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Chipotle: The Challenges of Integrity

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Chipotle: The Challenges of Integrity

Chandler Hull

Ottawa University

Author’s Note: This paper was prepared for Strategies and Policies OAD 49100 on January 23, 2018.

Introduction:

Chipotle Mexican Grill (CMG), founded in 1993 in Denver, Colorado, was the brain child of Steve Ells. It was based on the principles of using locally-sourced ingredients (Chipotle, n.d.). In 1995, CMG had three locations and was funded by a $1.5 million investment from Ells’ father and a private stock offering. By 1998, CMG had attracted the attention of McDonalds and shortly thereafter, McDonalds became a minority investor. 1999 saw the opening of 37 more locations, expanding outside Colorado for the first time. In the same year, McDonalds also increased their investment in CMG, by becoming a majority investor in the company. This partnership lasted until 2006, when CMG was spun off as a public company. Despite becoming a newly autonomous entity, CMG continued its aggressive expansion, with a particular focus on international expansion. Since then, Chipotle has opened over 1,000 stores all over the U.S., as well as Canada and the U.K (Baylis, 2015).

The purpose of this paper is to analyze Chipotle Mexican Grill’s current situation and explore areas where improvement can be made by the company’s leadership and management teams. To begin the paper, there will be a review of the key strategic issues CMG faced with recommendations for CMG following.

Analysis:

        CMG has faced several challenges over the years, however, none as imposing as the challenge to source local, organic ingredients and increased competition. Although CMG was the pioneer for the fast-casual healthy restaurant segment, other competitors have stepped into the ring. CMG has a simple business model that consists of sourcing and offering quality ingredients, which is very easy to replicate on a local basis. This is becoming an increasing trend for many fast food and fast-casual restaurants, along with modernizing the look of their restaurants and adding more menu items. These trends are making it increasingly difficult for Chipotle to differentiate themselves in the segment, especially with local favorites. Chipotle's same-store sales growth has been slowing, leaving some investors to wonder if the chain is beginning to lose its luster after 22 years in business. Chipotle also has more competitors than ever before, as the fast-casual industry gets increasingly crowded with new restaurant concepts trying desperately to replicate Chipotle's success. According to the Wall Street Journal, Chipotle is facing four major challenges right now: slowing sales growth, a tightening labor market, supply chain issues, and new attacks from critics (Peterson, 2015).

        CMG’s main competitors; Panera, Pei Wei and Qdoba are the largest competitors in this segment. Despite these restaurants being in the same segment, they operate differently. Panera offers all day dining menus; offering breakfast, lunch and dinner. Qdoba Mexican Grill offers similar foods, however, their menu contains less filling and healthier options. Qdoba also franchises its locations. Lastly, Pei Wei offers full service, as well as fast-casual dining experiences to offer their customers more options for dining and a different ethnic offering. The threats that these companies carry are ones that CMG has no control over. These companies have explored options that CMG has avoided, such as standardized sourcing for ingredients, and have been successful with their business models. CMG will need to begin to diversify its place in the segment if they want to continue to succeed in the segment. This will require a broader menu, with more optionality and differentiation. CMG has had very little innovation over the past decade.

        CMG has had the mission to serve food with integrity since its early days, however, over the past decade, CMG has faced issues with the delivery of this promise. While sometimes failing to deliver on this promise, CMG has also made great strides in making it known that they have continued to strive towards their goal. By the end of 2010, CMG sourced a high enough percentage of meat from sustainable suppliers to claim that their food is from sustainable suppliers. In 2010, roughly 40% of CMG’s beans were organic, all of their cheese was rBHT free and at least 35% of one produce item was sourced from small local farms. Despite the increase in sustainably sourced food, CMG’s reputation has been under fire for a lack of transparency about their Food with integrity mission (Baylis, 2015).

        In 2010, CMG knew that their reputation was diminishing and that they needed to reconnect with their existing customers and attract new ones. Rebuilding customer faith was now an important goal of the Food with Integrity mission. To try and combat the negative outlook on the company, CMG focused and promoted their farm-to-table-to-consumer supply chain. Beginning in 2011, CMG began a new campaign called, Cultivate a Better World. This campaign focused on telling the story of why CMG sources sustainable foods and to also change the way people think about what they eat (Baylis, 2015).

Strategies:

        CMG has recognized the issues that have risen over the past handful of years. To make sure these issues do not creep up again, C MG must realize that they need to shift their focus and devote themselves to their mission. First, CMG needs to focus on increasing the percentage of food that is sustainably raised. Just having a majority percentage is not enough. Customers will begin to wonder how often the “normally” raised meat is substituted. This can cause a customer to lose interest in CMG. The number of healthy options and alternatives need to be increased as well. In America, it is estimated that 35% of adults are overweight or obese (National Center for Health Statistics, 2017). Given that CMG’s customer base are adults ranging from 18-49 years old, a shift needs to happen. An adult should have 1,800 to 2,000 calories a day to maintain a healthy diet, while most of CMG’s entrees contain that much in just one meal. The excessive caloric intake can be solved by adding smaller portion sizes for guests that do not want the full serving. This approach also falls in with what other competitors are doing.

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