Jump online, or thumb through the morning paper, and you'll likely come across a few articles about Chipotle's (CMG 0.43%) recent health scares. It's clear the company has a tough road ahead as new E. coli and norovirus breakouts continue popping up, but let's take a moment to talk about its story up until this point with 15 things you may not have known about Chipotle.
1. Chipotle founder Steve Ells borrowed $75,000 from his father to start the company, which today is worth $15 billion. Ells originally got the idea for what he thought would be a "good little business" while sitting outside a taqueria in San Francisco.
2. Chipotle shares have skyrocketed 940% since their IPO in 2006, when McDonald's (MCD -1.08%) started spinning off its 51% stake in the company.
3. You probably won't be surprised to hear that the partnership between McDonald's and Chipotle was not a match made in heaven. Perhaps this is one reason McDonald's parted ways with the company after racking up a $1.5 billion gain on its original investment. Ells was notorious for shooting down the burger-maker's attempts to turn Chipotle into a Mexican food version of McDonald's, drive through and breakfast menu and all.
4. The years spent under McDonald's wing weren't completely wasted for the burrito maker, though. McDonald's streamlined Chipotle's real-estate development and supply chain strategies, which helped Chipotle to nearly quadruple its restaurant count over the past decade.
5. Chipotle's decade-long run of same-restaurant sales increases will likely soon come to an end. Executives recently went on record predicting that same-restaurant sales will decrease 8% to 11% due to its string of E. coli and norovirus breakouts.
Chipotle's quarterly same-store sales, including Q4 2015 estimate. Image source: MarketRealist per Chipotle 10-Q filings.
6. Chipotle's restaurant-level operating margins are among the highest in the fast-food industry. Its margins are consistently above 25%, while competitors McDonald's and Yum Brands (YUM -0.54%) are consistently under 20%. High margins are why every new fast-food start-up wants to be known as "the Chipotle of [insert food category]," although many have failed to achieve this moniker.
7. Chipotle was one of the first fast-food companies to exhibit pricing power at scale. Pricing power is crucial in the age of the "value menu" because it generates high operating margins, which then throw off massive amounts of cash flow that Chipotle can funnel into aggressive (and very costly, but very profitable) restaurant growth.
8. It makes financial sense to aggressively develop restaurants because the cash returns of building Chipotle restaurants are nearly unmatched in the industry. Average restaurant profits are $250,000 annually, while the cost to develop a restaurant runs anywhere from $600,000 to $1.3 million, depending upon location. On the low end, Chipotle recoups its investment in under three years. The same can't be said for McDonald's, where start-up costs are as high as $2.3 million.
9. From a financial perspective, Chipotle has a near-perfect business model. The best way to put this in perspective is by reviewing its return on capital. The company's return on capital is 25.6%, and the cost of that capital is 8.45%. The 17.1 percentage difference is the value Chipotle creates by investing in growth. For some context, the banking industry is built upon earning more on its loans (the return on its capital) than it pays on deposits (the cost of that capital) and banks generate low, single-digit spreads.
10. Chipotle's real estate strategy has evolved dramatically over time. Whereas the company primarily used to build free-standing units in the highest-trafficked areas, Chipotle now operates a variety of restaurants that require lower up-front investments, including locations such as retail centers and mall food courts.
11. Chipotle is far from saturating the U.S. landscape with its restaurants. In fact, there are six Chipotle restaurants per million U.S. capita compared to 45 for McDonald's. While I can't imagine Chipotle will dot the landscape with restaurants as McDonald's has, there is a long runway before ending up on every street corner like Starbucks (SBUX -2.43%), which operates 24 restaurants per million U.S. capita.
12. Don't confuse Chipotle's slogan of "Food with Integrity" as meaning healthy. You'll get your daily allowance of sodium (and then some) after putting away a meal from Chipotle. One burrito with fixings packs an unhealthy punch of 2,410 mg of sodium and 1,275 calories!
13. Chipotle is honest about more than just the ingredients inside its food. Steve Ells admits the company has no crystal ball to forecast same-restaurant sales, a metric watched closely by investors who falsely believe they can predict this number from the outside looking in. As Ells stated when asked about predicting same-store sales:
We don't spend a lot of time trying to predict how we are going to leap over that number. What we do is, we take our current sales trends and we literally just push them out over the next 14 months -- for the rest of this year and then for all of 2015. ... This is the way we have always predicted comps. ... [W]e really don't have a magic approach or a crystal ball to predict how you are going to exceed, like, a 19% comp, for example.
14. There's a secret way you can score free Chipotle burritos for a year. Unfortunately, you must first become a celebrity and tweet about how much you love Chipotle, just like pro athletes Russell Wilson, Bryce Harper, Tony Hawk, and many other celebrities have before.
15. Chipotle tidbits aside, the company has some serious health concerns to address. After closing down 53 restaurants in Washington and Oregon because of an E. coli breakout in October, a separate and unrelated norovirus breakout was reported in Boston just weeks ago. And the hits keep coming. The CDC is now investigating another E. coli outbreak potentially linked to Chipotle locations in the Midwest. It's no surprise shares have dipped to multiyear lows as a result.
