The Chipotle Mexican Grill way

(This is not an actionable idea or writeup.)

What makes Chipotle different is how small its menu is.  With a barebones menu, the restaurant can turn over its food quickly.  This allows Chipotle to make food before a customer orders, allowing customers get freshly-cooked food without having to wait for that food to cook.  This means high-quality food with a very short wait, making Chipotle an attractive choice for workers on their lunch break (or anybody who wants a quick meal).

Menu discipline

There’s a cost to big menus.  If a restaurant uses fresh ingredients that spoil, having to stock a greater variety of fresh ingredients will lead to more wastage.  Chipotle’s former owner McDonald’s avoids this problem by using ingredients that don’t spoil.  Side note: almost everything on McDonald’s menu comes frozen, are dehydrated (onions), or comes with preservatives (e.g. ketchup instead of tomatoes).  Frozen items like fries and patties are thin so that they can cook from frozen very quickly.

Another issue with large menus is that the kitchen configuration becomes more complicated.  For this reason, McDonald’s does not serve its entire menu throughout the day.  It has a breakfast menu and then switches over to its normal menu after re-configuring its kitchen.

Large menus also require more kitchen equipment, which have a capital cost and an efficiency penalty if the kitchen becomes too crowded.  With smaller menus, kitchen staff can prepare large batches of food at once.  Whereas McDonald’s might only have a few meat items on the grill at a given time, a Chipotle cook might fill the entire grill with meats.  There are small efficiencies to preparing large batches of food at once.  As well, having less to learn makes it easier for employees to get trained.  This is helpful in an industry where there is a lot of churn among the employee base.

Among (fake) Mexican restaurants, very few of Chipotle’s competitors actually copy the concept of a slim menu with freshly-cooked food.  There’s a natural tendency for chefs and restaurateurs to offer a menu that is too large.  Because the customer turnover is spread over a larger menu, any restaurant making freshly-cooked food has to store that food at a high enough temperature to maintain food safety.  The high temperature causes the meats in the food to become less tender and lose taste.  Or, the restaurant has to force customers to wait for food to be cooked.

The upside of the McDonald’s way

The Chipotle way is not necessarily better.

McDonald’s is one of the few restaurants that is busy during breakfast, lunch, and dinner hours.  Many competing burger chains offering similar food struggle to put together a profitable breakfast business and have given up on it.  Being able to put together a viable breakfast menu helps McDonald’s restaurants use their real estate more efficiently and generate higher returns on capital.  McDonald’s is also one of the few restaurants with a viable after-hours/24-hour business.  Chipotle restaurants are limited to lunch and dinner hours.

Secondly, McDonald’s has figured out how to make delicious food in a low-cost manner.

Overall, the methodologies are different.  McDonald’s cooks to order for many (though not all) of its menu items.  Its food is designed to cook very quickly.  Frozen items are thin so they cook quickly from frozen.  The Big Mac uses two smaller patties instead of a single larger patty.  The fries are thin-cut.  Almost all of its menu items are designed to be easy for a low-wage employee to cook, such as having deep-fryers with timed alarms.  Chipotle’s food is more difficult to cook, but they keep the menu extremely small.

The downside of food with integrity

Obviously there are food safety risks with fresh ingredients, which has caused Chipotle’s same store sales to plummet.

During slow periods in a day, a Chipotle restaurant may not be able to turn its food over quickly.  This can cause their food to lose freshness and not taste very good.

Food theatre

What happens in a consumer’s head matters.  People taste with their eyes and their brain.  Take New Coke for example.  The drink is objectively better tasting than classic Coke in blind tests.  Yet the Coke brand leads consumers to think that classic Coke tastes better.

Back to Chipotle.  Suppose that Chipotle hid its entire kitchen.  The customer would only see Chipotle employees scooping food out of metal containers.  To create a better experience, Chipotle puts part of its kitchen within the customer’s view.  Customers see and hear meat sizzling on the grill.  They see fresh vegetables being chopped and prepared before their eyes.  They see real food being prepared.

What they don’t see are giant industrial freezers and the less sexy aspects of running an efficient kitchen.  Chipotle puts on a show for the customer and keeps those other things hidden backstage.  The following video on Youtube (Behind the Counter: Inside Chipotle) has a few shots that show what the restaurant looks like behind the scenes.  It also has a great profile on the company’s founders.

The whole food with integrity thing

I don’t think that Steve Ells feels particularly strongly about food with integrity.  The Chipotle profile video notes that he graduated from the Culinary Institute of America (one of the most prestigious culinary schools in the world), which is where you go if you are passionate about making high-end cuisine.  Ells also originally wanted to open his own white table cloth restaurant.  When Ells started Chipotle, he probably did not think about sustainability given that the menu started with beef and chicken.  A meat-based diet has a larger ecological footprint than a plant-based diet.  Ells knows this now and comments on how he is trying reduce his personal meat consumption.  Whatever his personal beliefs are, Chipotle happens to be starting a burger concept that will likely sell a lot of beef patties… even though beef (especially if it is free-range) is not a very sustainable ingredient.

At the end of the day, Ells has amazing instincts as a restaurateur and is able to spot a business opportunity.  There are some people who pay high prices to shop at Whole Foods for organic, GMO-free, and other specialty food products.  Chipotle’s food is very close to what the Whole Foods crowd wants- real food, no preservatives, organic, GMO-free, antibiotic-free, free-range, vegetarian/vegan options, etc. etc.  But Ells is pragmatic and realizes that switching to organic, local, GMO-free, etc. etc. ingredients would badly disrupt Chipotle restaurants in some cases.  So Chipotle has an odd marketing campaign where it talks trash about modern farming practices, while continuing to source ingredients that come from modern farming practices.  It’s good business I guess.

Overall thoughts on Chipotle

I suppose the only real investment insight from this is that there aren’t a lot of competitors copying Chipotle.  The Qdoba chain (owned by JACK) is very similar to Chipotle but they have not embraced the model of a small menu.  In general, Chipotle’s competitors simply aren’t executing as well.  Qdoba’s restaurant count has not grown as fast as Chipotle’s, rising from 583 in 2011 to 661 in 2015 (3.2% growth / year).  Chipotle’s restaurant count has risen from 1230 in 2011 to 2010 in 2015 (13.1% growth / year).

Personally I think that Chipotle’s dominance will continue because the management team at Chipotle has wonderful instincts and knows how to run a restaurant well.  Ells is incredibly pragmatic.  Despite his background in high-end cuisine (CIA, worked as sous chef for two years under Jeremiah Tower, aspired to open his own white table cloth restaurant) he did not try to innovate new menu items and kept his menu extremely small.  And regardless of what his views towards sustainable agriculture and organic farming are, Chipotle continues to serve beef and to source from conventional farms.

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8 thoughts on “The Chipotle Mexican Grill way

  1. Pingback: Some links | value and opportunity

    • Hmm unfortunately I don’t know too much about the supply chain side of the business.

      Probably one of the issues is that Chipotle needs a consistent supply of ingredients. If there is a local drought, they will still need to source produce and they may not be able to get it locally.

      McDonald’s is a little different. They bring back the McRib whenever pork prices are low.

  2. Time is key. When I order at Cosi/Panera/Five Guys, I make my order and then wait like an idiot. With CMG I wait in line but once I order the food is right there. It’s like the indoor version of a drive through. By the way, the Qdoba breakfast burrito is great, Cosi has a pretty good one too. I definitely think CMG could come up with a decent breakfast burrito.

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