Chipotle Mexican Grill, Inc.

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Chipotle Mexican Grill, Inc.

1543 Wazee Street, Suite 200
Denver, Colorado 80202-1442
U.S.A.
Telephone: (303) 595-4000
Fax: (303) 595-4014
Web site: http://www.chipotle.com

90-Percent-Owned Subsidiary of McDonald's Corporation
Incorporated: 1993
Employees: 6,600
Sales: $321 million (2003 est.)
NAIC: 722211 Limited-Service Restaurants

Chipotle Mexican Grill, Inc. is one of the leading fast-casual Mexican restaurant chains, with approximately 400 outlets in about 20 states, mainly in the West and Midwest. Known for its fresh, gourmet, and increasingly organic ingredients, Chipotle (pronounced chi-POAT-lay) offers a fairly simple menu of burritos, fajitas, and tacos featuring pork, shredded beef, chicken, steak, and vegetarian fillings. Customer checks average about $8.50. From a single location in Denver, Colorado, in 1993, the chain is now growing at the rate of 100 new restaurants per year thanks to the deep pockets of its parent, fast-food giant McDonald's Corporation. McDonald's first invested in the company in 1998, before taking majority control the following year, and it now holds a 90 percent stake. The vast majority of Chipotle restaurants are company-owned; fewer than ten are franchised. Annual revenues per unit are an estimated $1.2 million.

Early 1990s Brainchild of Steve Ells

Born on September 12, 1965, in Indianapolis, Steve Ells, the founder and CEO of Chipotle, developed a deep interest in cuisine, cooking, and restaurant eating at an early age. He told Nation's Restaurant News in January 1999 that in family travels across the United States and Europe he had an opportunity to taste many different foods and to develop an appreciation for fine cuisine at an unusually young age. Instead of cartoons, he was interested in watching Julia Child cooking shows. "When I was in fourth grade, I used to make eggs Benedict before I had to catch the school bus."

Ells attended the University of Colorado at Boulder, where he received an art history degree in 1988. He then decided to pursue his lifelong interest in fine food by attending the Culinary Institute of America in Hyde Park, New York. After graduating in 1990, he worked for two years at the high-end Stars restaurant in San Francisco under famed chef Jeremiah Tower. His inspiration for creating Chipotle, however, came from his frequent off-hour visits to little taquerias in San Francisco's Mission District. There he was struck by the fat burritos prepared to order, everything bundled in a giant flour tortilla wrapped in foil. Ells's idea was to put a twist on this traditional Mexican peasant food by stuffing the tortillas with gourmet ingredients, leveraging his culinary knowledge.

After a year of planning during which he arranged an $80,000 loan and persuaded his father, a former president of the pharmaceuticals firm Syntex Corporation, to invest an additional $85,000, the then 27-year-old Ells returned to the Denver area, where he had lived during his junior/senior high years, to open the first Chipotle Mexican Grill. It was named after a smoked and dried jalapeño pepper that figured prominently among the ingredients, particularly the marinades used to flavor the meats. Located on Evans Avenue in Denver near the campus of the University of Denver, the restaurant opened in July 1993. The configuration of the restaurant made for a somewhat rough beginning. The kitchen was in the back, and customers and employees had to yell back and forth during ordering. Ells soon developed an open-kitchen design in which the food prep was brought out front, and the customers could interact directly with the staff and have more control over the food they were ordering.

The simple menu enabled customers to choose among burrito, taco, and fajita items; select a filling of steak, chicken, pork carnitas, or vegetarian; and then add various other fillings or toppings—all as they moved along a serving line. The huge burritos, weighing a pound and a quarter and wrapped in enormous 14-inch flour tortillas, held rice and beans in addition to the aforementioned fillings. All the ingredients were of high quality and fresh, and Ells put special gourmet touches on nearly everything: cilantro and lime juice in the rice; chopped serranos, more cilantro, and marinated red onions in the guacamole; romaine lettuce rather than the typical iceberg in the tacos. In an early rave review, Bill St. John, writing in the Rocky Mountain News enthused: "Nothing is plain here; everything has depth, character, nuance, layers of flavor." The main items on the menu were quite reasonably priced, initially ranging from $3.95 to $4.55. Among the drink offerings were margaritas and beer.

