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Chipotle's Search for Excellence

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Excellent companies transform entire industries. Prior to Starbucks (NYSE: SBUX  ) , for example, restaurants could get away with selling "bottomless" cups of coffee, because the coffee usually tasted so bad that you didn't want a second cup. And Netflix (Nasdaq: NFLX  ) changed the way we bought our movies -- no longer do you have to go out to the video store and be subject to long lines and late fees.

Chipotle (NYSE: CMG  ) is another example of an excellent company that is transforming its industry. In advance of its earnings release later this week, I took a look at its most recent conference call transcript. I was extremely impressed with what I discovered.

Despite noting that its business was facing some challenges in the current environment, the company's two co-CEOs, Steve Ells and Monty Moran, spent most of the call talking about two things not always associated with the fast-food industry: quality food and outstanding people. The intense focus on these two areas is the key to Chipotle's emerging excellence as both a business and an investment.

Quality food
Steve Ells began the call by talking about the company's goal of using 10 million pounds of produce from farms that are within 350 miles of Chipotle's restaurants, which will allow them to serve, "fresher, better tasting food, while also supporting local family communities all across the country." He then spoke about the company's programs to educate customers about food. These programs appear to be successful, according to Ells, as "evidenced by our double-digit sales comps." Just as Howard Schultz talks of Starbucks being the "undisputed coffee authority," Ells wants everyone to associate Chipotle with high-quality food. It will be interesting to see if the company's consumer awareness programs can continue to be successful in this area.

Quality people
After Ells' opening remarks, Monty Moran talked about Chipotle's focus on creating more and more "restaurateurs," who are the company's top-performing managers and future leaders. At restaurateur-led restaurants, according to Moran, crew members describe their colleagues as "family" and tend to perform better than non-restaurateur-led stores. So far this year, the company has added 55 new restaurateurs, bringing the total number to 239. Ultimately, Moran feels that Chipotle's focus on developing its people will lead to better customer experiences, which will in turn lead to more loyal customers, stronger sales trends, and better financial results.

Moran did concede that Chipotle's personnel turnover has inched up in recent months. This isn't always a bad thing, however, as the company wants to get rid of poor performers. The company needs to keep an eye on turnover, though, as it's costly to train too many new workers all at once.

Searching for excellence
The way that Chipotle develops its people is very similar to how "excellent companies" like IBM (NYSE: IBM  ) , Hewlett-Packard (NYSE: HPQ  ) , and McDonald's (NYSE: MCD  ) have invested in their people, as documented by Tom Peters and Robert Waterman in their classic book In Search of Excellence. Writing in 1982, Peters and Waterman found that "if you want productivity and the financial reward that goes with it, you must treat workers like your most valuable asset." And this can't be just lip service either. Excellent companies mean what they say and set high-performance standards for all of their employees.

Chipotle's dedication to training its crew members and providing them with opportunities to rise through the ranks appears to be a sign of excellence that investors should pay very close attention to. Peters and Waterman write that excellent companies respect the individual, while also displaying a "willingness to train him" and to "set reasonable and clear expectations for him." From Chipotle's most recent conference call, that is precisely what they are doing. I'm looking forward to the call later this week to see how they are progressing in this area.

If you're interested in an additional stock idea from the fast-food industry, take a look at The Motley Fool's new free report, "The Hottest IPO of 2011." The report includes a recently IPO'ed restaurant that has tremendous promise in Latin America. Click here for your free report.

John Reeves owns shares of Chipotle. The Motley Fool owns shares of Starbucks, IBM, and Chipotle. Motley Fool newsletter services have recommended buying shares of Starbucks, Chipotle, McDonald's, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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