Chipotle has changed the model of the quick service restaurant in the United States for good. People will wait for something good, especially if it is in their budget, and that’s how Steve Ells designed the service model for this restaurant chain in 1991 when he got the first ideas to start Chipotle. Ells was eating a burrito at a taqueria and noticed that people were lined up around the corner to get their food.
Most quick service restaurants sacrifice the quality of their food and the flavor of it so that it can be rapidly served. What Chipotle does is reduce the cost of food while still providing fast service, but slower than a typical fast food joint. One could call Chipotle the first “Fast Casual” restaurant. It’s working. In 2011, Chipotle brought in a 25% profit margin on $2 billion of revenues.
Sometimes You’ve Got To Change the Rules
When Ells opened his first Chipotle in Boulder, CO in 1993, the criticisms were rapid and fast. People said that the menu options were too limited. Many said that the menu items were also too expensive. Ells has always stated that the reason why the Chipotle business model has been successful is because he didn’t know the rules of the QSR industry when he got started.
He just knew that people liked good food and would pay a premium price for a better experience. The Fast Casual restaurant now offers an upscale dining experience to customers, better food quality, and the familiar service model of the QSR. People feel like they get to eat healthier. In the end, all of the initial criticisms of Chipotle turned out to be completely false.
Now other restaurant chains in the QSR industry are catching on to the successes that Chipotle has experienced over the last two decades. Walk into a Wendy’s and the interior atmosphere is remarkably similar to Chipotle. The expansive QSR menu options are there, along with customizable soft drinks and iced teas, but so is the emphasis on a superior level of food quality. Wendy’s has seen a remarkable change in profits as a result. They now sit #2 in the US, pushing hard against a McDonald’s QSR business profile that has been in a slow, negative spiral for some time.
Even those that are serving the same style of food have caught on to what the Chipotle business model has been able to achieve. A visit to your local Taco Bell will also look similar to a visit to a Chipotle. Upscale menu options, including rice bowls, are specifically designed to compete with the menu offerings Chipotle has.
The Chipotle Business Model Challenges Every Concept
Before Chipotle proved that its concept of healthier, but still fast food could work, traditional wisdom about QSR profits was pretty basic. Grind out the dollars by expanding menus, reducing prices, and increasing operational efficiencies. In many ways, the QSR industry took the concept of “lean and mean” to crazy levels.
Taco Bell had items on their menu for $0.59 at the time Chipotle started to make strides with their own business model. Ells discarded all of these traditional concepts. The Chipotle business model succeeds, in fact, because it changed the rules of how food is served. Walked into a typical QSR restaurant, even today, and you’ll find frozen fries, frozen burgers, and highly preserved foods.
Walk into a Chipotle, on the other hand, and you won’t even find a freezer. Instead of keeping food losses to a minimum, Chipotle initially invested into equipment that made serving fresh foods faster. They even abandoned that since Ells thought that the hand-cut foods tasted better than the machine-cut foods.
This means Chipotle offers a hand-made food experience that is fresh. Who wouldn’t pay a little more for a fresh burrito when it can be served for maybe a dollar or two more over a frozen or highly preserved item? That may be the biggest “secret” to the success of the Chipotle business model.
Chipotle Also Treats Its Employees Differently
In the QSR industry, the employment opportunities that exist are seen as the epitome of an entry-level job. Although some areas are campaigning hard for a $15 per hour minimum wage and some regions, like North Dakota, have high wages because of low unemployment, the trend is to pay a QSR employee the least amount possible. Margins are slim, food prices can be high, so the rule is to save on salaries.
At Chipotle, some of this still exists. Employees aren’t going to make the same amount of money that someone with a graduate degree could make. They will, however, make more than the standard QSR employee. More of the staff is also required. Chipotle maintains a traditional “hire slow, fire quick” philosophy.
This business model demands employees have high energy levels, a commitment to food safety, and the ability to provide outstanding customer service. If an employee doesn’t make the grade, then they aren’t part of the company. Many on the crew are paid hourly, but there are a higher level of salaried employees in the Chipotle business model than in the average QSR industry. This income security, Chipotle reasons, helps to attract even better employees who are committed to the growth of the restaurant chain.
It’s hard to believe that this is the same company that McDonald’s once held a large stake in before selling in 2006. Imagine if Chipotle sold cookies and coffee like McDonald’s wanted them to do? The Chipotle business model would be very different. Almost 200 new restaurants opened in 2014, proving that Chipotle has charted the right course.
How Does Chipotle Keep Staying Profitable?
Chipotle stays in the good graces of their primary customer base by focusing on the guest experience. The business model has been seeing an annual growth rate in revenue above 19% over the past five years. In the fast food industry, the average compound annual growth rate has been about 5.5%. Gross profit margins for Chipotle have even been 10% better than Starbucks.
Same restaurant sales have been increasing an average of 17% per quarter. In comparison, McDonald’s has seen an average decline of 1.5%. The concept behind these successes is pretty simple: in order to develop unique results, a unique culture must be grown and maintained.
A key component of this unique culture is the entrepreneur program that Chipotle offers. They are accepting people into the program who have no experience at all. General Managers are coming from the restaurant crews. Restauranteur level managers earn an average of $106,000 per year, so there is some serious money that can be earned. This gives people who start on the crew an incentive to keep growing.
The Chipotle business model has a new restaurant opening every 2 days. As they say: “Opportunity isn’t knocking. It’s pounding.” The rest of the QSR industry is on notice. Chipotle is here to stay.
Chipotle Took a Lesson Direct From Warren Buffet
Warren Buffet has always said that the secret to building a successful enterprise is to invest strongly when everyone else is afraid. That’s exactly what Chipotle did when every other QSR restaurant was slashing prices and competing to have the cheapest price possible. Chipotle held fast to their prices and even raised them in some circumstances.
A classic example of this is the shredded pork burrito. Ells reportedly ate one and didn’t like the quality of the food. He went out and sourced a new supply of pork that was a higher grade. This caused the price of the burrito to rise by $1. The end result was that the sales of the burrito doubled so that it contributed 8% on its own to the company’s total revenues.
Chipotle has followed this trend to avoid almost all low-risk, high profit items within their business model. They are the larger purchaser of chicken, beef, and pork that has been fed and raised outside of the cheap factory farming system in the United States. They attempt to source local products for vegetables. This focus on sustainability shook the QSR industry to its core and has shown just how strong Chipotle has become.
People want food that has been created with integrity. The Chipotle business model proves that they are willing to pay for it too. Many of Chipotle’s competitors have 10,000 restaurants or more. Chipotle is hovering around the 1,500 mark. This means the business model has plenty of room to grow. What could the opportunities be for Chipotle in 2015 and beyond?
One thing is for certain: Chipotle isn’t just going to grow because it has the ability to do so. It is only going to grow when it can continue providing the high quality dining experience that has changed the QSR industry. Growing smartly rather than quickly – that’s the lesson to be learned from the Chipotle business model.
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