Group 8

Abesamis, Cadungon, Lee, Santiago, Sto. Domingo, Tagapan

K32

Chipotle Mexican Grill in 2013: Can it Hit a Second Home Run?

1. Does Chipotle have any core competencies and, if so, what are they?
Chipotle Mexican Grills core competencies are the following: a) using high quality organic
ingredients to provide delicious and reasonably priced dishes; b) having a limited, but focused menu; c)
having an operationally efficient restaurant which has an aesthetically pleasing setting; d) employing and
training employees to be friendly and multi-skilled.
First, Chipotle provides customers delicious food at a reasonable price using high quality organic
ingredients and classic cooking methods. This is in line with their Food with Integrity campaign which
promotes using organic ingredients, and at the same time Chipotle has a quality assurance department to
ensure the best is being served to customers. Furthermore, none of Chipotles rival firms (Qdoba, Taco
Bell) have done this concept since they rely on industrialized method to prepare food; thus, it sets apart
Chipotle from its competitors. Given this position, Chipotle continues to meet customer expectations, and
deliver high quality food at an affordable price.
Second, Chipotle offers a limited, but focused menu that caters to people looking for delicious
fast food. Having a limited menu gives Chipotle the opportunity to refine their food, and provide a fast
service. In addition, this limited menu lets customers customize their burritos, burrito bowls, tacos, and
salads which gives them a unique experience. This is in contrast to the menu provided by competitors as
they tend to expand their menu. With this, they are able to become efficient not only in service, but also in
cost.
Third, Chipotle boasts an operationally efficient restaurant and gives the customer an
aesthetically pleasing environment to dine in. This is practiced through a fast and friendly service as the
customers are able to provide the servers their specifications on how to prepare their food. Chipotle has
given customers the satisfaction of seeing their food being made quickly while the servers are preparing it
to perfection. Also, Chipotle designed the interiors of their restaurants in a way that would support
efficiency and organization, and create a comfortable place for the diners.
Lastly, Chipotle ensures that the employees maintain a friendly attitude which lets the customer
feel welcome to their establishment. Further, employees are trained to be multi-skilled in order to have
labor efficiency during peak periods. This type of strategy is based on the idea of Chipotle executives who
wanted to create a people-oriented, performance-based culture that provides satisfaction to both
customers and employees alike. Consequently, it became one of Chipotles core competencies which
encourages efficiency through motivation and empowerment.
2. What are the primary and secondary components of Chipotles value chain?
Porter suggested that in order to create an increased value in providing the companys products or
services, the value created or captured must be more than the cost of creating or providing that value
(Robben & Probert, 2015). And the more value created, the higher the chances of becoming profitable and
sustainable because of the created competitive advantage. With this, it is important to have in-depth
knowledge and to fully understand the companys activities in order to classify and exploit those that add
value to the organization as a whole.

Porter also proposed a generic value chain that focuses on the systems within the company rather
than the classification of its department or cost types (Mind Tools, n.d.). The value chain is divided into
primary and support activities; applying this classification for Chipotle would give us the following
primary activities: Supply Chain Management, Restaurant Management and Operations, Distribution,
Sales and Marketing, and Customer Service; the support activities, on the other hand, are the following:
Procurement, Human Resources Management, and Administrative and General Administration.

Figure 1. Chipotle Value Chain Analysis

Primary Activities:
a. Supply Chain Management: Chipotle does not purchase ingredients for its dishes directly
from farmers or purchase supplies and materials directly from manufacturers; but rather, the
company relies the most on its long-term relationships with some selected reputable food industry
suppliers that provide high-quality, fresh ingredients, and other products that meet Chipotles
specifications.
b. Restaurant Management and Operations: Part of the companys operations is the quality
assurance and food safety check in order to ensure compliance with applicable federal, state, and
local food safety regulations. Strict compliance of the standards throughout Chipotles supply
chain all the way through the serving lines at restaurant is being implemented. Moreover,
executives of the company sought to build and nurture a people-oriented, performance-based
culture in each Chipotle restaurant as they believe that such a culture led to the best possible
experience for both the customers and employees. Every restaurant is operated and managed in
such a way that pleases every customer, a kind of environment that is achieved through hiring of
staff with good work ethic.
c. Distribution: Instead of making purchases directly from Chipotles suppliers, the
company makes use of its 23 owned and operated regional distribution centers that delivers
ingredients and other supplies to Chipotle restaurants. These distribution centers are also required
to make their purchases from the approved list of suppliers so as to conform with the agreed-upon
pricing guidelines and protocols. The expansion of Chipotle globally requires adding more
distribution centers, which is already the plan of Chipotles management.

