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.

Images

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.

Three stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers