It's hard to remember -- or even picture -- that until 2006 McDonald's (MCD +0.75%) owned a majority stake in Chipotle (CMG 2.29%).
The completely unhip but then-wildly successful burger chain took the fast-casual Mexican eatery from 16 to 500 locations before selling its stake and pocketing $1.5 billion, Bloomberg reported. Now, not only did the chain close 2014 with over 1,700 restaurants, but it also posted nearly $1.1 billion in sales last quarter, a 20.4% increase.
Chipotle has built itself up at a time when its one-time owner has struggled with a string of monthly sales declines, including a global drop of 2.3% in the first quarter.
More important than just the raw sales data -- which is as impressive for the Mexican chain as it is disappointing for the home of the Big Mac -- is the way Chipotle has captured the public. While McDonald's is viewed as a low-quality purveyor of cheap calories of questionable quality with major health drawbacks, the chain it once owned has the exact opposite reputation.
In many restaurant-goers' eyes, McDonald's is bad for you and not very good anyway, while Chipotle is healthy, fresh, and good for the planet to boot.
It's not always a fair assessment, but the seller of tacos, burritos, and assorted other Mexican food has made every right move while McDonald's has acted as if Grimace and the Hamburglar have been setting its corporate strategy.
Quality (and the perception of it) lets you charge more
Chipotle has built its business around the idea that it offers quality. Its website and in-store signs are filled with lines about its commitment "to sourcing the very best ingredients we can find and preparing them by hand," and how its vegetables are "grown in healthy soil," and how its pork comes "from pigs allowed to freely root and roam outdoors or in deeply bedded barns."
You can find those quotes and more like them in a section called "Food With Integrity" on the chain's website. It's a smart marketing strategy (and perhaps what company executives honestly believe is right) that subtly helps its customers feel good about what they're eating -- even if it's a 2,000-calorie burrito with chips and guacamole on the side.
It doesn't matter that a Big Mac, large fries, and a large Coke come to only 1,540 calories -- Chipotle has carefully created a reputation as being if not good for you, then at least better, while McDonald's has a whole section of its website devoted to answering questions about whether its food is actually food.
This perception -- and in some cases that's clearly all it is -- allows Chipotle to charge more for its food. Whereas McDonald's touts value, something that used to work, the Mexican eatery has proved that people will pay for food they perceive as better. There's no dollar, or even discount, menu at Chipotle, while deals remain a key part of the Mickey D's marketing plan.
Chipotle has built up a reputation for serving quality food. Source: screen shot.
Limit your menu
One of the biggest complaints from McDonald's franchisees is that the menu has gotten too big, which not only confuses customers but also costs more money and requires more staff training. The chain, which once literally served only burgers and fries, now has a family of chicken products, wraps, smoothies, salads, a complicated array of coffee beverages, and a variety of other items on a limited-time basis throughout the year.
The company is trying to have something for everyone, but that can be a path toward doing nothing very well.
Chipotle, on the other hand, has a very limited menu. Essentially, the chain serves burritos, tacos, and bowls, which are all the same thing served in different vessels. You can pick your meat (or the vegetarian option), but everything you can order is essentially the same thing.
People like choice
But although Chipotle has a relatively simple menu, it allows complete customization within that limited product space. This gives customers the ability to have an enormous amount of control as part of the normal course of operations. You never have to ask for an ingredient you don't like to be omitted, because every item is made to your exact specifications, right in front of you.
McDonald's, on the other hand, has a large menu of foods that are made out of customers' sight. A Big Mac comes with (you remember the jingle) two all-beef patties, Special Sauce, lettuce, cheese, pickles, onions, on a sesame seed bun. You can request it without one or more of those items, but it's always a bit of a risk as to whether it actually gets omitted.
Chipotle offers a personalized experience, while McDonald's offers fast food done with an emphasis on being able to deliver the "fast."
The Big Mac is the signature burger at McDonald's. Source: screen shot.
It's tough to change
The new McDonald's CEO probably knows his company needs to be more like Chiptole, but changing involves more than desire. The burger chain has been testing simpler menus, more customization, and the use of higher-quality ingredients, but it's not easy to change public perception.
It's possible for McDonald's to turn the corner, but it won't be quick, because any changes bump up against years of built-up public perception. The Golden Arches could rise once again, but it's going to be an uphill fight to win even a portion of the goodwill held by its one-time subsidiary.