d. Sales and Marketing: Chipotle utilizes various forms of marketing its products and
company as a whole; some of them include print, outdoor, transit, theater, radio, and online ads.
The management also decided to make use of television ads when it launched its first-ever
national TV commercial during the broadcast of the Grammy Awards. It was also able to receive
considerable media coverage from scores of publications that has largely favorable articles
describing Chipotles food, restaurant concept, and business; it was also featured in a number of
television programs. Aside from the mentioned common forms of advertisement, Chipotle had
also been testing the use of owned media, which includes new video and music programs, and
it is considered a more visible event strategy that included the launch of the companys first
festival of food, music, and ideas. The management believes that the said new programs allowed
the company to communicate better its story and to establish emotional connections with its
customers. The company is also increasing the use of digital, mobile, and social media in its
overall marketing mix as the management sees the opportunity for greater access and information
communication to the customers.
e. Customer Service: One of Chipotles biggest commitment and innovation is to have
customers order ready quickly. Customers are able to customize their dishes by personally
selecting what they wanted and how they wanted it by speaking directly to the employees that
prepared the food and were assembling the order behind the counter. Management ensures that
Chipotles speed in servicing customers is improving so that orders placed by fax, online, or via a
smartphone ordering app are accommodated without hampering the service within the stores and
compromising the interaction between customers and crew members on the service line.
Support Activities
a. Procurement: As mentioned previously, Chipotle heavily relies on its approved list of
suppliers, whom they had been working with for a long term. The company worked with them on
a regular basis to establish and implement a set of forward, fixed, and formula-pricing protocols
for determining the prices that suppliers charged Chipotle for various items. Increasing the
number of approved suppliers will also help Chipotle to obtain best prices while providing the
best quality dishes.
b. Human Resources Management: Chipotle highly values its employees regardless of the
position and achievement. Its employees are the source of value-creating environment for its
restaurants, thus, motivating and empowering them is one of the companys commitment. Each
restaurant is typically composed of a general manager, an apprentice manager, one or two hourly
service managers, one or two hourly kitchen managers, and an average of 21 full and part time
crew members. Most employees are cross trained to work in different stations and situations, both
to provide people with a variety of skills and to boost labor efficiency during busy periods. In
addition, both managers and crew members are expected to deliver an interacting and friendly
attitude with the customers. It is also worth stating that Chipotle strives to hire and retain workers
who have a strong work ethic, took pride in preparing food items correctly, enjoyed interacting
with other people, and are team players at all times.
c. Research and Development: Last 2003-2004, Chipotle had started to give emphasis on
using organically grown local produce, organic beans, and meats from animals that were raised in
accordance with animal welfare standards and were never given feeds containing chemicals. This
shift in ingredient usage had led the company to commit itself in using top-quality, nutritious
ingredients, and improve the Chipotle Experience, an effort designated by the management as
Food with Integrity. The management had begun by working with animal ethics experts, and
continued by visiting farms and ranches, investigating the use of produce supplied by farmers
who respected the environment, and avoiding the use of chemical fertilizers and pesticides.

d. General Administration: As the expansion of the company is continuous, it employs a

