1 Surprising Key to Chipotle's Sustained Success

The one thing that keeps Chipotle successful, and how your portfolio could benefit.

Jul 21, 2014 at 9:30AM

Having seen some swings recently, Chipotle Mexican Grill's (NYSE:CMG) pending earnings may have shareholders on edge. Investors can take comfort in the company's devotion to its unique culture and long-term business strategy in order to keep Chipotle at its premium valuation.

Hiding in plain sight
The burrito maker has been working diligently to outperform the rest of the fast-food industry by providing its customer base with a product they can design, enjoy, and believe in, all at the same time.

Screen Shot

Source: Chipotle website.

Chipotle's efforts have been validated, as the company's P/E ratio is beating the industry by just about seven points, and its return on assets is quite impressive as well. So, what's the secret?

The company's unique philosophically-driven culture.

Growth spurt
It's the Denver-based company's dedication to cultivating a better world that beacons burrito heads from near and far to both enjoy and serve Chipotle's nearly limitless menu.

Chipotle's transparent alignment with its core values has struck a cord with its customer base, as evidenced by the company's steady growth during the last quarter. The Mexican food chain had 44 store openings and saw same-store sales increase by about 13.4%.  

It's this type of expansion and same-store growth (the company expects to open between 180 and 195 restaurants in 2014) that validates Chipotle's long-term culturally driven business strategy as both profitable and sustainable.

Screen Shot

Source: Chipotle website.

Aces in their places
Sustainability is a cornerstone of Chipotle's long-term business strategy. Ensuring its ability to keep growing in an economically, socially, and environmentally considerate manner has solidified the company in my good graces.

It's the considerate way in which Chipotle operates that keep the stock in my portfolio and the burritos in my belly. By hinging its growth on socially sustainable initiatives, Chipotle accomplishes two crucial things:

  • It keeps its talent pool honest, loyal, and successful.
  • It meets its customer demand without sacrificing their experience.
Screen Shot

Source: Chipotle website.

Friends with benefits
Chipotle is devoted to cultivating teams of employees who are honestly invested in the company's future. The company prides itself on its Restaurateurs program, a clearly defined internal promotion road map. Each employee has the opportunity to advance, so long as she is deemed able to empower the people with whom she works. Providing a future to its employees ensures that each new store, of which there are plenty, is staffed with the future leaders of Chipotle.

Screen Shot

Source: Chipotle website.

The Chipotle army is bred to create an enjoyable customer experience. Look past the ridiculously customizable menu, the transparent supply chain, and the affordable price point, and we get to the heart of how the burrito maker justifies its premium: throughput, or how fast customers get through the line. When those highly trained burrito slingers work as a fluid team, they cut the time it takes to get my perfect meal to my grumbling belly. More importantly, that higher throughput means more revenue and, ultimately, more return for its investors.

By building stable relationships with its employees and customers, Chipotle has solidified the permission to move with agility and shift focus at will.

Socially sustainable returns
This license to operate, afforded to Chipotle by its key stakeholders in recent years, has allowed management to make investments and take calculated risks. And, looking at Chipotle's return on assets (basically, how efficiently management can use its assets), that leeway has served the taco tycoon well.

CMG Return on Assets (TTM) Chart

CMG Return on Assets (TTM) data by YCharts.

The burrito maker's ROA outperforms the industry by a cushy 10 points. Perhaps that's because of Chipotle's focus on efficient operations going far beyond the register. The company's philosophically driven culture has been implemented in a classic top down approach, thus guides the entire Chipotle kingdom.

The head nachos have had the intrinsic freedom to explore various operational strategies over the years. Investing in "growth seeds" like Pizzeria Locale and ShopHouse exemplifies Chipotle's cultural devotion to a flexible and agile long-term business strategy.

Screen Shot

Source: Chipotle website.

Riding the change
Rooting itself in cultivation of change, Chipotle's culture is able to bend to whatever comes its way. The company's devotion to its key stakeholders combined with stellar management of its assets will continue to justify Chipotle's tasty premium.

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Leah Niu owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. 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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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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