After working out the initial kinks, the first Chipotle became a huge hit. Ells's father got his investment back within a month or so. Over the next few years, more outlets were opened in the Denver metro area, funded by an additional $1.5 million investment by Ells's father and a $1.5 million private stock offering. The second store opened in February 1995, and then six more debuted during 1996. Ells concentrated first on siting restaurants in Denver's trendier neighborhoods before moving into the suburbs. Backing this growth initiative and adding efficiency to the overall operations was the addition of a central commissary where some of the ingredients were prepared. By this time, Chipotle was considered a pioneer in two national restaurant trends: so-called wraps and the fast-casual sector. The latter category encompassed chains that were a bit fancier than typical fast-food restaurants such as Taco Bell and a bit faster than casual-dining chains such as Chevys. Each Chipotle was estimated to be generating just over $1 million in annual sales at this time. Sales were divided about 50–50 between eat-in and carry-out customers. Chipotle's clientele was mainly composed of adults between the ages of 18 and 49, a contrast to most fast-food restaurants, which catered to teenagers and families.

Whereas the first Chipotle was a cramped 800 square feet in size, the subsequent units covered 1,600 to 2,800 square feet, and they employed about 17 workers each. Although the design differed from unit to unit, the architecture aimed for a hip, urban feel. The decor was spare and industrial: halogen lighting, metal tabletops, wooden benches and seats, concrete floors, and arched metal ceilings. At this time, design and construction costs totaled about $249,000 per unit. Also noteworthy during this initial period of growth was that Chipotle did little in the way of advertising or promotion, relying instead on word-of-mouth testimonials.

Rapid Expansion Funded by Late 1990s McDonald's Buyout

As six more Chipotle Mexican Grills opened in the Denver area during 1997, bringing the total to 14, Ells and other company leaders were seeking more funding to accelerate the growth rate. Venture capital firms were more interested in the high-flying tech world at the time, so a member of the Chipotle board of directors sent an unsolicited business plan to fast-food leader McDonald's Corporation. The timing was perfect. Domestic sales were flattening at the burger giant, and executives were seeking a way to jump-start growth. In February 1998, after a year of negotiations and due diligence, McDonald's made its first-ever investment in a restaurant chain it did not itself develop, buying a minority stake in Chipotle. (Later, it bought the Boston Market chain and owned the Donatos Pizza chain for a few years.) Chipotle continued to be run independently, headed by Ells as CEO, and neither its management structure nor its menu changed. Growth would continue to be generated through company-owned outlets—now with the backing of much deeper pockets—but there was the clear potential for franchising, eventually, through McDonald's system of franchisees.

Following the McDonald's infusion, Chipotle began expanding outside of Colorado, sometimes aided by McDonald's expertise in site selection. Two units were opened in Kansas City (one in Kansas and one in Missouri) in 1998, and several new markets were entered in 1999: Chicago; Cleveland, Columbus, and Dayton, Ohio; Minneapolis-St. Paul; Phoenix; Dallas; and Washington, D.C. The restaurant count more than doubled in 1999, ending at 37. Revenues for the year totaled approximately $31 million, compared to $13 million for 1997. McDonald's increased its stake in Chipotle to more than 50 percent in 1999 and would later bump its ownership interest to 90 percent.

Another early benefit of the McDonald's relationship was that Chipotle could leverage McDonald's industry clout in, for example, getting a better supplier of avocados. Chipotle was also able to have supplies such as avocados shipped immediately through McDonald's massive distribution system. Such access was indispensable as Chipotle's operations spread out geographically.

Company Perspectives:

"When I created Chipotle in 1993, I had a very simple idea: Offer a simple menu of great food prepared fresh each day, using many of the same cooking techniques as gourmet restaurants. Then serve the food quickly, in a cool atmosphere. It was food that I wanted, and thought others would like too. We've never strayed from that original idea. The critics raved and customers began lining up at my tiny burrito joint. Since then, we've opened a few more."

