How Chipotle Overcame Disaster

How Chipotle Overcame Disaster

From side hustle to a mega fast-casual chain, the story of Chipotle is inspirational. Read on to know how Chipotle grew into a multi-billion-dollar empire!

Serving all things Mexican, Chipotle Mexican Grill is a household name in the U.S. But did you know that this mega fast-casual chain was merely born in 1993 – less than 30 years back?

Originating in California, Chipotle Mexican Grill serves tacos, burritos, salads, and more. Its founder calculated that the business needed to sell 107 burritos a day to remain profitable. Within a month, however, the burritos were flowing off the rack, with more than 1000 sold every day!

chipotle-logoSource

As the pioneer of "fast-casual dining", this food chain has had an exhilarating journey, full of ups and downs. However, it has managed to create a name for itself with over 2,700 branches, second only to the Mexican food mammoth, Taco Bell.

A few statistics that depict the size and stature of Chipotle Mexican Grill are as follows:

From a staggering rise to a complete slump and then a boom again, the business cycle of Chipotle Mexican Grill has been fluctuating throughout. However, its journey and the crucial decision-making behind it remains nothing less than inspiring.

Do you want to know how Chipotle rose to the fame it has today? Munch on a burrito and read on as we take you back to the ‘90s, and eventually get you caught up with the company’s progress today.

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The Birth of a Burrito Empire

The story of Chipotle Mexican Grill, commonly known as Chipotle, began with its food-loving founder – Steve Ells.

steve-ells-chipotle-ceoSource

Passion For Food Bears Fruit

Ells had always been a foodie. As soon as he realized his love for food could mean much more for his career, he went on to pursue the culinary arts at the Culinary Institute of America.

When he graduated, he put his passion into action by working as a sous chef in Stars restaurant under the famous Jeremiah Tower. However, during his work, he observed the growth of taco stands and burritos in San Francisco by the day.

By 1993, he realized he did not want to work for anybody but instead open his own restaurant. Leveraging his observation into opportunity, he knew just what he needed to generate capital – a Mexican-food business.

Ells Opens The First Chipotle in Denver

Considering San Francisco was full of taquerias, Ells decided to move to Denver, Colorado. There, the food wasn’t as popular yet and therefore there was a gap in the market and less to no competitors.

Ells took a loan worth USD $85,000 from his father and opened the Chipotle Mexican Grill in what was formerly an ice cream parlor at East Evans Avenue.

first-chipotle-storeSource

However, since the loan was not enough to create a high-end restaurant, this enterprise was to be merely a side hustle for Ells, a stepping stone on his journey to his restaurant in the U.S. – or so Ells had thought.

1000 Burritos A Day!

Ells had a plan from the beginning. He calculated the need to sell 107 burritos every day to be able to generate enough profit that he could repay his father’s debt.

Therefore, the selection of the location for Chipotle had been carefully thought out. The business was located near the University of Denver, making students a prime target audience.

As Ells states, the initial sales were about $240, and then they began to grow by the day as the deliciousness of the burritos traveled through word of mouth. Then, come September, the opening of the University for the fall semester resulted in a massive turnover.

Consequently, after one month only, Chipotle was selling 1000 burritos a day, and generating unforeseen profits! This also meant Ells was able to repay his father in a few months.

Takeaway 1: Be Vigilant For Entrepreneurial Opportunities.

Many can argue that the establishment of Chipotle was merely by chance. The founder, Ells, desired to open a high-end restaurant. But the lack of funds meant only a small, Mexican-food business could initiate and prosper. Regardless of the dire financial circumstances, Ells kept his eye on his final goal, the restaurant, and in the meantime, grasped a viable business opportunity that came his way – Chipotle.

From the get-go, he had a financial plan drawn and knew just enough cash flow required to turn profitable, repay liabilities, and generate capital over time to materialize his dreams of a high-end eatery. Through observation and vigilance, Ells was able to create a thriving burrito business, that he did not know would turn into so much more, had he not taken the leap.

The Golden Arches Offer A Boost

In San Francisco, Ells had seen wondrously high prices on slim, unfulfilling burritos, and strived to make his food different. The company served delicious, large-sized burritos, made using the best, fresh ingredients, and most of the items still remained under $5 (Yes, really!). Perhaps this was what was working for Chipotle because it began expansion soon after the first location took off.

