Chipotle's Natural Selection

Chipotle Mexican Grill CEO Steve Ells believes that improving ingredients, not changing the menu, will sustain the chain.

By David Farkas, Senior Editor -- Chain Leader, 7/1/2006

With comparable-store sales growing by double digits, shares trading hands at $60 apiece and a market cap of nearly $2 billion, 505-unit Chipotle Mexican Grill looks like the real deal: a proven concept with plenty of staying power.

The 13-year-old company’s track record helped double the stock price on its opening day in January, making it the second biggest gain in restaurant history (ill-fated Boston Market holds the record). The Denver-based company is using part of the $121.4 million it raised to open about 90 units this year and 80 to 90 in 2007.

Credit McDonald’s Corp. for recognizing the chain’s potential in 1998, investing in it and waiting patiently as founder and CEO Steve Ells and his management team opened new markets and improved a limited menu emphasizing naturally raised meats and vegetables.

Today, Ells, 40, who earned a degree at the Culinary Institute of America, remains focused on improving food quality without adding new products. In fact, the food is a subject he prefers over sales trends, margin issues, traffic counts and the like.

In a Chipotle unit near company headquarters, Chain Leader grilled him about the direction the chain is heading.

I’ve been wondering why you don’t add another healthful protein.

We could do that. What next, lamb?

No, fish.

Maybe. We are taking a slightly different angle. We’ll offer the things we are currently offering, only we will make them better. The whole concept of “fresh” not being enough anymore. To the people who appreciate Chipotle’s tastes and also those people who consider their diets and what they are putting into their bodies, this concept of “food with integrity” makes perfect sense.

How far can you take it? Some people don’t care where the corn comes from or whether the stuff is organic.

Not everybody is asking for that. But people were not asking for Chipotle 13 years ago, either. Today, about half the chicken [Chipotle] serves is naturally raised with no antibiotics, on all vegetarian feed and humanely raised.

I don’t think this restaurant qualifies because I see that the thighs in the walk-in come from a purveyor not known for naturally raised chicken.

Yes, that’s correct. But we have made huge strides in getting naturally raised meat into our restaurants in just the last year.

You have said it’s tough to get naturally raised chicken in the West. Any idea when that will change?

Our two biggest suppliers are in the Midwest and East. Within the next couple of years, all of our meats are going to be naturally raised. Today, all of our pork is naturally raised.

Is it harder to market something that’s good for you even though you might not be able to taste the difference in the products?

I think you can taste the difference over time. We’re putting more organic beans into the mix every day. We are serving naturally raised beef. And constantly pushing to get better quality raw ingredients, whether it’s pasture-raised dairy or organic cilantro or what have you, and always following this food-with-integrity journey—and always making sure you’re raising things in a sustainable way is appealing on so many different levels.

Why pay more for such products now when you have to take a price increase or lose margins on it?

We are not losing margin because we take a price increase when we add naturally raised items, and we’re not seeing any degradation in transaction counts as we did this. So it’s telling us that customers do think this is relevant and important.

At some point, do you want to account for the provenance of all your ingredients?

Absolutely. It is important that we know where every single ingredient comes from. It has an impact on the environment, on the workers who farm the land, on the notational value of what we are feeding customers. The more we can understand how the food was raised, the better off we are at giving customers a better quality experience.

Have you figured out a tipping point where you raise prices too much?

Our vision is to feed the masses. We want to be available to people who eat fast food.

That’s what McDonald’s does now.

And we are feeding the masses, too. We think we can have thousands of restaurants.

You’ve said elsewhere that “food with integrity is the single biggest factor driving growth and profitability.” Is this true?

It is one of the things that contributes to it.

How do you know this?

We talk to our customers. We get a lot of customer feedback about what they like and don’t like. You also understand what’s going on in the world around you and what’s important to people.

How do you know it’s not just a bunch of people who like coming here for the flavor of Mexican food?

That’s part of it. If you look at the Chipotle demographic, [the concept] appeals to so many people for so many reasons. Just to expand the number of reasons that people come is good for us.

When you do attribute research, what do you see?

The last customer research we did, people say they come for the taste of the food and quality. That’s the No. 1 reason they are coming. That’s great, but it doesn’t mean we can’t improve our food.

In three to five years, what’s the menu going to look like?

I hope exactly what it is today but with better ingredients.

But new ingredients?

There have been two new ingredients in the past 13 years: red-wine vinegar and honey. And those are in the Chipotle honey vinaigrette.

As a food person, I can certainly think of new, exciting things to make, but we have discipline here to appreciate our operating system. It has allowed us to bring cooking back to fast food. We are cooking in front of the customer. You can’t do that and continue to drive sales by adding new menu items. How new are “new” menu items anyway?

But fish seems like a natural.

You really want fish. Well, you are not going to get it anytime soon! It’s certainly doable.

Can you do it in your kitchen setup?

Hey, I’ve set up the whole line with breakfast. It was great. We could roll out a new daypart. We’ve done shrimp tacos, we’ve done fish tacos just playing around back there. All these things are a possibility.

So why not add something new?

We continue to grow the business—new units and same-store sales—by staying very focused on a few things and doing those few things better than anyone else.

Aren’t purveyors trying to interest you in the new and better?

They know we want something better. We want something better from everybody, even our best suppliers.

How do you work with purveyors?

We visit farms, commissaries, distributors. It is about the profit and taking advantage of opportunities.

What’s on the horizon in that regard?

The question now is how to make our dairy better: sour cream and cheese. And we are working with the supplier who makes our cheese. And they are purchasing milk from farmers that don’t use [bovine growth hormone]. Not all have that ability, but they will get there. And we’ve been looking at pasturing dairy operations and organic and sometimes nonorganic. Pasture ways can look better than organic, but you really have to get in and understand what the conditions are.

What difference does it make flavor-wise?

It has an impact on flavor. The flavor of milk from cows that are out on pasture and in sunlight all day is probably different from that of eating grain in a barn.

Is Whole Foods a model for Chipotle?

Whole Foods is definitely someone we look up to. By the way, not everything in Whole Foods Market is organic and free range. At Chipotle we can’t have 100 percent free range or organic. We wouldn’t succeed in our mission to feed the masses—or make acceptable really great quality food. We have to have a stair-step approach to work with suppliers to manage the cost.

On the note of food with integrity, I wonder if you’ve ever thought of “expansion with integrity”? In other words, avoiding expanding to avoid urban sprawl.

It’s an excellent point, and certainly, you know, I could feel hypocritical about on the one hand, [promoting] naturally raised meat and, on the other, supporting that kind of sprawl.

With the addition of 80 or 90 restaurants this year, can you avoid it?

A lot of our development in the past has been areas where we remodel old buildings. We have excellent examples of this, especially as we go into densely packed cities. In Boston we will have a lot of opportunity to do that kind of thing. And certainly in New York.

But Chipotle’s expansion isn’t limited to urban areas.

No, it will be a balance. You’re right. Certainly we will be going into new development. There’s no question about that.