team of real estate managers that devotes substantial time and effort in evaluating potential
locations for its new and future restaurants. The company also sought the help of external real
estate brokers in order to select the best location for its future restaurants. Some of the factors
considered in selecting for the appropriate site include trade area demographic and business
information, and food establishment operations of competitors. Chipotle Mexican Grills had also
proved to be successful in selecting for its site location be it in regional malls, downtown business
districts, and others.
3. What are the chief components of Chipotles strategy? Which one of the five generic
competitive strategies most closely approximate the competitive approach that Chipotle is
employing?
In order to succeed and secure a favorable position in a competitive market, a firm must choose
one generic strategy to pursue and it must be effectively implemented through total commitment.
(Porter, 1980 as cited in Ormanidhi & Stringa, 2008). Chipotle committed itself to give its customers a
unique experience. This unique experience has been delivered to its customers through its core
competencies and marketing strategies.
As previously mentioned, Chipotles core competencies include its dedication to provide healthy
and great-tasting food using high quality and organic raw ingredients at a reasonable price. This sets
Chipotle apart from its competitors since the company is able to provide consumers quick meals without
sacrificing the nutritional content of the food and the company is able to promote awareness and respect
for environment as well. Its focused menu also makes Chipotle different from its rivals because even
though it products are limited to four, Chipotle allows customization from its consumers. This also
permits them to give efficient and quick services without the traditional fast-food ambience since its
restaurants are distinctively designed similar with fine-dining. Finally, all these practices are maintained
because Chipotle ensures that its employees are multi-skilled and friendly. This significantly contributes
to its success since customers are welcomed and catered with utmost concern and efficiency.
Aside from its core competencies, Chipotles marketing initiative makes them distinct from its
competitors. Its marketing includes the use of various media such as print, online, outdoor, transit, theatre
and radio advertisements. Chipotle has also been involved in different community events, food and music
festivals to educate consumers on healthy and sustainable cooking which also assist the company in
promoting its services through connecting emotionally with the consumers. Lastly, the company also
takes advantage of the technology as they increase the use of digital, mobile and social media in overall
marketing. Chipotle utilizes various forms of advertising since their executives believe that best brands
are built through all the ways people experienced the brand.
With these kind of practices employed by Chipotle, it can be concluded that the company is
banking on a differentiation strategy to outperform its competitors. Chipotle provided its customers with
quick, nutritious and delicious meals without the usual fast-food treatment.

Figure 2. Chipotles Strategy

4. What does an analysis of the data in case Exhibit 1 reveal about Chipotles financial
and operating performance?
The financial analysis presented on Exhibit 1 shows that overall, the company is constantly
improving. Looking at its total revenues over the five-year period, we can say that the improvement in its
operations is outstanding. From revenues of $1,085,782,000 in 2007 to a gradual increase per year leading
to $2,731,224,000 in revenues in 2012, and more or less an average of 20% annual increase, it proves that
it continues to be a leader in the fast-casual sector of the restaurant industry. The figure below shows a
summary of the growth in revenues and it might be indicative of the fact that Chipotle will certainly be
bigger in the future than it is today basing it from the increasing steepness or slope of the line, and that it
will be financially successful. (Disclosure: Exhibit 1 in the case presents the years 2007-2012, but lacks
the information for the year 2008, so the group researched for Chipotles annual report for 2008).

Figure 3. Total revenues for the period 2007-2012

Figure 4. Restaurant Operating Costs for the period 2007-2012

With its ever increasing and expanding operations, it is inevitable that Chipotles costs increased
over the years to accommodate the rising revenues that were the direct result of its effort in emphasizing
quality. As can be seen from the figure above, Chipotles major expense is food, beverage, and packaging
costs followed by labor. Although the food, beverage, and packaging costs increased over the years,
Chipotle was able to effectively manage its costs because, as presented on Exhibit 1 on the case, the
amount spent on those expenses relative to sales did not get substantially higher compared to the previous
year at any given period. In fact, the percentage of these costs compared to sales ranges from 31%-33%
which suggests a very low deviation, and indicates that this cost, as a percentage of sales, remains steady
annually. However, upon looking at Exhibit 1 in the case, we noted that the labor costs as a percentage of
sales gradually decrease annually. From 26.7% in 2007, it decreased to 23.5% in 2012. This is a clear
indication that operations are effective. Employees are constantly improving because they are generating
more revenue annually as proven by a decrease in labor costs as a percentage of revenues (Jones, 2014). It
might mean that Chipotle highly values employee training and is directly gaining advantage from it.

Figure 5. Net Income for the period 2007-2012

A look at the above figure shows the increasing net income of Chipotle over the years. This
means that generally, Chipotle is profitable and it that this profitability is intensifying as the years go by.
A sharp increase that occurred from 2008 to 2009 is noticeable compared to the net income growth from
2007 to 2008. Financially, Chipotle is impressive because of the rising net income, but this does not
represent how much the company saves from the revenues it generates. Further analysis reveals the
following graph that represents the net income/profit margin.

