Is Chipotle’s strategy enough to drive an Asian invasion of the fast-casual space?
A corporate strategy article by Thunderbird students Manya Andrews Dotson, Wes Herche, Brie Lam, William Randle and Jonathan Walters
Abstract: Can a cut and paste application of the Chipotle strategy lead to another runaway restaurant success in an industry rife with pressures on profitability? Was it the business model that fueled Chipotle’s meteoric rise? Or was it that CEO Steve Ells took a food we already knew and loved, the burrito, and made it taste even better? Or, are the two inseparable? Will replicating Chipotle’s strategy yield another blue ocean success story?
The foodie blogs are abuzz . . . a new naked light bulb has been lit in a stainless steel restaurant in Washington DC’s Dupont Circle. Firmly planted in a neighborhood where restaurants such as Panera Bread, Cosi and Starbucks dot the grid, it fights for purchase in a bloody — if tasty — battle for the upscale business lunch crowd fed up with traditional fa(s)t food (though, there’s some of that around there too). It boasts artisanal tofu, farm fresh ingredients, and free-range meats charred to medium-rare perfection right under the customer’s nose. It would be hard to believe that an Asian restaurant this good could be using the same playbook as the blazing burrito chain, Chipotle.
ShopHouse Southeast Asian Kitchen is Chipotle founder Steve Ells' fresh attempt to democratize sophisticated food, and his strategy is to cut and paste the ensemble of business ingredients that he believes are behind Chipotle’s success. Although the sector is quickly growing, with 9.3% sales growth last year at fast-food and fast-casual Asian chains, the Asian fast-casual space already has firmly entrenched incumbents. Can ShopHouse Kitchen be to Asian fast-casual what Chipotle is to Fresh Mex, even without the first mover advantage? Is Ells' restaurant recipe unique and potent enough to cook up another stunning success?
The Rise of the Fast Casual Industry
Fresh out of culinary school, Steve Ells opened the first Chipotle Mexican Grill in Denver, Colorado in 1993 with the simple intention of generating some cash to start a fine dining restaurant (Brand). Ells suspected that customers wanted fresh and tasty food, but little did he know that Chipotle would lead a new category of restaurants known as “fast-casual”— establishments that focus on simple but high quality food and décor, but without the table service and long waits that come with sit-down restaurants. At the time, it was a redefinition of the restaurant industry—a Blue Ocean strategy that made new rules for restaurateurs, and broke open a wide untapped market.
Not only would the fast-casual industry boom, it would become large enough to spawn sub-categories such as “Fresh Mex” where Chipotle holds the dominant position. Pinpointing an exact commencement for the fast-casual restaurant movement is difficult but many of the restaurants that currently make up the category began in the early 1990s, and really started gaining momentum in the last five to ten years. Even as the United States and many other Western nations are experiencing a sharp economic downturn, the fast-casual industry has maintained steady growth even through 2007 global recession (Hensley). With typical Western consumers becoming ever more aware of (and discerning about) the sourcing of their food choices and the growing pressure on personal budgets, the fast-casual industry, Chipotle Mexican Grill in particular, has been perfectly positioned to meet this new demand.
A Porter-led Portrait of the Industry
A quick glance at the industry using Michael Porter’s famous Five Forces analysis framework, reveals that all of the pressures on profitability are high in the fast-casual space.
Competition amongst rivals is already high, and increasing, as fast food chains attempt to give themselves makeovers to take advantage of the trend. Substitution power is high in the fast-casual industry as fast food options, sit down restaurants, and food delivery services are abound. Threats from new entrants is very high, as space in existing retail areas is plentiful, and with many fast-casual chains offering franchise opportunities, start-up costs can be low. There are few trade secrets in an industry that generally allows customers to view the kitchen while their food is being prepared.
With rivals and substitutes available on every corner as well as virtually no switching costs in the growing fast-fresh movement, buyer power is also high. If the popularity of food television channels and the proliferation of “celebrity chefs” are any indicator, the modern consumer palette continues to grow more sophisticated. Looking for healthier options that are still convenient is increasingly a priority. Industry players could neutralize this power to some degree by creating loyalty programs and carefully locating stores in geostatistical sweet spots characterized by a high density of white-collar businesses and low density of existing fast-casual options.
Though the fast-casual industry is rapidly growing, stacking up the major competitive forces paints a stark picture of a tough industry in the long term. Is there really space for an Asian permutation of Chipotle? Is there enough ethically produced meat to supply two chains?
Within the fast-casual category, restaurants focusing on organic ingredients have onerous buying requirements. Supplier power is medium- to- high, as fewer suppliers are able to meet the requirements and prices remain higher. Additionally, increasing global population, particularly the rise of consumer consumption in India and China, are putting further upward demand pressure on food prices. Restaurants using organic food may be forced to compromise their quality standards (or pay more) when demand outstrips supply.
In The Kitchen: The Inner Workings of Chipotle
In the fast-casual category, different ethnic and thematic categories with fast, fresh and healthy food compete to satiate customer hunger. Even within, the Fresh Mex sub-category competition is fierce; however, Chipotle and its 1,100 restaurants lead the pack beating out the closest rival Qdoba with 800 restaurants (The QSR 50). Competitors such as Baja Fresh, Barberitos, Illegal Pete’s, Freebirds, and others also vie for potential Chipotle customers. What a company chooses not to do is often what differentiates a company within an industry and Chipotle makes some tough trade-offs to define their strategy and brand.
