It may sound strange to say that a quick-service restaurant should take cues from a tech giant, but this is a fundamental lesson that transcends industries. Recently, in an in-depth interview with Wired magazine, Google (NASDAQ:GOOGL) CEO Larry Page enumerates the successes and failures of today's corporations. As Chipotle (NYSE:CMG) completes its shift from market darling to market pariah, the company could do well to heed this advice from one of the greatest tech minds of our time.
Here, then, is one big lesson Chipotle can learn from Google.
From disruptor to obedient
For a while there, Chipotle had turned the QSR world upside down. Fast, delicious, healthy(ish), sustainable(ish), affordable food. No fast food had accomplished things like that with great success before the maker of giant stuffed burrito goodness came along. Wall Street, of course, loved the idea -- especially in recessionary times. People who needed to cut back on the dining front could come to Chi-po for an extremely satisfying meal in a sophisticated environment. It wasn't The Palm, but it would do until that year-end bonus came back. The company basically found a way to be sexy while being a fast-food chain. The closest anyone else got was Carl's Jr. by hiring beautiful women for their advertisements.
But then, as ingredient prices went up, Chipotle's margins shrank, with very few alternative avenues to make up the difference. That brings us to today's Chipotle -- one that's trading down nearly 20% from a year ago. Now, let's keep in mind this is all short-term compared with the company's history. You only had to buy the stock three years ago to still have a healthy three-digit return today. Still, the heat of market excitement surrounding the company a year or two ago just isn't there today.
In the New Year, Chipotle announced that, in an effort to boost sales, the company was entering the lucrative field of catering, currently dominated by other QSRs such as Panera Bread (NASDAQ:PNRA).
Catering? That's your answer? Oy.
Why did Chipotle kick off as a tremendous QSR innovator and disruptor and then discontinue its quest? Now seems like the right time to bring in Larry Page to lend an opinion.
Whaddya say, Larry?
In his surprisingly insightful interview with Wired, Page explains why a 10% improvement to your product or business is basically not an improvement at all. Typically, it's just following the moves of one of your competitors in an effort to stay "competitive." That's exactly what Chipotle is doing by following Panera's lead into catering.
A real improvement, according to Page, is rethinking an issue or a model completely. Tweaking and pulling a lever here and there will not yield the innovation that's needed to pull away from the pack and become (or remain) the market leader. A company needs to improve not by 10%, but by 1,000%. For Google, this is Google Glass, it's self-driving cars, it's everything that makes you go "wow" when you read about it.
Chipotle did that in the beginning -- it reinvented what it meant to eat fast food, and it worked. That's exactly how and why the company grew the way it did. That's why, up until recently, the market had the audacity to value the company in a way that implied each individual location was worth $10 million. The premium came from its genius -- not just its profits. Chipotle won't find salvation in catering. It may satisfy some analysts for the time being. It may even boost the bottom line in a meaningful way that suggests the company was right. But it's not going to bring the company back to where it was just a short while ago.
I don't want to take too much real estate quoting Page, but I find this point to be important:
I worry that something has gone seriously wrong with the way we run companies ... it's hard to find actual examples of really amazing things that happened solely due to competition. ...That's why most companies decay slowly over time. They tend to do approximately what they did before, with a few minor changes. It's natural for people to want to work on things that they know aren't going to fail. But incremental improvement is guaranteed to be obsolete over time.
Funny you mention it ...
It's hard to have a discussion about Chipotle's ShopHouse concept unless you've been to it. Unfortunately, that excludes nearly the entire country. But ShopHouse is probably the best forward-thinking effort the company has going. By introducing a foreign cuisine -- southeast Asian -- that John Smith from Anytown, USA, probably wouldn't have eaten before, but presenting it in a familiar and appealing manner, at an affordable price, and with the same quality of a Chipotle burrito, the company is again redefining what it means to eat fast food in this country.
What happens when 50 million people discover that these Asian rice bowls are 10 times better than anything you've ever had at Panda Express and cost about the same? You achieve the same status that occurred when America found out there was a better Taco Bell.
Why this isn't the fast-tracked product for Chipotle management right now, I do not know. Whether they know it or not, they already have an idea of what Larry Page is talking about -- they just need to follow it with the confidence Page had when he decided cars should be driving themselves.
Fool contributor Michael B. Lewis has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Google, and Panera Bread and owns shares of Chipotle Mexican Grill, Google, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. 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.