How Chipotle is Winning the Burrito Wars

Last Updated Jan 3, 2011 6:54 PM EST

Chipotle Mexican Grill is a Denver-based operator of Mexican eateries located across the U.S. Unlike fast-food or casual-dining competitors, the restaurant chain eschews traditional promotional channels, such as price discounting or constant menu changes, for concept marketing focused on brand education to drive traffic -- and sales metrics show "meal is the deal" message is working.

Chipotle (CMG) serves its customers tasty ethnic fare at "fast-casual" outlets, so-named because its stores combine the convenience and quick preparation times common to fast-food chains -- like McDonald's (MCD) and Yum! Brands (YUM), parent company to KFC, Pizza Hut, and Taco Bell -- with the higher quality ingredients found in the food dishes of casual, sit-down restaurants, such as The Cheesecake Factory (CAKE) and P.F. Chang's China Bistro (PFCB).

Since opening its first restaurant in 1993, Chipotle has elevated a simple menu of burritos, tacos, and salads into meals that legions of loyal customers find zesty and more sophisticated in flavor, as more than 65,000 sensory experiences are made possible by mixing raw ingredients into signature recipes (including sides like guacamole, cilantro rice and beans) and novel cooking techniques.

By not straying from chairman and founder Steve Ells' original vision of making good, affordable Mexican food, Chipotle has emerged the market leader in the $4 billion Mexican-themed, fast-casual, dining segment, with 1,023 units opened in 33 states and Toronto, Canada (2) as of September 30.

Despite ongoing unemployment and wage-constraint uncertainties in U.S. labor markets and occasional burrito food fights with other U.S.- operated, Mexican-inspired establishments, like the Jack in the Box (JBX) subsidiary Qdoba, or Moe's Southwest Grill, Chipotle delivered a solid financial performance in third-quarter 2010:
  • Comparable restaurant sales (at sites open more than 12-months) increased 11.4 percent to $1.81 million per unit, driven by an increase in customer visits and a slight 1.4 percent increase in average revenue per consumer check (which included about a 0.4% price hike in steak), according to chief financial officer Jack Hartung.
  • Net income also improved almost 40 percent to $48.2 million, helped by year-on-year increases in comparable unit sales and interest income, slightly offset by a higher effective tax rate.
That the company posted healthy operating metrics is even more impressive when one acknowledges many Chipotle eateries compete in highly saturated urban markets, often characterized by hundreds of rival restaurants (from quick-service to casual-dining) -- many of which offer on any given day lower-price point (discounted) menu deals designed to steer traffic through their own restaurant doors (irrespective of margin-centric impacts). For example, Wendy's (WEN) 99 cent Every Day Value Menu includes a 5-Piece Chicken Nugget, "Hot 'n Juicy Double Stack" junior cheeseburger, and a crispy chicken sandwich -- not bad for price-conscious patrons.

Hungry and dollar poor diners could also head over and chow down on 99 cent burritos or tacos from the the "Why Pay More?" Value Menu offered by Taco Bell.
"It ain't what you don't know that gets you into trouble," observed Mark Twain. "It's what you know for sure that just ain't so."
Lowering meal prices will attract traffic to Wendy's or Taco Bell -- but for how long? And at what cost to operating profitability?

In third-quarter 2010, Chipotle's restaurant level operating margin improved 220 basis points to an industry-leading 27.7 percent, as management refused to endorse the normative economic mandate that price discounting was a requisite to boosting unit sales. Instead, the company dug in and doubled efforts to maintain its food and brand integrity.
The creed all Chipotle employees are taught to honor is simple: "Good food IS good business." Also known as the company's mission statement -- Food With Integrity:
  • It means serving the very best sustainably raised food possible with an eye to great taste, great nutrition and great value;
  • It means that we support and sustain family farmers who respect the land and the animals in their care -- sourcing organic and local produce when possible; and,
  • It means that whenever possible we use meat from animals "naturally raised" on pure vegetarian diets without the use of antibiotics or synthetic hormones.
A Hartman Group survey conducted last year demonstrated an increasing awareness and concern among consumers about the quality of what they eat and how the food is prepared:

"Related to cultural concerns for quality and health, (especially for children, personal and family welfare), consumers resonate more strongly today than ever before to fresh organic categories, which offer the perceived benefits of being hormone or pesticide free. Organic categories that still resonate highly today include dairy, fruit, vegetables, prepared foods, meats, breads and juices."

These polling results reinforce the dogma central to Chipotle's competitive advantage in the fast-casual food segment. As articulated by Ells on the third-quarter earnings call: "Buying local produce contributes to the great taste of the food we serve, which keeps customers coming back."

In other words, underpinning consumer loyalty is: meal is the deal -- not discount pricing strategic to (fleeting) traffic gains at other food-service companies.

Healthy growth of the Hispanic population in the U.S. and the love of Mexican cuisine by Americans -- almost eight out of ten surveyed adults like to try Mexican flavors and foods, according to Chicago-based foodservice consultant Technomic -- further proof Chipotle remains well-positioned for continued market expansion across the country.

In 2011, the company plans on opening between 135 and 145 restaurants, up from 120 - 130 new units this year, co-chief executive Monty Moran told analysts on the recent earnings call.

Management is showing few signs of complacency. Internal surveys conducted in 2009 revealed that though customers loved the burrito chain's menu items, many had poor recall or knew little about Chipotle's dedication to its Food With Integrity philosophy.

Last June, the company launched an unconventional marketing campaign, which also included a revamped website, to further build brand awareness by simultaneously entertaining and educating consumers on the company's commitment to sustainable farming, and the related benefits of Food With Integrity to both customers' families and local communities.

To more effectively communicate its brand message, Chipotle worked with San-Francisco based design firm Sequence to leverage use of its in-store materials as mini-billboards: Chipotle unveiled a new design style, "passionate ramblings," on a variety of packaging items, including cups, bags, and basket liners in all Chipotle restaurants.

Beyond price, meals that offer something more in terms of quality, variety, and healthfulness are more appealing to parents and their children, according to industry news aggregator Foodsight. Consequently, after 17 static years, the company has introduced a few new items to its limited-service offerings. Chipotle's new kid's menu, featuring quesadillas and tacos, is debuting in select cities across the country, from Boston to Chicago and Denver.

Introducing an entire generation (young families) to the Chipotle brand for the first time will likely prove an additional boon to brand awareness and customer traffic.

Related Posts:
  • David Phillips

    David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

Comments

Market Data

Market News

Stock Watchlist