Chipotle Case Analysis: Core Values vs. Wall Street Pressure

Introduction

This case analysis of Chipotle (CMG) examines the industry in which the restaurant has risen and looks at the company's background and core values. The problem that the company has encountered in the last five years is really one of the financial markets and not so much a matter of image, brand, or poor business decisions — at least in terms of what the business was doing prior to 2012. However, when famed investor David Einhorn picked CMG as a potential short, the market decided he was right: Chipotle lost nearly half its market cap over the course of the summer of 2012. Since then, the company's stock price rebounded to all-time highs in 2015 and fell again to where it was prior to Einhorn's short call.

The company, in turn, began focusing more and more on what its stock was doing, investing millions in share buybacks. In the past two years alone, Chipotle spent over $150 million buying back its own shares and enriching investors — money it could have spent on marketing, research and development, building out its supply chain, investing in communities, promoting its sustainability cause, and myriad other endeavors that would have been nearer and dearer to its core values.

Chipotle's main problem is similar to that experienced by Hewlett-Packard at the beginning of the 21st century, when a revolving door of CEOs tried to figure out how best to prop up the ticker of the IT company (Bandler & Burke, 2012). Chipotle is in danger of making the same mistakes that led to HP's fall from being an innovative leader in the tech industry. In order to get back on track, Chipotle must begin to refocus on putting people before profits and stop placing so much emphasis — and money — on what the stock price is doing. If Chipotle continues to deviate from its core values of sustainability, food with integrity, and cultivating the fast casual dining experience, it may end up losing more ground in the fast casual niche restaurant market to eager up-and-coming competitors.

General Environment and Industry Analysis

In 2012, the restaurant industry held 48% of the food dollar — almost half of every dollar spent on food in the U.S. was spent at a restaurant. This figure was well up from the 25% of every food dollar spent at a restaurant half a century earlier (Subramanian, 2013). Today, the restaurant industry consists of three main segments: "full service, quick service, and fast casual" (Subramanian, 2013, p. 1). Full service restaurants are those in which diners sit down at a table and are waited on by a server. Quick service — also known as fast food — includes the national fast food chains with counter ordering, drive-throughs, and sit-down tables inside. Chipotle falls into the smallest of the three segments: the fast casual segment, which focuses on delivering portable food using fresh, healthy ingredients. Full service restaurants make up roughly 32% of the restaurant industry, quick service restaurants account for 28%, and fast casual accounts for only 4% (Subramanian, 2013).

In terms of price points, fast casual falls right between full service and quick service — higher than fast food prices but lower than full service. Customers understand they are paying for quality when they purchase fast casual food and are willing to pay more than they would at a drive-through. They also recognize that they are getting a portable meal that lets them get in and out without tipping or allocating time to the full-service experience. The average cost of a fast casual meal is between $7 and $10 (Subramanian, 2013).

Given the growth opportunity of the fast casual segment, several larger restaurant chains — both full service and quick service — have entered the space. P. F. Chang's opened its fast casual Pei Wei restaurants. Full-service dine-in restaurant Ruby Tuesday launched its Lime Fresh fast casual concept. Panera Bread, Five Guys Burgers, and myriad other national and local fast casual restaurants have emerged across the U.S. in recent years. The combination of counter ordering and high-quality, fresh ingredients has made fast casual one of the most preferred restaurant segments among young consumers today (Patel, 2017).

This shift away from fast food toward fast casual — with its emphasis on fresh ingredients and healthful meals — began earlier in the 21st century when Fast Food Nation by Eric Schlosser was published in 2001. The book was an in-depth exposé focused primarily on McDonald's and its less-than-healthy approach to food, ingredients, and hooking customers with fatty menu choices. Schlosser (2012) pointed out how fast food restaurants were trying to pose as sources of all-natural, organic meals while actually deceiving their customers. The book helped spark public consciousness and drove consumers away from the staple of the American diet throughout the latter half of the 20th century. It was followed by Morgan Spurlock's award-winning 2004 documentary Super Size Me, which again focused on McDonald's. In the documentary, Spurlock filmed himself consuming nothing but McDonald's food for a month to examine its effects on his health — and the results were alarming. Audiences were horrified, and the shift toward healthier but still convenient restaurant options accelerated.

By 2010, any restaurant offering tasty fast casual fare was bound to attract health-conscious consumers — the same consumers who generally supported sustainable concepts in retail, whether from Patagonia, Eileen Fisher, or Tesla (Elks, 2013; Farris, 2016). They appreciated companies engaging in corporate social responsibility and felt that organizations, whether restaurant or retail, should start putting people before profits. These consumers identified fast casual dining as precisely the type of restaurant that did put people first, offering great meals at great value in an easy, accessible format.

Investment is one of the biggest factors in the restaurant industry: where to invest, how to negotiate with suppliers, and how much to put into a restaurant's interior and exterior are questions that must be answered routinely. Full service restaurants typically invest more in their interiors to enhance the experience for guests. Fast casual restaurants can take a more minimalist approach because their clients are not seeking the same type of experiential dining. The global economy is another factor many restaurants must consider. Supply chains can become unstable in the face of tense relations between nations, trade wars, and economic uncertainty (Brown, 2017). Restaurants that depend on local sources and farmers may fare better during trade wars, though their price points are likely to be higher.