The Tally of the Stores Begins

Since the first store had generated a high cash flow, Ells decided to expand to a second store using the money, merely two years later.

Consequently, in 1995, Chipotle had transformed from a standalone eatery to a now-budding chain of Mexican food. A year later, a third store was added to the list, funded by a Small Business Administration (SBA) loan. Ells father, upon seeing the success of the business, decided to reinvest in his son’s business with a stake of $1.5 million.

As the stores and the business continue to garner acclaim and investment, Ells began to rethink his plans for a high-end restaurant. Although he had decided to use the cash flow from his first store’s profits to open the restaurant, he now realized Chipotle to be his golden opportunity to succeed.

The Golden Arches Enter The Picture

While the first funding of Chipotle was from Ells’ father, who gave the money based upon a simple, one-page financial plan; Ells knew he had to think big now.

Since Chipotle was his newfound way to success, he began drafting a business plan and vision to guide the business. Shortly after, a Board of Directors was also created, which facilitated in generating an additional $1.8 million.

In 1998, Chipotle branched outside Colorado for the first time, opening in Kansas City, Missouri. However, the highlight of the year was when this Mexican eatery caught the eye of fast-food giant McDonalds, which decided to undertake minor, partial ownership in the company.

mcdonalds-chipotleSource

While initially, the investment was quite small, by 2001, Mcdonald's was the largest investor in the company. By 2005, it had a 90% share in Chipotle, having invested roughly $360 million in the company over its tenure of 7 years.

Nonetheless, Ells maintained the reins of the company as CEO and took this help from the fast-food giant as a blessing in disguise. The firm made use of targeted locations, McDonald’s strong distribution network, and quality of suppliers to ensure Chipotle’s food remained top-notch while the pricing remained unburdening for the mass market.

Shortly after, in 1999, another Chipotle store opened up strategically near the University of Minnesota, in Minnesota.

McDonald’s financial investment and Ells’ strategies and delicious food had enabled the business to grow from a local chain of 16 restaurants in 1998 to a national Mexican food brand with 500+ restaurants in 2005!

Chipotle Goes Public

In early 2006, the management at McDonald’s realized that Ells’ vision for Chipotle and their own did not align. In addition, they wanted to focus on its core operations and decided to divest all its non-core diversifications, including Chipotle, as well as Boston Market, and Donatos Pizza. McDonald’s decided to sell its share in Chipotle to the public.

However, this was not a low point for Chipotle. In fact, it was far from that. Seeing the company's success and expansion, the demand for the stock was soaring. Consequently, the share price for Chipotle was raised twice, before finally making its initial public offering (IPO) on 26th January 2006.

The response was unpredicted and overwhelming, to say the least. On its first day at the stock market, the stock of Chipotle rose by a whopping 100%, becoming the best IPO in the U.S. in the past six years.

From an IPO of $22, the stock price had doubled when it opened on the first day to $45 and closed at $44 the same day. As McDonald’s slowly divested operations from Chipotle, by the end of the year, the company was ruling the stock market and had a wide public share.

Takeaway 2: Leverage The Best Possibilities

The investment by McDonald's was a knight in shining armor for the budding Mexican food chain. Instead of resisting change or the idea of different management, Ells and the Chipotle staff welcome the merger with open arms.

Strategically, Chipotle utilized the resources and opportunities of McDonald’s to its best potential. Since the fast-food giant had long been in business, it had a vast network of suppliers and distributors, as well as researchers that understood location analytics to determine market niches and suggest expansion.

By leveraging the many advantages of McDonald’s, Chipotle was able to grow exponentially, from stores in the double digits to hitting triple digits! Once the merger came to an end, Chipotle also welcomed the idea of going public and boosted its share price following prevailing high demand – realizing the potential of public support!

The Company Grows

By the late 2000s, Chipotle streak of expansion had become unstoppable. They opened their first Chipotle Mexican Grill outside the U.S, in Toronto in 2008.

