If there is one name that has witnessed phenomenal growth in the fast food industry, it is Chipotle Mexican Grill (CMG, Financial). The major highlight of this restaurant is that it is the perfect sandwich between the sectors of fast food and casual dining. The burrito-maker has been making the right moves, through which it has been able to put the brakes on the progress of giants like McDonald’s (MCD, Financial) as well. How did Chipotle manage to become such a big name in the fast food industry and what does the future have in store for the brand? Read further to understand more.
Food for Integrity
Though the US market is the biggest in the world as far as fast food is concerned, even American customers are becoming heath conscious recently. Youngsters who frequent these fast food joints in great numbers are constantly on the look-out for three important factors – fresh food, natural products, and affordable prices. Chipotle scores heavily on all these three fronts as its main objective is “Food for Integrity”. Through this policy, the company ensures that the animals whose meat was used in their dishes, were only bought from suppliers who treated those animals in the most humane way possible. Quality of products came first for the team at Chipotle and profits were only the secondary objective.
They follow this policy quite strictly as was evident from a recent example. When Chipotle discovered one of their pork suppliers were treating pigs in a cruel way, they immediately took the decision to stop their pork supply from that dealer completely. This came as a surprise because pork burritos were the reason for close to 7% of the total sales of Chipotle. By banning this particular dealer, Chipotle, surely lost some short term profits; however, it gained immense popularity and respect among its customers. Until now, Chipotle buys only from dealers who treat animals humanely. With most of the customers today becoming more and more aware about the products that go into their salads, burritos, burgers and the like, this initiative has surely given an edge to Chipotle that big players like McDonald’s do not have. By following such ethical rules and policies, Chipotle was able to witness a 16.8% growth in same store sales during 2014, a growth that most of its small and big peers can feel envious about.
Challenges ahead
Chipotle, which is currently thriving on producing healthy dishes at affordable prices can enjoy monopoly in the casual dining sector as long as its competitors keep quiet. Analysts from Trefis indicate that Chipotle could face the music when competitors like McDonald’s and Burger King (BKW, Financial) come up with healthy and organic dishes at great prices. Currently the estimated number of customer visits to Chipotle is expected to increase by 6% during 2015. However, if competitors come up with exciting and healthier dishes, this figure is expected to increase by only 4%. Chipotle should continue to innovate around its burritos, if it wants to keep its competitors at bay.
The second challenge is with respect to increase in the prices of ingredients. During 2014, beef, pork and meat prices had gone up in the range of 15 to 20%. Chipotle was left with no other option but to increase the prices of its dishes as well. On average, Chipotle increased the price of its menu by 6.5% last year. This year will be tougher with unpredictable weather conditions and chances of drought looming large over the US economy. If that is the case, Chipotle should be ready to increase prices further, which might lead to reduced margins. Let us look at the share price trend of Chipotle for the last few months herewith:
Conclusion
Chipotle is currently in a very strong position. Transparency in its prices, healthy products, ethical business values, customer focus, well-planned store expansion, properly phasing out dishes with genetically modified ingredients and innovative dishes are some of the principles that will stand in good stead for the success of Chipotle for the coming years as well. With such strong business values, it will hardly be a surprise when Chipotle outperforms its competitors during 2015 as well.