—Steve Ells, founder and CEO

Early 2000s: Accelerating Growth, Shifting to Organic Ingredients

Expansion accelerated in the early 2000s, with the store count reaching 100 by the end of 2000 and then 175 at year-end 2001. Among the new markets were Baltimore, Houston, Los Angeles, and San Francisco. A McDonald's franchisee began operating two Chipotle units in Dayton, Ohio, but there was not yet a major move into franchising the concept. During 2001 Chipotle dropped the phrase "Mexican Grill" from the name of its restaurants (though the company name itself did not change). Officials at the chain reasoned that "Mexican Grill" had become too commonly used throughout the industry and might prove limiting, given that the menu already went well beyond typical Mexican fare. Around this same time, the company made the first significant changes to the menu since the first store opened. In addition to fine-tuning the recipe for its homemade guacamole, Chipotle switched to free-range pork for its carnitas. The supplier, Oakland, California-based Niman Ranch, raised its pigs "naturally"; Niman allowed them to roam free and did not feed them antibiotics. The result, according to Ells, was better-tasting pork. To use the higher-end and higher-priced product, Chipotle had to raise the price of its pork burritos by more than $1, to $5.50, but sales hardly suffered. Ells told Nation's Restaurant News in July 2001 that "our customers can't get enough of the new recipe. . . . In fact, we are selling two-and-a-half times more carnitas than before, and sales continue to rise." Food industry research and consulting firm Technomic estimated that overall revenues at Chipotle more than doubled in 2001, reaching $145 million.

About 55 more Chipotles opened in 2002 and another 70 the following year, bringing the total to 300. As it celebrated its tenth anniversary, Chipotle ranked as one of the fastest-growing restaurant chains in the country. The chain entered the Las Vegas, Atlanta, and New York markets, among others, in 2003, by which time Technomic estimated revenues at $321 million. Same-unit sales (that is, sales at units open more than one year) were growing at an impressive rate of 20 percent per year. Late in 2003 McDonald's announced, contrary to earlier rumors, that it would sell neither Chipotle nor Boston Market, both of which were operating in the black (it soon sold Donatos Pizza, however). Chipotle remained a major growth avenue for McDonald's.

Continuing to upgrade his food ingredients, Ells switched from yellow corn, which could contain genetically modified stock, to organic white corn, which did not have any genetically modified stock. He also began switching to organic beans, but a shortage of suppliers meant that Chipotle could get only 10 percent of the beans it needed from organic sources. In addition, he was running into similar problems finding suppliers of organic chicken. By mid-2004 Chipotle was offering naturally raised, antibiotic-free chicken from Bell & Evans in 50 restaurants in Washington, D.C., New York, and Ohio. Eight restaurants in Chicago and New York were using naturally raised beef.

Starting with 2004, Chipotle increased its growth rate to 100 new units per year, aiming to hit the 500 restaurant mark by the end of 2005. The chain expanded into the Pacific Northwest by entering the Seattle and Portland, Oregon, markets and also moved into Florida, specifically Orlando and Tampa. Chipotle also beefed up its marketing efforts by hiring its first outside advertising agency, the New York office of an irreverent British agency, Mother. Chipotle had been producing its own humorous radio, print, and billboard ads featuring a photo of a burrito wrapped in foil accompanied by brief, witty copy, such as "A complete, four-course meal in a handy tortilla carrying pouch" or "Burrito? Or body pillow?" Chipotle's marketing budget was estimated to be $10 million per year. Another development was an addition to the menu in response to the low-carb diet craze: Chipotle began offering its burritos and fajitas in a bowl, sans tortilla, and with romaine lettuce standing in for rice.

By late 2004, with the store count nearing 400, nothing appeared to be slowing Chipotle's remarkable growth. Ells had made only small changes to the still-simple menu in the 11-plus years he had been in business, and he continued to seek out new sources for organic ingredients. "It's not just about fresh anymore; fresh is sort of the minimum that you have to do in this category now," Ells told Nation's Restaurant News in October 2004. "You have to be concerned where your food comes from and how the animals were raised. I call it 'Food with Integrity.' " Backed by the cash-rich McDonald's, Ells was positioned to maintain the rapid growth of Chipotle: "I think there's a huge demand in the U.S. for the brand. And so the challenge is to improve the experience and deliver it to more and more people."

Principal Competitors

Fresh Enterprises, Inc.; Rubio's Restaurants, Inc.; Moe's Southwest Grill, LLC; Qdoba Restaurant Corporation; El Pollo Loco, Inc.

Key Dates:

1993:: Steve Ells opens the first Chipotle Mexican Grill in Denver, Colorado.
1995:: Second Chipotle restaurant opens.
1997:: Six more Chipotle Mexican Grills open, bringing the total to 14.
1998:: McDonald's Corporation purchases a minority stake in Chipotle; first units outside Colorado open in Kansas City.
1999:: McDonald's purchases majority control of Chipotle; several new markets are entered as store count reaches 37.
2001:: Menu begins featuring Niman Ranch free-range pork.
2003:: Store count reaches 300.