Great taste, but at what cost? Chipotle strives to reinforce its strategy

chipotle1By Matthew Blong, Richard Kim, Rebecca Knowles, Wei Li, Eri Miyagi and Ryan Scalise

Stephen Lindner’s eyes lit up as he pulled a hefty burrito wrapped in foil out of a brown bag covered with the catch phrases “I think about Chipotle every time my stomach growls” and “one delicious bite left in the bottom!

When asked what he liked so much about Chipotle, the graduate student at Thunderbird School of Global Management in Glendale, AZ – famished as he began to devour his burrito – immediately responded, “because it tastes good!”

Without knowing it, Lindner exemplifies the effect that Chipotle’s strategic advantage has on its customers.  Namely, that Chipotle tastes great because it serves classic Mexican entrees made from organic and locally sourced meats and produce, all under the banner of the company’s motto, “Food with Integrity.”  And like Lindner, few Chipotle customers realize that good taste is, in fact, a direct result of organic ingredients.

Founded by Denver chef Steve Ells in 1993, Chipotle Mexican Grill’s vision is to provide traditionally-cooked, convenient, delicious and affordable food made from high-quality ingredients, while avoiding the image of being a stereotypical “fast food joint.”  With 37% market share, Chipotle is the market leader in the Mexican fast-casual sector, netting an impressive $126 million in income in 2009.

Few of Chipotle’s customers are aware that well over half of its meats are organic and locally sourced, and much of its produce is grown on small farms.   This, Chipotle believes, is its strategic advantage – that organic and natural foods are higher quality than their conventional counterparts, resulting in greater tasting food.

“They’re not asking for free-range meat or organic beans,” said Ells of his customers in a September 22, 2009 interview with The Wall Street Journal.  “Ultimately, if you give people great-tasting food, they’ll come back.”

And customers do come back in droves (as evidenced by Chipotle’s 30% compound annual growth since 2003), seeking a delicious taco or burrito, not aware that the organic sourced ingredients, as Ells believes, are the crux of great taste, as well as a barrier to imitation by its closest competitors.

Yet there are challenges to “Food with Integrity.”  Chipotle is having difficulty sustaining what its executives recently described in its earnings conference call as its “commitment to building a unique food culture based on making better food from more sustainably raised ingredients.”  Chipotle’s high-quality food supply chain, based on a network of over 45 organic farmers, is costly to maintain and even more costly to imitate.  In order to sustain its competitive advantage, Chipotle will need to expand its organic food supplier base in order to meet its goal of sourcing 100% of its ingredients organically.

For most players in the quick service restaurant (QSR) industry, the balance of bargaining power rests with food suppliers, who provide commodity-priced products that are subject to fluctuations in price.  And given the higher costs of organic farming, many large farmers have not found it economical to pursue the natural food business model, limiting Chipotle’s supply options.

This is why Chipotle is seeking to actively expand its list of “approved” suppliers, particularly seeking out more small and mid-sized farms, which pass muster with its quality assurance department. But the process of identifying and securing these relationships with organic farmers takes time and money.  Chipotle hopes to consolidate its position vis-à-vis its competitors through an expanded supplier network.  One solution might be to establish exclusive relationships, thereby creating an even stronger barrier to imitation.

Unlike many of its direct competitors, Chipotle maintains full ownership over its more than 1,000 stores.   This is unusual in the QSR industry, which is dominated by franchises.  Yet Chipotle eschews the franchise model, underscoring its commitment to maintaining full control over product quality.  In return the trade-off that Chipotle has accepted is increased reliance on debt financing.  Normally this would also slow Chipotle’s growth, yet this is not apparent against the backdrop of approximately 120 new store openings in 2010.  Many of these feature the company’s new and lower fixed-cost “A-Model stores,” which are defined by their LEED-certified architecture and reduced energy costs, environmentally friendly features that are consistent with Chipotle’s natural, activist image and that provide cost savings that it can apply towards supplier costs.