The most salient aspect of Chipotle’s culture is the commitment to sustainability which is reflected across all of its operations; from selecting organic ingredients to using environmentally responsible materials for stores. This encompassing commitment is valuable, creates good PR and marketing opportunities, and is a defining differentiator for brand positioning. While each of these “green” activities are more commonplace individually, the overall commitment to aligning all activities with this vision is certainly rare, and would be costly to comprehensively imitate at large scale.
Chipotle has made a commitment to sourcing “clean food,” and outlined this in its mission statement titled: “Food with Integrity” (Chipotle). All of the meat purchased by Chipotle is raised free-range without antibiotics or hormones. Chipotle uses organic vegetables while attempting to purchase locally grown produce where possible. The uniqueness and extent of the organic angle significantly differentiates Chipotle from its competitors as seen in New York City where only 19 restaurants serve up free range beef to a city of over 8 million people (Grass Fed Beef). Free-range meat sourcing is a challenging activity for rivals to replicate.
In traditional fast-service, high volume restaurants, food preparation is centralized off-site, trucked to restaurant freezers with precise supply chain management processes, and dumped into the hands of minimum wage microwave operators. The lack of can openers, microwaves and freezers in Chipotle stores reflect the commitment to serving fresh food made seconds before it is consumed. Ells credits the food preparation techniques as the reason for the restaurants popularity. Creating teams of “chefs” out of low-wage cooks is an activity that is rare, not easily replicated, and yet a perfect fit with the overarching vision of quality food. Many Chipotle restaurants also sell alcohol as fresh Margaritas and cold Mexican beer can complete the Fresh Mex experience. Alcohol differentiates Chipotle from substitute products such as traditional fast food (Taco Bell, McDonald's, Arby’s, etc) and other fast-casual offerings (Starbucks, Panera Bread, etc).
Chipotle helped create and define the fast-casual restaurant category, but unfortunately the incumbency advantage may not be enough to ward off new entrants in a context where there are few barriers, and individual activities are well known and widely touted. Luckily for the industry overall demand for “cleaner,” “greener,” “healthier” and more sophisticated options in quick service food seems to be on a steady rise. This trend definitely plays to the favor of Chipotle’s strategic position.
But Chipotle’s simplicity might ultimately be its downfall — with a formula so tight it leaves little room for innovation, one wonders how long our so-called sophisticated palates will crave the simple burrito. How can Ells ensure that his restaurant concepts stay as fresh as the ingredients he so carefully sources? It’s a problem that Ells has been noodling for some time.
A recent Fortune interview with the man himself, reveals what Ells thinks is the secret of Chipotle’s success: sophisticated cuisine, operational competence and social responsibility. "Chipotle succeeds not because of the burritos... It works because of our system: fresh, local, sustainable ingredients, cooked with classic methods in an open kitchen where the customer can see everything, and served in a pleasing environment." So rather than trying to evolve Chipotle, Ells is diversifying his restaurant portfolio — and adding East Asian cuisine to the mix. (Kaplan)
ShopHouse East Asian Kitchen – A Different Bowl of Rice
Supporters of Ells’ new strategy emphasize that only 1.7% of sales in the top 500 U.S. restaurant chains are from Asian chains, with the category representing a relatively untapped haven in the mature fast-food industry. This gap has not gone unnoticed. According to food industry consultant Technomic, Asian items on menu offerings at the top 250 restaurant chains were up 19% in the latter half of 2010 against the same period a year earlier. Consumers who considered themselves likely to order a Chinese-style beef dish while dining out rose from 30% to 46% between 2008 and 2010 (Market Intelligence Report: Asian).
Detractors, however, argue that Chipotle’s success was based on first-mover advantage, and that ShopHouse can’t close the gap with a small number of powerful incumbents deeply entrenched. But while other companies copied the tone and idea of fast-casual, none have adopted wholesale the combination of activities that Porter would argue undergird Chipotle’s success. Until now . . .
The first thing Ells has done with ShopHouse is to simplify — but not dumb down — East Asian cuisine; breaking the menu into a system of infinitely combinable parts (http://shophousekitchen.com). Unlike direct competitors Pei Wei and Panda Express, which both offer traditional Americanized Asian cuisine in all of its sweet-crunchy-greasy and caramelized glory, Ells brought classically trained chefs James Beard, rising star chef Nate Appleman, and Kyle Connaughton to develop the menu (Shunk). It’s telling that at ShopHouse there’s not an eggroll in sight.
The process — as at Chipotle or Cosi — takes the customer right to the assembly line found in any fine kitchen, allowing them to call the shots at each step. The customer initially chooses a starch (bread, noodles, rice), adds freshly charred grass-fed meats, line-prepared locally grown vegetables, proprietary sauces, crunchy relishes and pickles, and unique toppings (e.g. dried rice) . . . snags a culturally appropriate alcoholic beverage (Beer Lao anyone?), and bon appetite. A delicious (and suprisingly complex) meal with integrity is the result.
While restaurateurs, analysts and foodies debate the reasons behind the success of Chipotle, and seek to predict the profitability of its future, ShopHouse’s doors are open in Dupont. From the look of the lunch-hour lines, Ells will effectively diversify his product portfolio, boost overall business sustainability, increase economies of scale, and set up an insurance policy in case his beloved burrito is ever finito. And we’ll look forward — with mouths watering — to the future forays of this foodie and his recipe for success.
* A look at a Blue Ocean Strategy Canvas comparing ShopHouse and its main competitors quickly reveals that the value curve here — identical to Chipotle’s — is once again, a blue ocean.