Chipotle's Business and Stock Research Paper

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Case Analysis of Chipotle

Introduction

This case analysis of Chipotle (CMG) examines the industry in which the restaurant has risen and looks at the company’s background and core values. The problem that the company has encountered in the last five years is really one of the financial markets and not so much a matter of image, brand, or poor business decisions—at least in terms of what the business was doing prior to 2012. However, when famed investor David Einhorn picked CMG as a potential short, the market decided he was right: Chipotle lost nearly half its market cap over the course of the summer of 2012. Since then the company’s stock price has rebounded to all-time highs in 2015 and fallen again to where it was prior to Einhorn’s short call. The company, in turn, began focusing more and more on what its stock was doing, investing millions in share buybacks. In the past two years alone, Chipotle has spent $150+ million in buying back its own shares and enriching investors. That is money it could have spent on marketing, research and development, building out its supply chain, investing in communities, promoting it sustainability cause and myriad other endeavors that would have been nearer and dearer to its core values. Chipotle’s main problem is similar to that experienced by Hewlett-Packard at the beginning of the 21st century when a revolving wheel of CEOs tried to figure out how best to prop up the ticker of the IT company (Bandler & Burke, 2012). Chipotle is in danger of making the same mistakes that led to HP’s fall from being an innovative leader in the tech industry. In order to get back on track, Chipotle must begin to refocus on putting people before profits and stop placing so much emphasis (and money) on what the stock price is doing. If Chipotle continues to deviate from its core values of sustainability, food with integrity, and cultivating the fast casual dining experience, it may end up losing more ground in the fast casual niche restaurant market to eager up-and-coming competitors.

General Environment/Industry Analysis

In 2012, the restaurant industry held 48% of the food dollar: almost half of every dollar spent on food in the U.S. in 2012 was spent at a restaurant. This figure was well up from the 25% of every food dollar spent at a restaurant half a century earlier (Subramanian, 2013). Today, the restaurant industry consists of three main segments: “full service, quick service, and fast casual” service (Subramanian, 2013, p. 1). Full service restaurants are those in which diners sit down at a table and are waited on by a waiter or waitress. Quick service is also known as fast food any of the national fast food chains with counter ordering, drive-thrus and sit down tables inside qualify as quick service. Chipotle falls into the smallest of the three segments—the fast casual segment, which focuses on delivering portable food using fresh, healthy ingredients. Full service restaurants make up roughly 32% of the restaurant industry. Quick service restaurants account for 28% of the industry, and fast casual account for only 4% (Subramanian, 2013).

As for price points, the fast casual is right in between full service and quick service—higher than fast food prices but lower than full service. Customers know that they are paying for quality when they purchase fast casual food and so they are willing to pay more than they would at a drive-thru. They also recognize that they are getting a portable meal that gives them time to get in and get out without having to tip and allocate time to the full service sort of experience that would be required of them were they dining in somewhere. The average cost of a fast casual meal is between $7 and $10 (Subramanian, 2013).

Given the growth opportunity of the newest segment in the restaurant business—the fast casual segment—several larger restaurant chains, both full service and quick service, have entered into the space. P. F. Chang’s opened its fast casual Pei Wei restaurants. Full service dine-in restaurant Ruby Tuesday now has its Lime Fresh fast casual restaurants. Panera Bread, Five Guys Burgers, and myriad other national and local fast casual restaurants have popped up all over the U.S. in recent years. The combination of counter ordering and high quality, fresh ingredients has made fast casual one of the most preferred restaurant segments among young consumers today (Patel, 2017).

This shift away from fast food towards fast casual, where the emphasis is on fresh ingredients and good-for-you meals began earlier in the 21st century when Fast Food Nation by Eric Schlosser was published in 2001. The book was an in-depth expose of McDonald’s mainly and its less-than-healthy approach to food, ingredients, and hooking customers to fatty menu choices.

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Schlosser (2012) pointed out how fast food restaurants were trying to pose as sources of all-natural organic meals but were really just duping their clients. The book helped spark the public consciousness and drive consumers away from the staple of the American diet throughout the latter half of the 20th century. The book was followed by Morgan Spurlock’s award-winning 2004 documentary Super Size Me, which again focused on McDonald’s. In the documentary, Spurlock filmed himself consuming nothing but a McDonald’s diet for a month in order to see if the food really did affect his health—and it did. Audiences were horrified and shocked by what they saw and the shift towards healthier but still fast options in the restaurant industry picked up speed.

By 2010, any restaurant offering tasty, fast casual was bound to get noticed by health-conscious consumers. These were the same consumers who generally supported sustainable concepts in retail—whether from Patagonia, Eileen Fisher or Tesla (Elks, 2013; Farris, 2016. They liked the idea of companies engaging in corporate social responsibility and felt that it was about time that organizations, whether restaurant or retail, began to start putting people before profits. These consumers identified fast casual dining options as the type of restaurant that did put people first. They offered great meals at a great value in an easy to order and take home or dine in manner.

Investment is one of the biggest factors in the restaurant industry: where to invest, how to negotiate with suppliers, how much to put into the restaurant’s interior and exterior—these questions have to be answered on a routine basis. Full service restaurants will typically invest more in their interior to enhance the experience for clients. Fast casual restaurants can get away with a bare bones approach because they know their clients are not there to have an experience in the same way guests go to a full service restaurant.

The global economy is another factor that many restaurants have to take into consideration. As is currently being seen, supply chains can become unstable in the face of tense relations between nations, trade wars, and economic uncertainty (Brown, 2017). Supply chains can impact a restaurant business that depends on food items sourced abroad. Restaurants that depend on local sources and farmers may fare better in times of trade war, but it is also likely that their price points will be higher.

Company Analysis

The New Fast Casual

Chipotle has risen to capture the fast casual segment of the restaurant industry in recent years. The firm started out as a taco shop in 1993 in Denver, when Steven Ells set out to reinvent Mexican food (Subramanian, 2013). Five years later, he had 16 restaurants and an offer from McDonald’s to help fund further growth. With the investment from McDonald’s the chain opened 500 new locations by 2005 and the firm became public in 2006, allowing McDonald’s to exit its investment with a tidy profit of more than $1 billion (Subramanian, 2013). While McDonald’s had certainly helped to create the Chipotle chain, at the end of the day, the two companies had completely different philosophies with regard to the industry. McDonald’s still wanted to make cheap food fast. Chipotle wanted to make great food quickly using fresh, organic ingredients.

Sustainability

Like many trending companies, Chipotle wanted to promote the concept of sustainability as its main driving force. Ells wanted to source his meats from open-range, naturally-raised farmers. This was the essence of his “food with integrity” mission (Subramanian, 2013, p. 87). As Ells and the company stated, “Food with integrity is our commitment to finding the very best ingredients raised with respect for animals, the environment and the farmers. It means serving the very best sustainably raised food possible with an eye to great taste, great nutrition and great value” (Subramanian, 2013, p. 87). The concept of “food with integrity” gets to the heart of Chipotle’s core value and it this value coupled with the fast casual concept that allowed Chipotle to attract the attention of investors in the first place.

Sustainable sourcing was part of Chipotle’s success almost from the….....

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