Chipotle’s Success: Food With Integrity

While many would consider such rapid growth to be unsustainable, Chipotle ensured the food, and its quality was never compromised. Therefore, while the queues at their store may have been long and kept the customers waiting, each delicacy was prepared carefully and surpassed quality control. In fact, Chipotle had a motto that emphasized on good food; it was called “Food With Integrity”.

chipotle-adSource

Ells had observed the American fast-food industry and saw that food quality was directly proportional to the time taken to produce it. Therefore, as most in the industry intended to become quick servers, they also lost out on quality.

Chipotle, on the other hand, was committed to serving fresh, ethically produced, and naturally grown food. This, as they state their unique selling proposition (USP) to be, makes their meat taste better than that of competitors, giving Chipotle an edge in the industry.

Recession Strikes

After going public, the company was doing well. The expansions continued, and the share price even went as high as $150 in mid-2007. Unfortunately, when the Great Recession struck, its shocks were also felt by Chipotle, whose share price went as low as $36.86 in 2008.

As consumers continued to spend less and less on restaurants, the company understood such troublesome times required a new strategy. Therefore, in January of 2009, the then COO, Monty Moran, was promoted to become co-CEO with Steve Ells. While Moran retained his position as President also, the slight executive restructuring paved well for the company.

As Moran pumped up the operations, Ells continued to tackle the food side of the business with his entrepreneurial prowess and vision. Consequently, while Chipotle had ranked 9th on the list of fastest-growing restaurant businesses in 2009; it attained the 3rd rank on the same list merely a year later. The restructuring plan had worked.

Diversifying Chipotle

While the business was growing, Ells and Moran had understood that to ensure renewed consumer interest, they had to continue improving the cuisine, restaurant format, and overall ambiance. Consequently, the next few strategies formed a way to diversify the business plan and distribute the stakes in multiple holdings.

In December 2010, Chipotle, in keeping with its mantra of Food with Integrity, hired Nate Appleman, winner of Rising Star Chef and named “Best New Chef” by a prestigious magazine. Appleman diversified the menu of Chipotle by bringing his own spark and developing a distinct, updated cuisine.

However, this was not enough. Sales slowed and the management feared tumbling share prices. Thereafter, in September 2011, Chipotle made an unprecedented move – it opened Shophouse Southeast Asian Kitchen.

shophouse-southeast-asian-kitchenSource

This was an Asian-inspired chain of restaurants with the same underlying concept of Food with Integrity and fast-casual dining. The restaurant opened up in Washington D.C. Unfortunately, the progress for Shophouse was not as expected. While Chipotle had grown at a magnanimous rate, opening as many as 150 branches a year, Shophouse was only able to grow to 14 locations throughout its tenure.

The brand was finally closed down in 2017, as Chipotle understood it to be an anchor on total company earnings without providing much substance in return. Some also think that the strategy that worked for Chipotle – quick but quality burritos – does not work for every cuisine and therefore did not work for Shophouse’s success.

Takeaway 3: Slow Growth Requires Strategic Decisions

Chipotle’s success, albeit quick, was the result of a series of strategic decisions. To stand out amid competition, it embraced the idea of natural, ethically-produced ingredients, paving the way to a food ideology – Food with Integrity.

When the economic situation worsened, Chipotle had to make other strategic decisions like restricting the executive management and diversifying their business by creating Shophouse and hiring popular chefs. While all risks did not pay well, the intent behind them was clear: Risks yield progress, and eventually progress yields profits.

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Outbreaks Cause A Stir

While Chipotle diversified, restructured and grew, the next year – 2015 – was a great one for them. The share price of Chipotle Mexican Grill skyrocketed to reach an unprecedented, all-time-high figure of $758.61. From what began with a single share trading for $44 had grown magnanimously in size and stature by more than 17 times. Yes – 17 times! Unfortunately, the high point was short-lived.

The Norovirus Outbreak

In August 2015, a norovirus outbreak occurred in Simi Valley, California. It was traced to a Chipotle restaurant where 18 employees and 80 customers had reported becoming simultaneously sick. It was found later that a kitchen manager was sick with the virus. However, worked full shifts for 2 days before being sent home, thereby becoming a cause of the spread.

