food safety throughout the company’s supply chain and all the way
through the serving lines at restaurants
• There were quality and food safety standards for certain farms that grew ingredients used by
• Chipotle’s training and risk management departments developed and implemented operating
• The food safety programs for suppliers and restaurants were designed to ensure compliance with
Case 10 Teaching Note Chipotle Mexican Grill in 2014
408
5. Which one of the five generic competitive strategies discussed in Chapter 5 most closely
approximates the competitive approach that Chipotle Mexican Grill is employing?
Clearly, differentiation is a core element of Chipotle’s competitive strategy. Because of the company’s
Mexican-themed menu, class members might argue that Chipotle’s competitive strategy most closely
resembles that of focused differentiation (since the company’s menu appeals chiey to those who like
But there is room for a third strategy possibility—that of best-cost provider; this is because of Chipotle’s
strong emphasis on low-cost operating efficiency and competitively attractive meal prices. In a very real
We see no compelling reason to push hard for a definitive class consensus on which of the above three
6. What chief difference(s) do you see between Chipotle’s strategy and the strategy being
employed at Moe’s Southwest Grill?
The biggest and most glaring difference is that Chipotle only has company-owned restaurants whereas
Moe’s Southwest grill only has franchised restaurants.
7. What is your appraisal of Chipotle Mexican Grill’s financial performance based on the
data contained in case Exhibit 1? How well is the company doing financially? Use the
financial ratios in Table 4.1 of Chapter 4 as a guide in doing the calculations needed to
arrive at an analysis-based answer to your assessment of Chipotle’s recent financial
performance. In addition to the ratios in Table 4.1, there are occasions when you will
also need to calculate compound average growth rates (CAGR) for certain financial
measures. The formula for calculating CAGR (in percentage terms) is as follows:
Case 10 Teaching Note Chipotle Mexican Grill in 2014
409
If your students do a creditable job of poring through the data in case Exhibit 1 and crunching some CAGR
values, they should come up with the following:
nFrom the end of 2007 through the end of 2013, Chipotle’s total revenues increased at a CAGR of 19.8%.
n The percentages of total revenue for the various types of operating expenses at Chipotle’s restaurants (all
n Chipotle’s operating income increased to $532.7 million in 2013 from $108.2 million in 2007, equal to
a CAGR of 30.4%.
nChipotle’s operating profit margin was 16.6% in 2013 versus 16.7% in 2012, 15.4% in 2011, 13.4% in
2009, and 10.0% in 2007.
nNet cash provided by operating activities have been rising annually, climbing to $528.8 million in 2013
from $146.9 million in 2007, a CAGR of 23.8%.
nAverage annual sales for Chipotle restaurants open at least 12 full calendar months have increased
Conclusions: Overall, since 2007 Chipotle has posted strong financial and operating results in a ho-hum
economic environment. We would give Chipotle a solid A for its performance, especially in light of the
8. How does Chipotle Mexican Grill’s competitive strength compare against that of Taco
Bell, Qdoba Mexican Grill, and Moe’s Southwest Grill? Do a weighted competitive
strength assessment using the methodology presented in Table 4.4 in Chapter 4 to
support your answer. Based on your assessment and calculations, does Chipotle have
a net competitive advantage over some or all of these rivals? Which rival—Chipotle
Mexican Grill or Moe’s Southwest Grill or Qdoba Mexican Grill—seems to have the
strongest set of resource strengths and competitive capabilities and is most likely to
achieve the best financial performance? Does Chipotle have a good enough strategy
and adequate resource strengths and competitive capabilities to compete effectively
against Taco Bell?
There is ample information in the Chipotle case for students to do a competitive strength assessment of
Chipotle vs. Qdoba vs. Moe’s vs. Taco Bell and practice using the methodology presented in Table 4.4 in
Chapter 4. We urge spending about 10–15 minutes of class time drilling students on proper use of this tool.
Case 10 Teaching Note Chipotle Mexican Grill in 2014
410
TABLE 1 Competitive Strength Assessments of Chipotle, Qdoba,
Moe’s, and Taco Bell
(Rating scale for each strength measure: 1 = very weak; 5 = average; 10 = very strong)
Competitive
Strength
Measures
Importance
Weight
Chipotle Qdoba Moe’s Taco Bell
Strength
Rating
Weighted
Score
Strength
Rating
Weighted
Score
Strength
Rating
Weighted
Score
Strength
Rating
Weighted
Score
Menu selection
and appeal
(especially as
concerns dish
customization)
0.15 91.35 91.35 91.35 71.05
Food quality
and taste 0.25 10 2.50 82.00 92.25 61.50
Score
The competitive strength ratings in Table 1 indicate that Chipotle has a competitively strong position. We
have rated it a bit stronger than Taco Bell because of its menu appeal, food quality and taste, and marginally
better dining ambience—there is reason to believe that Chipotle has drawn customers away from Taco Bell
because of these factors (which accounts for some of its success and growing acceptance in the fast-food
Student competitive strength ratings will, of course, differ from those in the table above because there is
room for different judgments both as to the importance weights and the strength ratings. However, we
think that the total rating/score should nonetheless be highest for Chipotle and Taco Bell (some students
Case 10 Teaching Note Chipotle Mexican Grill in 2014
411
9. What action recommendations would you make to CMG’s top executives to strengthen
the company’s growth and profitability?
