Chipotle Mexican Grill, Inc. established in 1993 in Colorado by Steve Ells, is an international chain of ‘fast casual’ restaurants supplying a menu of burritos, tacos, salads. Chipotle has seen strong growth since its initial creation. The company’s revenues grew to $4108 million in 2014, 27.80% higher than the year previously.
Chipotle’s Business Strategy
The company’s success in recent years has been linked to the achievements of its differentiated strategy, unique brand and food philosophy. Boasting its ‘food with integrity’ mission, Chipotle has capitalized on recent consumer preferences and trends by focusing on healthy, convenient food with organic ingredients of the highest quality. This has lead to them stealing market share from industry leaders such as McDonalds and YUM.
The company incorporates a premium service across establishments and ensures that they employ top performing employees. Chipotle also uses a production line within their restaurants, allowing for speedy service even during peak hours.
In 2011 they developed their slogan ‘Cultivate a Better World’, striving to illustrate to consumers the loyalty they hold towards their suppliers and the environmental advantages that their behaviour encourages.
Chipotle has seen its share price plunge recently as an E-Coli breakout has lead to a mass loss of sales a tarnishing of their brand. In order to counteract the negative effects that the company is suffering, Chipotle’s management may need to consider various expansion strategies to ensure they keep shareholders happy. This article suggests various development strategies that Chipotle could implement, as well as the key aspects that management should contemplate when considering the implementation of each tactic.
Expansion and Development Recommendations
1) Expand operations into other developed economies
Chipotle now has a strong presence in the US, currently opening 2-3 stores a week. The company should now seek to expand into other well-established economies to grow their business, particularly in Canada and Western Europe as consumer tastes are similar in these economies and members of society generally have a reasonable amount of disposable income. Chipotle has recently opened their first store in London.
- Ensure promotion of their brand and ethical image when entering into new markets, as this is their unique selling point
- Confirm that organic ingredients are readily available in the geographical markets that they expand in
- Investigate the regulation and tax implications of expanding abroad
(A) Horizontal Integration
Chipotle acquiring smaller chains would allow them access to firms with already well-established operations and relationships with suppliers. It would also remove excess capacity and competition from the industry. Particularly when expanding abroad, acquisitions would allow for a smoother transition into new markets. For example niche Burrito bars are beginning to open up throughout the UK such as Mission Burrito and Pinto. As Chipotle currently has no debt on their balance sheet, management should consider using leverage to expand into different geographic markets via acquisitions.
(B) Vertical Integration
Chipotle’s food costs are currently 35% of sales, significantly higher than the industry average of 27%. To tackle this problem, as well as the rising commodity costs, the company could also consider backward integration, by purchasing suppliers’ operations. This could ensure that Chipotle keeps their costs as low as possible while still providing quality food, as it would reduce the mark up costs associated when suppliers sell to retailers. If no vertical integration is possible, ensure strong relationships with suppliers are kept.
(A) Understand the Market
When considering an acquisition in new markets/geographies management should consider the attractiveness of the sector by:
- Identifying key competitors
- Identifying entry barriers
- Identifying technology trends
- Investigating competition, regulation and tax laws
(B) Develop a Shortlist of Targets
Create a shortlist by looking at various criteria that fits Chipotle’s strategy such as:
- Supplier relationships
- Location of Operations
- Competitive Position
- Product Mix
- Cultural and Management fit
- Cost and revenue synergies potentially achieved
3) Offer breakfast
Currently Chipotle currently opens at 11am to serve lunch, a whole 5 hours after competitors such as Panera Bread who open their doors at 6am. Management should consider opening up earlier and offer breakfast to increase revenue per store and hence overall sales.
- Ensure breakfast options are in line with the ‘healthy’ image
- Ensure standards do not slip due to longer hours
- Evaluate the costs associated with offering breakfast
4) Innovative start-ups
Management should consider opening US fast food restaurants with a different cuisine to Mexican. Chipotle already has established operations and supplier contacts so this could be the perfect time to delve into different areas of the market. They have recently released a new store ‘Pizzeria local’, an extra fast pizza takeaway. I would advise management to be careful when choosing which cuisines they choose to establish, as some types may tarnish their ‘healthy image’. New innovations should still focus around producing high quality and ethically produced food to ensure that it is aligned with Chipotle’s strategy.
