Last week, I teamed up with Motley Fool analysts Andy Cross and Charly Travers to interview CFO Jack Hartung of Chipotle
Charly Travers: Hey, Jack, last time we talked, I think you said you were talking about rolling out some breakfast at the Dulles Airport.
Jack Hartung: That restaurant is a brand-new restaurant that has not opened yet. It will open up later this summer, and one of the requirements of the restaurant is that we need to offer some kind of a breakfast, and we don't know exactly what that means yet. Offering breakfast could [mean that] you can get the same burrito that you get at lunch or dinner at breakfast.
And so [CEO Steve Ells] is still considering what exactly we want to do -- whether we want to come up with some kind of an egg dish. Maybe it is a breakfast burrito or something like that. It is an interesting little experiment that we can do because we are forced to do something. Then we will see what our customers are up for. Are they up for a large chicken burrito in the morning, or would they like a breakfast burrito? We can learn a lot from that sampling. We have no intention of looking at breakfast beyond just this one store, because it was required.
Mac Greer: So, I am not going to be thinking of Chipotle in the same vein that I think of Starbucks
Jack: Maybe someday, but not on the near-term horizon. One reason that we have been able to accomplish as much as we have is we are a company with a lot of focus, and so we focused on a vision and a strategy where we want to change the way the world thinks about fast food. We have done this for [almost] the last 16 years now, and not by adding a lot of menu items, not by adding breakfast, not by adding games and gimmicks and things like that.
We have done this by constantly making our food better, making our ingredients better, ... by continually refining our cooking techniques so that we are always doing real cooking -- so that the food is always tasting better. We are also really emphasizing a people culture, where we can provide the best possible service that we can.
Does integrity matter?
Mac: On the recent earnings call, CEO Steve Ells said that research showed that people weren't giving Chipotle credit for the Food with Integrity initiative. So, my question is, to what extent is that a marketing problem, and to what extent do you think that people just don't care, as long as the food tastes good?
Jack: You know, it is a great question, but I think it is a combination of both. It doesn't mean we are not going to communicate with our customers, but we have to be very, very, very sophisticated and thoughtful about how we do it. ... Some customers want to know where their food comes from. They care about eating organic versus commodity. They care about how the animal is treated. A lot of people frankly don't want that burden. They want to sit down and enjoy a meal. They want to sit down and enjoy their burrito, and they don't want to be preached to about how the animal is treated. They don't really want to think in those terms.
Chipotle's special sauce
Andy Cross: Jack, any fun little tidbits you could tell us about one of the particulars to developing that high-performance culture at Chipotle, which may be unique?
Jack: I would say what is unique in the restaurant industry is that fundamentally, most crew are hired in the restaurant industry for a particular job, a crew job, without any expectations that that person will ever be able to move up to the manager ranks. On day one, when we look to hire crew, the first thing we tell them is that we are looking for you to start at crew, but we are only interested if you have ambitions to do more, and we are going to support you, and we kind of don't care whether you have restaurant experience or not. We will teach you how to cook.
Andy: As a result of that, how does your employee turnover look?
Jack: Well, our manager turnover is quite low. It has typically been in the 25%-30% range, and a lot of that turnover, frankly, is involuntary, where we have identified people [who] don't have some of these characteristics that I mentioned -- they don't have the ambition, and they don't have the service orientation that we are looking for.
Our crew turnover has generally been lower than it has been in the industry, but it has still been just over 100%. And even that figure, which is over 100%, a lot of it is driven by us identifying people who have not demonstrated the ambition and have really looked at their position as just a job. ... But we think the right turnover can lead to a stronger culture, and we think that is happening.
Grading my local Chipotle
Mac: Jack, I want to evaluate the performance of my local Chipotle here. So specifically, from the time I order, how quickly should I be getting my food?
Jack: I am going to tell you what some of our fastest restaurants … are capable of. In an urban restaurant, like a downtown Chicago or a downtown New York, for example, we can serve over 300 transactions in an hour. Now, depending on how long the line is, if you are in a line that is 50 people deep or 40 people deep, if we are really on our game and we are moving customers through at this rate of 300 customers per hour, it should take you maybe seven, eight, nine, 10 minutes.
Mac: You are testing some new menu items in your Denver store. Can you give us a quick overview of that new menu?
Jack: We have a number of items that we are offering to customers that weren't on the menu board before, and all of this is based on research that we did with our customers last year. We found that while customers love the food at Chipotle, and they love the simple menu, many customers didn't fully understand the flexibility that is inherent in our menu.
For example, a lot of our customers love coming to Chipotle, and they wish they could bring their kids to Chipotle -- they didn't know, for example, that you could get one taco instead of a full order of three. They also didn't know that you can get a cheese quesadilla, a small cheese quesadilla that doesn't have any spice, and that young kids absolutely love.
We also know that a lot of customers … want to come to Chipotle, and they don't know how they can balance their budget, if you will, and so they may feel like they have to come in and always spend six or seven dollars on a burrito. Well, we have something called a low roller menu.
Charly: It is a nice problem for you guys to have, to generate so much cash that you can build out all the stores you want and then have some left over either to buy back shares or even just build up a war chest, if you felt like it. So, what is your overall capital allocation philosophy?
Jack: We have some of the highest cash-on-cash returns in the restaurant industry, maybe the highest in this environment, but it is certainly up there if not at the very, very top. I want to make sure that we focus on those, running restaurants and opening great performing restaurants as the way we can add the most possible value.
We happen to have a very strong balance sheet with over a couple hundred million dollars in cash. ... And over this past several months, when we have been doing the buyback, ... we were fortunate to be able to buy it at, so far, very, very low rates. ... I would love to take most of the money on our balance sheet and invest that in opening up new restaurants because I know that is the best way to generate the highest shareholder returns.
For further Foolishness:
Mac Greer does not own any companies mentioned in this article. Chipotle Mexican Grill is a selection of Motley Fool Rule Breakers and Motley Fool Hidden Gems, and the Fool owns shares of it. Roll up into any of our Foolish newsletters today, free for 30 days.