Chipotle's Recipe for Success

The four key ingredients for 12 times returns since 2006.

Apr 21, 2014 at 2:30PM

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 FoodLaborOccupancyTotal
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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Brendan Mathews has no position in any stocks mentioned. The Motley Fool and owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. 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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