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Chipotle outgrows McDonald’s and puts the “fast” in fast casual, leaving its former parent in its wake
In just 21 years, Chipotle has fast become one of America’s major success stories, growing from a single restaurant in 1993 to over 1,700 restaurants (1,715 as of June 30, 2014). However, the company had a little help along the way. In 1998, fast food giant McDonald’s took a minority stake in the fledgling Chipotle, owning 90% of the company by 2006.
During McDonald’s’ stewardship, Chipotle grew its restaurant network from 14 restaurants to over 500, with 100 a year being added. When Chipotle went public in 2006, McDonald’s took many by surprise by divesting all of its shares and seeing a $1.5bn return on a $360m investment.
Although seen as a decent return at the time, the momentum Chipotle gained under McDonald’s continued. After closing its opening day of trading at $44 a share in 2006, the company’s shares were trading at over $657 each by December 9, 2014, with a market capitalization of over $20bn and over 1,700 restaurants worldwide. Painful numbers for McDonald’s to swallow in hindsight.
Chipotle has firmly established itself as a leading fast casual restaurant chain, operating in a niche market that has come to prominence in the last few years. Sitting between fast food restaurants and casual restaurants, fast casual restaurants have a higher price point than fast food chains and a correspondingly higher standard of food served, with fresh unprocessed ingredients made to order as opposed to cheap processed ingredients which are part of a standardized set menu.
Since divesting all of its Chipotle assets, McDonald’s has embarked on a number of business decisions emulating many of Chipotle’s assets. For example, taking its cue from Chipotle and the fast casual segment, McDonald’s embarked on a $2.4bn refurbishment project in 2010 in an effort to attract more customers. Initial results for the renovated restaurants proved promising as sales saw an increase in the US and abroad. However, this success was short-lived as 2014 results showed declines in global sales, with the US, Asia-Pacific, and Middle East and Africa all seeing contraction.
McDonald’s’ 2014 results have served to highlight the negative connotations associated with the food served at fast food chains. Customers who want healthy food will not visit a fast food restaurant; equally, customers who want fast food will not purchase healthy food from a fast food restaurant. No amount of redesigned interiors and healthy options on fast food menus appear to be able to alter these two quandaries for companies like McDonald’s.
Chipotle has demonstrated remarkable growth in the number of its locations since 2005, while McDonald’s has seen comparably stagnant growth. Revenues and net income tell similar stories, with Chipotle outperforming McDonald’s in terms of growth.
However, McDonald’s’ profit margins remain almost twice that of Chipotle. This is due to a number of factors including the company’s use of cheap highly processed ingredients, standardized menus and product preparation, and the use of franchises – all factors Chipotle lacks, and is likely to continue to avoid.
Instead, Chipotle has taken a different approach, focusing on its “food with integrity” values. Although not conducive to profit margins, it gives the customer what they want. It also concentrates on its social values, particularly in regards to its corporate culture and how it treats staff. The company’s restaurateur program is the complete antithesis of the franchising strategy that McDonald’s so heavily relies upon.
Although these decisions are not as productive as McDonald’s’ approach in terms of profit margins, they are arguably more sustainable and Chipotle’s remarkable performance would appear to back this up.
Chipotle’s approach to its profit margins is to rely on cultivating its employees to perform to the best of their abilities and to retain its best workers by promoting from within. It has also focused heavily on improving throughput by exploiting what it does best, and its dedicated workforce’s skills, a strategy that is paying dividends.
Although still relatively young and far from saturating its home market, let alone the international market, the company has already expanded into new cuisine with the opening of two new restaurant concepts. As of Q3 2014, Chipotle has eight ShopHouse Southeast Asian Kitchen restaurants, also operating in the fast-casual sector, which serves Asian inspired cuisine. It is also an investor in Pizzeria Locale, a fast-casual pizza restaurant with one location and a second expected to open by the end of 2014.
With these two new businesses, Chipotle is sticking to what it knows best, fast-casual dining. It just so happens that fast-casual is the hottest sector in the food service industry right now and McDonald’s no longer has a significant stake in it – or Chipotle.
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