Chipotle's Recipe for Success

Chipotle Mexican Grill  (NYSE: CMG  )  went public in 2006 with 480 stores and $471 million in sales. Just eight years later, it has over 1,600 stores and $3.2 billion in sales. During that time, the stock is up 1,080% (a 12-bagger) -- absolutely trouncing the 46% growth of the S&P 500 over the same period.

What is Chipotle's secret sauce? I've been following the company since 2006, and I attribute its phenomenal success to a combination of outstanding leadership, clear purpose, an innovative operating model, and great people.

1. Outstanding leadership
Great leaders can revolutionize an industry, build awesome businesses, and massively reward shareholders. Steve Jobs did it in consumer electronics, Howard Schultz did it for coffee, and Elon Musk is doing it for cars. Steve Ells, founder and co-CEO of Chipotle, did it for restaurants.

Ells opened the first Chipotle restaurant in 1993 with $85,000 cobbled together from family. At the time, he had no business experience -- he'd never taken a class or looked at a business plan. The restaurant industry is brutally competitive -- 30% of new restaurants fail in the first year. Yet he succeeded wildly.

Within six months of opening, his new restaurant generated daily sales of $3,000 per day. He opened two more stores in 1995 and five more in 1996. And the growth just kept coming. In 2005, the company opened its 500th store, and today it has more than 1,600 stores.  

2. Clear purpose
To succeed as an organization, it helps to have a clear purpose -- a problem to solve, a bold vision to implement, or an ambitious goal to achieve. It provides a North Star for strategic decisions, and it helps everyone in the organization paddle in the same direction.

Chipotle has always had a clear purpose. It is all about great food. Ells, a trained chef, is a perfectionist. He is passionate about food, and he started Chipotle based on his vision for a better kind of fast food. He wanted to use higher-quality ingredients and prepare it more skillfully.

And the company's focus on great food has never wavered. Even when McDonald's owned a majority stake in the company, it didn't compromise. At one point, McDonald's executives suggested expanding the menu, adding items like coffee or cookies. Ells refused because "we wouldn't do it better than anyone else. And I don't want anything to be part of Chipotle that wouldn't be the very best."

Today, the company proudly describes its purpose as "Food with Integrity." It is continually working to improve the food by using better ingredients, including more local sourcing, more organic produce, and more meat and dairy products from antibiotic- and hormone-free animals. This is good for the environment, farmers, and animals, but it also makes for tastier, healthier food.

3. Innovative operating model
Chipotle has a unique model among restaurants. It does very few things, but it does them very well. That means a limited menu. That, along with an efficient assembly-line process for preparation, makes for a very efficient operation. This maximizes the number of customers that can be served during peak times, and it makes a Chipotle store's real estate and employees very productive. And by saving money on real estate and labor, Chipotle can spend more on quality ingredients while still charging reasonable prices.

Restaurants have three main costs: food, labor, and rent. If you look at those three costs as a percent of sales for Chipotle versus other successful fast-casual restaurants, you'll see that Chipotle's efficiency results in lower total restaurant-level costs despite spending more on food. It's a win-win model -- customers get better food and faster service and Chipotle generates higher profits.

Company  Food Labor Occupancy Total
Chipotle 33% 23% 6% 63%
Potbelly 29% 28% 12% 69%
Panera Bread 30% 33% 7% 70%


4. Great people
In the restaurant industry, people matter. It is labor-intensive to prepare food, so you need to have a big workforce -- Chipotle has over 45,000 employees. And the attitude, performance, and morale of front-line employees can make or break the customer experience.

Under the supervision of co-CEO Monty Moran, Chipotle has built an exceptional culture and employee base. To start, the company pays higher wages than its fast-food peers. This attracts better, more productive workers. And to motivate and retain its best employees, it offers opportunities for internal promotion and salary increases for high performers. Nearly 86% of salaried managers and 96% of hourly managers were promoted from within. Elite store managers, known as "restaurateurs," earn six-figure salaries and receive stock options.

According to Moran, "Our special culture is responsible for a better unit economic model at nearly every level and this continues to contribute to the strength of our business quarter after quarter and year-after-year."

Foolish bottom line
Outstanding leadership, clear purpose, an innovative operating model, and great people -- those are the primary ingredients in Chipotle's recipe for success.

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Read/Post Comments (6) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 21, 2014, at 2:51 PM, whodidntante wrote:

    "It's a win-win model -- customers get better food and faster service and Chipotle generates higher profits."

    And likely to spread to Asian (Shophouse) and Pizza... I like what I see on the Shophouse website, just need to visit one of the few stores... I added shares this morning... Seems like a no-brainer to me...

  • Report this Comment On April 22, 2014, at 5:49 PM, corpgov wrote:

    It isn't all milk and honey in the land of Chipotle. They sued me for simply filing a shareowner proposal, including trying to get their attorney fees from me... tens of thousands of dollars. All because I want to get rid of supermajority requirement, like the 67% vote required to amend bylaws. Fortunately, they lost but it is practically an unprecedented abuse of power to intimidate shareowners in this way.

    Additionally, CMG has of the worst pay-for-performance profiles in the Russell 3000, according to Equilar, with our co-CEOs each receiving $25 million in total grant date value compensation in 2013 and three-year realizable pay exceeding $144 million (~$300 million combined!).

  • Report this Comment On April 23, 2014, at 7:57 AM, TMFLomax wrote:

    Great article, Brendan.

    ...but corpgov, that shocks me that they sued you. Seriously, blows me away especially given the nature of your proposal. I find that incredibly disappointing that they would do that, and since majority voting proposals are standard, solid corporate governance proposals, yeah... good grief.

    Like I said, for a company I really like and respect, I find that very disappointing.

    Alyce

  • Report this Comment On April 23, 2014, at 4:04 PM, dgmennie wrote:

    Are we dishing up 20/20 hindsight here?

    Chipotle was not the only company going public in 2006. I'm sure many of the others looked like "good investments" to somebody. Is Chipotle's success a 1 in 100 or a 1 in 1000 statistic? Who selected them as a potential winner early-on, before it was obvious? Unless you can flesh out the reporting with this type of insight, what good does it do today's investor?

    PS: I hate Mexican food

  • Report this Comment On April 23, 2014, at 9:31 PM, phexac wrote:

    And outside of the "hey look this stock went up 8x, it's cuz the company is awesome" exercise in hindsight, there is zero attention given to at what price would you actually want to buy it. It looks like a good business, but that doesn't mean you want to pay any price for it, regardless of what it is. It went up 8x and is a good business doesn't mean you want to buy it now, but that's the point 90% of MF authors seem to miss.

  • Report this Comment On April 24, 2014, at 6:47 AM, snipe15 wrote:

    dgmennis, clearly the article was not to toot the Fool horn on "we recommended this stock on XX date", it was simply to highlight an outstanding company and maybe learn a little something. Having said that, as a member of Hidden Gems, I was around (and bought) when they recommended buying January of 2007. Why not earlier you ask? Well, because of the trading rules in place for Fool analysts, it couldn't have been recommended much earlier because the Lead Advisor had been spun out shares from his McD's shares and couldn't recommend them for a month or two ( I forget now) afterwards. Point being, I got in at $55 and am sitting on a 900% increase. So yeah, the Fool was on top of this one, and more importantly, this article speaks to why this company will continue to get it done.

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