While health inspections continued, the restaurant was allowed to operate. Unfortunately, the bad publicity caused by the outbreak was enough to deter customers from piling in through the doors as they usually did. Some newspapers reported the affected to be roughly 100, while The New York Times stated the number of victims to be twice than what was reported i.e., 207.

When the cause of the outbreak was confirmed, it was even speculated that the number of meals that the ill manager might have come into contact with could be as high as 3,000!

Salmonella Outbreak

Roughly at the same time as the Norovirus outbreak, there was a Salmonella outbreak in Minnesota that impacted as many as 17 Chipotle restaurants in the Minneapolis area. About 64 were affected.

The Chipotle team immediately got on the case to deter the spread, and soon, the source was traced back to contaminated tomatoes brought in from Mexico and used in Chipotle food. This was a sign for the Chipotle management to tighten their quality control and improve food checks throughout the process.

E.Coli Outbreak

It seemed that as soon as the business gained a grip on one outbreak, another came barging through the door. In October 2015, 22 people reported becoming sick after they had consumed food from various Chipotle locations in and around Washington and Oregon. Considering the wide radius of the spread, the cause was found to be a Shiga toxin-producing E.Coli bacterium.

Having been through the ordeal with the Norovirus and Salmonella outbreak, Chipotle knew it had to be proactive this time. Therefore, while the results of the investigation and the source of the bacterium were still pending, the company closed its 43 restaurants in Washington and Oregon.

However, as the number of affected increased to 52, with as many as 20 requiring hospitalization, the impact had been done. By November, the Chipotle stock price had dropped by 12%.

As more and more people reported to have eaten at Chipotle right before falling sick, the bad media attention was worsening the situation for the company. While the management tried its best to deal with such exogenous variables.

One decision was to hire a consultant that emphasized quality control and suggested new and useful ways of improving their food safety. Moreover, Chipotle’s food safety program was also frequently reviewed by the FDA and CDC to ensure adherence to food quality standards and regulations.

Another Norovirus Outbreak

Just as Chipotle was trying to escape the aftermath of the August Norovirus outbreak, another one in December jolted it from the core. Unfortunately, this one was purely due to endogenous factors.

A mega-lunch was prepared and packed at Chipotle and sent to Boston College. Thereafter, reports of sick students continued to come in, and as many as 80 students, including members of the college's basketball team, were thought to have contracted the virus.

The restaurant was closed, and it was found through the investigation that the meat on the serving line was maintained at a temperature below the one prescribed. To make matters worse, an employee had been sick that day and his manager, knowingly, let him work in the packing of the lunch – thereby disrupting health codes.

Although the sick employee, as well as the manager, were fired, there was a great public outcry against Chipotle. Consequently, the sales of the company deteriorated quickly. From a company that made $475 million in net income in 2015, Chipotle made merely $22.9 million in 2016.

The Founder Resigns

Although food safety policies were put in place and quality was being thoroughly checked for control, there was another norovirus outbreak in 2017. The stock price went down by 10% further for Chipotle.

bloomberg-business-cover-chipotle-outbreakSource

It seemed that while policies were designed, their implementation lacked stringency. As predicted, the water eventually boiled down to the management of the company, which was headed by Moran and Ells.

Realizing that their response to the outbreaks had been belated, and the occurrence of such health hazards at Chipotle too many times was more than just a coincidence, Moran stepped down from his position as Co-CEO in December 2016. Eleven months later, Ells followed suit and resigned from being CEO.

Takeaway 4: Promote Accountability

Chipotle is a pure case of a company that has been harmed too many times by external factors, some of which it lacked control over, such as the tomato contamination.

However, instead of shying away from the issue or dusting it under the mat, Chipotle fulfilled its role of responsibility towards its clientele by becoming proactive each time. Stores were closed upon the slightest hint of an outbreak, quality control personnel were hired, and those at fault were dismissed.

In the entire scenario, the company also accepted responsibility for the havoc caused. The stepping down of Moran and Ells, especially, was a depiction of them both understanding their failure to maintain the position assigned to them, and thereafter deciding to pass it to a newer, fresher, worthy choice.

Chipotle Makes A Comeback

2015-2017 might have seemed like bad years for the company (as they were), Chipotle has made a full recovery! In fact, its net annual income had reached its older high standards by the end of 2017, having generated $176 million in net annual income.