There are no big or threatening problems/issues that need fixing or correcting at Chipotle. There is certainly
no reason to overhaul or do major surgery on the company’s strategy—it is plainly delivering on all three
criteria for a winning strategy. But there are some actions that students might constructively propose:
nContinue to open new Chipotle restaurants at a rapid pace. There is a first-mover advantage in securing
prime retail locations in urban areas vis-à-vis the other Mexican fast-food rivals, especially Moe’s and
Qdoba—being the first to open new restaurants in locations where there is no Qdoba or Moe’s should
n Monitor the success and appeal of Taco Bell’s newly-upscaled and improved menu very closely. If
Taco Bell’s new menu proves a good bit more attractive than the earlier menu, then Taco Bell is likely
n Successfully combating a rejuvenated and better-tasting Taco Bell menu may require some menu and
nPress forward with testing and refining the ShopHouse Southeast Asia Kitchen and Pizzeria Locale
formats. If the testing goes well, then begin to roll out both formats and open new ShopHouse Southeast
Asia Kitchen and Pizzeria Locale restaurants at as fast a pace as the company can handle without unduly
Epilogue
In October 2014, Chipotle Mexican Grill reported revenues of $3.04 billion for the first nine months of 2014,
up 28.2% over the first nine months of 2013. Chipotle had 9-month net income of $324.1 million, an increase of
30.8% over the first nine months of 2013. Diluted earnings per share totaled $10.29 for the first three quarters,
an increase of 29.8% over the first three quarters of 2013.
Chipotle’s strong revenue growth was the result of an exceptionally big 17.0% increase in comparable restaurant
sales and sales at recently-opened restaurants not in the comparable base. Comparable restaurant sales growth
was primarily driven both by increased traffic and, to a lesser extent, by a 6.5% hike in average menu prices in
the second quarter of 2014 that resulted in an increase in the average check per customer visit. During the first
three quarters of 2014, Chipotle opened 132 new restaurants (bringing the total count to 1,724).
For full-year 2014, Chipotle management expected to open a total of 180–195 new restaurants and achieve
mid-teens comparable restaurant sales growth. For full-year 2015, Chipotle management was planning to open
190–205 new restaurants. Management expected that sales growth in restaurants open 12 or more months would
drop to the low-to-mid single digits; the smaller sales growth projection was partially due to the company
lapping quarters in 2015 that had outsized percentage gains in 2014.
Case 10 Teaching Note Chipotle Mexican Grill in 2014
412
In commenting on Chipotle’s third quarter 2014 results, founder, chairman, and co-CEO Steve Ells made a
number of important observations about Chipotle, trends in the fast-food business, and the prospects for fast-
casual restaurant chains like Chipotle with its three menu concepts:
These results would be remarkable for any restaurant company but for Chipotle where we are now more than
21 years old with more than 1700 restaurants and average unit volumes of more than $2.4 million, we think
they are extraordinary. While our performance has been particularly strong this year, our results have been
solid throughout our history as a public company even through the depths of the recession and I am often
asked how we continue to perform so well. The fact is there is no great mystery to it. Our ability to generate
such strong sales growth is the result of our commitment to serving the best tasting food we can. Food that
is made with ingredients from more sustainable sources and prepared using classic cooking techniques, and
our commitment to having teams of top performers in our restaurants who are empowered to provide an
extraordinary customer experience.
We have shown that we can spend more on ingredients not less and charge a fair price and at the same time,
generate outstanding business results. That we can prepare food using classic cooking techniques in each
and every one of our more than 1700 restaurants and have consistency. That we can provide great service
and still be fast. That we can have teams of top performing managers and crews cooking in the restaurants
and still maintain an efficient labor model. Rather than compromise any of the important variables involved
in running restaurants, our decision is to deliver all of them and it allows us to create an extraordinary
experience that is unique to Chipotle.
This formula has worked extremely well for us since the very beginning and others are starting to notice. A
July survey of fast food customers asked more than 32,000 participants who reportedly ate more than 96,000
fast food meals at 65 chains to rank restaurants based on the quality of the food and the experience. Chipotle
topped the list, while traditional fast food restaurants where ranked near the bottom, with customers citing
uninspiring food as the primary reason. Despite offering dollar menus and frequent discounts, many of these
chains also scored poorly in terms of value. The bottom line is that the customer wants delicious food, served
quickly and in interactive format and they are increasingly unwilling to compromise.
Perhaps not surprisingly this survey found that younger consumers, the millennials, were more inclined to
skip traditional fast food in favor of restaurants like Chipotle. Food industry research indicates that millennials
are turning away from traditional fast food in favor of better food and a more enjoyable experience overall.
They are more concerned with how food is raised and prepared than previous generations and are willing to
seek out and pay a little more for something they recognize as better tasting, better for the environment, and
better for their wellbeing.
During the quarter we opened another ShopHouse, the eighth one in the Washington DC area. ShopHouse
very much reminds me of Chipotle when I opened the first one of the restaurants. It is food that is new to
many of our customers but they love it and are thrilled to enjoy a meal that is avorful, skillfully prepared,
and served in a way that is accessible and affordable. At the beginning of this month, we also opened a
second Pizzeria Locale in Denver.
More than ever, I believe this is the new fast food model. Increasingly, consumers want what Chipotle
is doing and they seem to be turning away from traditional fast food in favor of better food and a more
compelling experience. That is what drives our business and continues to provide outstanding results for our
shareholders and will continue to be our primary focus.
During 2012, Chipotle Mexican Grill’s common stock traded as high as $442.40 (mid-April) and in November-
early December was trading in the $250–$270 range; on December 6, 2012, CMG’s closing stock price was
$266.51, some $74.76 below the price of $341.27 on January 3, 2012.
There was no other strategic or financial news of significance to report at the time this teaching note was prepared.
For the very latest information on developments at Chipotle Mexican Grill, we urge that you check the press
releases and the investor relations sections at www.chipotle.com.
1Chipotle Mexican Grill’s CEO Discusses 2013 Results—Earnings Call Transcript, January 30, 2014, posted at
www.seekingalpha.com, accessed February 8, 2014.