Figure 6. Net Profit Margin for the period 2007-2012

As can be seen from the graph, Chipotle experienced a decline from 2007-2008, but the company
managed to come back and improve afterwards. It experienced a slightly steady profit margin from 20102012, and it is noticeable that the company is continue to go upward. Other information on the exhibit
such as the net cash provided by operating activities are also constantly increasing, together with the
capital expenditures needed to open new restaurants, which are evidenced by the number of restaurants
open at year end (also increasing because of the expansion). In totality, Chipotles potential to be a leader
in the fast-casual restaurant sector is observable with reference to the previous discussion. The positive
and increasing trends in its financial data provide evidence of the aforementioned. With its improving
operations, the future of Chipotles financial and operational performance will be a success.
5. What action recommendations would you make to Chipotles top executives to
strengthen growth and profitability?
Considering that Chipotle is currently on an upward course, it may do them well to Hold and
Maintain their current expansionary strategy, enhancing their core competencies as necessary, but staying
the course in the grand scheme of things, since what they have appears to be working well. With that, the
group recommends that they continue to strengthen their core competencies, continue to build the brand
of Chipotle known to public, and expand their market either in domestic and foreign locations.
The group believes that Chipotle should continue to serve their limited and focused menu. Very
few actually can imitate the taste of the food at Chipotle because Chipotle created a burrito experience
that is different than its competitors. Likewise, Chipotle has been very appealing to the market because it
is vocal about using organic ingredients. Using only 100% naturally raised meat and sourcing cheese with
no rBGH, Chipotle has evolved into a burrito-making powerhouse that actually cares about the food it
serves. Moreover, they should continue to empower and train their employees so as to be able to serve
hundreds of customers in a very short period of time. High customer throughput yields greater customer
satisfaction and also more revenue generation.

Nonetheless, they should also be wary of the possible negative impact of purchasing organic
ingredients. As in the recent situation, Chipotle is faced with the problem of internal control failure in
2015. Health officials closed a Chipotle location in Seattle after repeated food safety violation and after
E.coli and norovirus incidents.(Little, 2015). This violation can be attributed to the fact that their
ingredients are organic, thus, these are easily contaminated as compared to those treated or grown with
chemicals. From this incident, Chipotle must revamp their supply chain management and their quality
assurance management to prevent similar incidents in the future. For instance, they should be more
careful in selecting suppliers through inspections of the agricultural processes in the farms., so that their
suppliers do not violate any health safety precautions.
Chipotle should continue to penetrate the market by making their brand recognizable. However,
there should still be careful planning before the executions. First, Chipotle must do marketing research
ethnography study, identification of target market, and forecasting of food trends. In this way, they will
know how or what approach they will execute their marketing. Also, since the company is reliant on the
word-of-mouth publicity from customers, potential customers will tend to search about the restaurant,
first. Therefore, the group suggest that company information must be well organized in the internet, so
that whenever potential customers are curious about Chipotle, the company can be easily communicate
what they have to offer. In line to this, their advertising should be refurbished and geared more in the
digital and social media sites. Another approach that they can use is to broadcast their brand in
televisions, print ads, radio, etc., so that they will not heavily rely on word-of-mouth publicity.
Lastly, having many assets and low liabilities, the company can leverage on expanding their
operations to foreign and domestic locations. In their efforts to expand, they should continue to uphold
their rigorous site selection process, so that they will construct a branch in a strategic spot where car and
foot traffic is abundant. They must take into consideration that organic ingredients are readily available in
the geographical market that they expanded in, investigate the characteristics of the people present in the
location, and evaluate potential risks that may arise after establishment.

References
Chipotle Mexican Grill. (2009). 2008 Annual report and proxy statements. Retrieved from
http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-reportsAnnual
Jones, A. (2014). An in-depth overview of Chipotle Mexican Grill. Retrieved from
http://marketrealist.com/2014/12/chipotle-mexican-grill/

Little, K. (December 11, 2015). CNBC. Chipotle just got more bad food safety news. Retrieved from
http://www.cnbc.com/2015/12/11/chipotle-just-got-more-bad-food-safety-news.html
Mind Tools. (n.d.). Porters Value Chai: Understanding How Value Chain is Created Within
Organizations. Retrieved from https://www.mindtools.com/pages/article/newSTR_66.htm
Ormanidhi, O., & Stringa, O. (2008). Porter's Model of Generic Competitive Strategies. Business
Economics,
43(3),
55-64.
Retrieved
from
http://0eds.a.ebscohost.com.lib1000.dlsu.edu.ph/eds/pdfviewer/pdfviewer?sid=66de0504-b501-4f99-9e07d385208086c2%40sessionmgr4010&vid=6&hid=4208
Robben, X., & Probert, C. (2015). Michael Porter's Value Chain : Increase Value and Beat the
Competition. Namur [Belgium]: 50Minutes.com.