- Align new restaurants with current vision
- Investigate which cuisines would receive the highest customer demand
5) Expand into supermarkets
Nandos, the well-established chicken restaurant in the UK has seen great success in releasing a range of spices and sauces that can be purchased within supermarket chains. Chipotle should consider a similar strategy by launching their own range of products with the leading supermarket stores.
- Perform market research to determine potential popularity of this idea
- Analyse competitive landscape of sauce market to discover if the market is oversaturated
6) Offer delivery services
Chipotle could now consider establishing a service that delivers their products straight to customers without them having to visit stores. Currently, fast food delivery service is not very popular in the market for healthier meals. Chipotle could take advantage of this and lead the way delivering fast food directly to customers.
- Establish efficient and user-friendly technology that would make orders easy to fill e.g. Chipotle apps
- Test delivery services in core stores in the US before expanding elsewhere
- Possibly offer delivery services to places of work such as offices
7) Launch sit down restaurants
Currently Chipotle offers a fast and convenient service, whereby customers receive their meal quickly and can either chose a takeaway option or to sit down in store. Some customers however may be looking for a more formal 3-course meal. Chipotle could now consider opening up sit-down restaurant options, similar to the likes of Chiquito in the UK. This could create further revenue streams.
- Assess already established Mexican restaurants and decide whether it is feasible to compete against them
- Determine whether formal restaurants will dilute Chipotle’s image
8) Strengthen marketing campaign
Although Chipotle is well known in the US, when expanding into new markets, it is critical to use promotion to make consumers aware of what Chipotle stands for.
- Consider heightened use of social media and apps
- When expanding internationally, a strong initial marketing campaign would be beneficial
- Consider advertising on TV, as Chipotle currently doesn’t
- Consider celebrity/athlete endorsements
- Consider Chipotle sponsored events e.g. marathons
9) Be proactive and stay ahead of the competition
Competitors such as McDonalds are beginning to adapt to the health conscious consumer market by trying to change their image and retain market share. Staying ahead of the competition is key to their success. Chipotle should reinforce their ‘economic moat’ and differentiated strategy, ensure that they don’t fall into the trap of supplying lower quality food and maintain strong relationships with suppliers and employees.
- Keep up to date with the competitive landscape
- Perform regular market research
- Ensure that the company’s values are clear and concise in the media and stores
- Maintain high quality and ethical food
10) Take advantage of consumer trends
(A) Be aware of consumer discretionary spending
Chipotle charges notably high prices for a fast food store, with the average consumer spending $8.50 per visit. It is key to keep track of macroeconomic variables such as consumer discretionary spending so that management are aware of consumer price elasticity and preferences. If consumers become particularly sensitive to price changes, Chipotle may have to look into discount and loyalty schemes.
(B) Be in Tune with Millennials preferences – Focus on Community
The Millennials, making up 25% of the US population, are known for being a very demanding and diverse consumer population. One aspect that the Millennials adhere to is community. Creating a community atmosphere in Chipotle will ensure that they remain popular among this key customer population.
- Establish friendly Facebook and Twitter Profiles
- Consider establishing online communities relating to Chipotle, such as online chat rooms or games
- Release Chipotle merchandise such as t-shirts and caps, to further emphasis the community atmosphere
There are a number of development strategies both domestically and abroad that Chipotle could implement. Personally, I feel that Chipotle should introduce breakfast into their stores, as this is an easy way for them to instantly increase revenue per store. Backward integration is also a viable option, as it would ensure that margins remain strong and it can also allow Chipotle to control their organic ingredients and limit potential supplier scandals. Throughout these expansion strategies, it is critical that Chipotle tries to maintain their ‘food with integrity’ and ethical image, although this will now prove difficult due to their recent in store health and safety issues.