Therefore, the story of Chipotle Mexican Grill is one of rising to success, failure, and then retaining their successful position yet again. Its comeback hinged on a few key strategic decisions taken in the tenure post-2016.

Improving Food Safety

In February 2016, all stores of Chipotle were closed nationwide for a staff meeting concerning food safety.

chipotle-health-and-safety-adSource

As a new head of safety was hired, a few practices were made necessary:

- Employees need to wash their hands every 30 minutes.

- The Mexican food staples i.e., jalapenos, avocados, and onions will be immersed for 5 seconds in hot water to kill any kind of germs or bacteria that may be lingering on the surface. In addition, there will be at least 2 witnesses to the act, to ensure implementation.

- Food ingredients are to be pre-treated through Pascalization. 

The stronger and more stringent safety protocols were not only implemented but advertised too, to reestablish goodwill with the target audience and assure customers that Chipotle was doing its utmost best to ensure circumstances like the outbreak do not happen again.

Aggressive Marketing

As the bad publicity yielded less and fewer sales, the management of Chipotle decided to improve its marketing to regain the lost goodwill.

While free food was distributed, the company focused on never-before-seen, heavier advertising. They began to broadcast nationwide commercials, a marketing tactic they had not undertaken in the past 5 years.

chipotle-marketingSource

Consequently, sales improved and the same stores with the outbreaks showed immense consumer response in 2017, with as much as a 17.8% revenue increase in the first quarter.

A New CEO

As Ells had also stepped down from the position of CEO, following Moran, the empty seat was filled in February 2018 by the very qualified Brian Niccol.

Niccol had been CEO of Taco Bell earlier, the biggest competitor of Chipotle Mexican Grill, and therefore knew everything about the industry, as well as competitor tactics. One of his first orders of work was to relocate the headquarters of Chipotle from Colorado to California – nearer to its competition.

By June 2018, the company also decided to close any stores that seemed to be weighing it down. Consequently, 65 under-performing Chipotle locations were closed. By March 2020, Ells had also resigned from his seat as chairman and left the board of directors. However, his spirit of food remained alive through the legacy he had created and the Food with Integrity motto he left behind.

Embracing Technology

Progress had always been a given for Chipotle. Therefore, as the company entered the 2000s, it decided to leverage the updated tech for its own benefit. By 2005, customers could order online through the website or fax and therefore, proceed to the front of the queue at Chipotle for their pre-ordered food. By 2009, the company had released an application for iPhone users to order and pay for food. Another app, now compatible with Android, was released in 2013 to ignite consumer interest.

Chipotle Today

The company continues to innovate with menu options, rolling out queso and tofu-based "softritas" after successful trials. Today, Chipotle has shown how it has become a newer, improved version of itself by connecting with its clientele more often.

For example, a mock photo of cilantro soap trended on Instagram in 2021 as humor by haters of the herb. The marketing team encapsulated the moment by working alongside production to release a real, live, non-food item to its menu – none other than Cilantro Soap. Surprisingly (and hilariously), the soap was sold out a day post its release!

The entire management of the company continues to keep an eye on prevailing trends, ready to bring about any new change as and when needed.

Takeaway 5: Adapt To Changing Times

While Chipotle began as a company that held onto its values and had a set of rules – including a menu – the changing times signified how the company adapted to effective demand to achieve consumer satisfaction.

Whether this meant hiring food safety protocol instructors in crisis, implementing an unconventional marketing strategy (for them), hiring a new CEO, embracing technology, or adding new menu items; the company’s management was ready to take the plunge.

Perhaps this is why Chipotle has managed to regain its position as a frontrunner in the industry, behind only Taco Bell, despite numerous outbreaks and impaired goodwill.

Summary and Takeaways

Steve Ells wanted to build a fine dining restaurant. Instead, opportunities led him to create a burrito empire that jolted the world with fast, casual Mexican cuisine.

What makes Chipotle different from the rest is that all the restaurants of Chipotle are company-owned. There are no franchises, and each store remains steadfast to the Ells legacy and ethos – Food with Integrity

Growth By Numbers

Chipotle’s journey can be gauged through a glimpse at its statistics.