Another defining feature of Chipotle’s unique strategy is its caring approach to its 25,000 employees, which is costly and difficult to imitate.  “Our culture appeals only to high performers,” said Ells in an October 2008 interview with Reader’s Digest, explaining Chipotle’s policy of providing performance-based bonuses to all employees, a rarity in the industry.  “We want our folks… to think like owners,” Ells said, noting that Chipotle promotes a stock option plan for its non-executive employees.

One local Chipotle kitchen manager praised his company for fostering a team-based environment by cross training all employees.  Indeed, all employees are expected to perform service line duties from chopping vegetables, preparing food, to serving customers at the register.  Furthermore, Chipotle empowers its managers to identify line employees who have leadership potential.  This provides the line employees an incentive to perform their best as they prepare menu items in front of the customer’s eyes, creating a strong fit and reinforcing Chipotle’s quality-based strategy.

Consisting of just four basic items – salads, tacos, burritos and burrito bowls – Chipotle’s simple yet focused menu is the epitome of what Harvard Business School professor Michael Porter calls “variety-based positioning.”  Competitors in the Mexican fast-casual sector, such as Qdoba Mexican Grill, Baja Fresh and Moe’s Southwestern Grill, offer more varied menu items than Chipotle does.  Nevertheless, Chipotle notes that its line cooks can offer more than 65,000 unique entree combinations, given the customer’s ability to customize each menu item.

Chipotle’s narrowly focused menu allows it to concentrate on obtaining the high-quality meat and produce that help it to realize its strategy.  Furthermore, the menu is intuitive and efficient, facilitating a customer turnover rate of over 300 customers per hour – many of whom are extremely loyal to Chipotle.

National exposure on television programs such as Jamie Oliver’s “Food Revolution” has helped Chipotle to establish itself as a pioneer in serving natural food in QSR industry.  Recently Chipotle has invested a great deal in its brand, emphasizing its close ties with the organic and “slow-food” movement.  Should “Food with Integrity” prove to be successful over the long run, competitors will find it very difficult to match the brand loyalty and superior quality food that Chipotle has so carefully crafted.

Yet this spotlight on Chipotle’s business model is risky.   Attention from food activists opens the company to scrutiny and criticism, should supply issues or a change in strategic tack force it to move away from natural and organic ingredients.  Nevertheless, Chipotle’s advocacy and consumer education efforts within the natural and organic food movement maintain Chipotle’s high visibility profile among its competitors.

These competitors are hot on Chipotle’s heels, having imitated Chipotle’s strategy by promoting their use of fresh ingredients to prepare entrees geared towards a sophisticated and health-conscious clientele.  Qdoba emphasizes reduced carbohydrate and caloric intake with its “Naked Meals,” tacos and salads served without tortillas.  Baja Fresh emphasizes fresh and healthy meals, subtly attacking Chipotle with its “No Compromises” slogan, which underscores Chipotle’s inability to meet its publicized goal of offering 100% organic foods in all of its restaurants.

As a result, Chipotle has forced itself to re-emphasize its original and most characteristic advantage: the “Food with Integrity” philosophy.  Early in 2010, Chipotle hired its first Chief Marketing Officer to upgrade its marketing strategy in an attempt to more clearly communicate how its food differs from that of its competitors.   It recently launched an ad campaign, “Straight Talk,” to speak directly on the radio and online about the company’s commitment to providing natural food and reinforcing customer loyalty to Chipotle’s brand.

Chipotle2“With our continued focus on developing our extraordinary food and people cultures, and the renewed commitment to bringing our marketing in line with the progress we have made in these other critical areas, we believe Chipotle remains well-positioned for long-term growth and will continue to provide value to our shareholders,” said Ells in a recent quarterly earnings call.

The company believes that its “Food with Integrity” strategy will continue to bolster demand for natural foods over the long-term, insisting that better quality ingredients lead to better tasting food.  Although Chipotle may have thus far fallen short in effectively communicating this to customers, the taste speaks for itself.  Chipotle believes that demand for its food will increase in the long-term and will continue to attract the interest and capital investment of larger farms and suppliers – a key aspect in Chipotle’s ability to maintain its strategic advantage.

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.