 

2020

2010

Revenue

$6.0 billion

$1.8 billion

Net Income

$355.8 million

$179 million

Number of Restaurants

2,768 (40 International)

1,084 (3 International)

Stock Price

$1,374.2

$212.7

Number of Employees

88,000

26,500

Strategic Takeaways

As a success story with multiple rises and falls, Chipotle’s journey is nothing less than inspiring for an enterprise aspiring to take its place in the market.

Here are 5 key points we can take away from Chipotle’s story:

  1. Ideas Stem From Observation

The story of Chipotle Mexican Grill began with a simple observation; Taquerias doing well in San Francisco, and the lack of them in Colorado. While what Ells really wanted was to begin a high-end restaurant, he understood the Mexican-food business to be one with high potential. Therefore, Chipotle was established with meager capital, but the ability to do tremendously well based upon observed demand – and so it did.

Throughout its journey, Chipotle's management has been observant of trends, ready to jump on the bandwagon and adapt. The addition of the recent Cilantro Soap was another example of just how vigilant they remain of their target audience and its wants.

  1. Greet Opportunities With Open Arms

In order for businesses to grow, they need to be vigilant for opportunities and embrace potentially fruitful ones with open arms.

Chipotle has especially been known to make the best out of current circumstances, opportunities, and threats. When McDonald's purchased a minor stake in the business, Chipotle was ready to understand and utilize their distribution and supply chain networks, as well as market research abilities, for their benefit.

When McDonald's sold its ownership in Chipotle, the company greeted the change by welcoming public ownership. Diversification into the Asian food industry via Shophouse was another way of following up on potentially profitable ventures.

  1. Do Not Be Afraid To Make Difficult Decisions

Although Chipotle was not well-known for taking risky decisions, the circumstances and market conditions propelled the management to venture beyond its safety net to make tough decisions.

Whether this meant restructuring the executive management to make Moran Co-CEO, having to own up to the health outbreaks, or Ells resigning altogether – the company made the decisions with complete confidence.

Chipotle also hired a competitor’s CEO, Brian Niccols, in its series of difficult decisions to gain an edge over the competition and refine its consumer tactics with someone proficient and aware of the Mexican food industry by their side.

The company also progressed by experimenting with new menu options; an act that was seldom undertaken by Ells as the founder wished to emphasize food quality and retain the same, original taste.

Chipotle proved that while difficult decisions may be unconventional and sometimes against the company’s established legacy (such as original menu items), success cannot be achieved without a little risk-taking.

  1. Uphold Goodwill – Always.

With its mantra of Food with Integrity, Chipotle has always kept its brand reputation as a foremost priority. This is why, whenever any circumstance led to defamation or diminished goodwill, the company made it their top priority to regain consumer trust and confidence.

With the Salmonella, E.Coli, and Norovirus outbreaks, the company’s image was close to being shattered. However, as Chipotle owned up to their mistakes, immediately called staff meetings for food safety protocols, and implemented new policies; the consumers were made aware of their efforts to prevent such an incident from happening in the future.

The resignation of Ells and Moran was another way of the company declaring to its clientele that their consumers, their health, and wants remain the guiding light of Chipotle.

  1. Innovate To Progress

Businesses that fail to adapt to changing times and instead, remain steadfast on their initial offerings and product portfolio, fail to steer through the cut-throat, competitive world of business. Chipotle understood creativity and innovation to be key to its survival. Therefore, while initially the company was slightly constrained to its original ideas, the years post 2000 were full of innovations and progress.

The company embraced the updating tech to create a website, make applications, and begin taking online orders. Chipotle also understood the opportunities of the digital world and redefined its marketing campaigns to suit current target clientele as well as connect with them through social media platforms. From constantly updating menu items to opening in new and important locations, Chipotle’s innovation continues to prosper.

The success story of Chipotle Mexican Grill is one that occurred by chance.

While Ells wanted to build a high-end restaurant and Chipotle was just a means to an end, the Chipotle story proves that the business world is unpredictable, and new, fresh, observant ideas can take off – regardless of motives.

From one location to over 3000 ones in multiple countries across the globe, Chipotle has achieved a marked presence in the Mexican Food world and continues to impress consumers with its fresh tacos and delicious burrito bowls.

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