In 1993, Steve Ells opened a burrito-and-taco restaurant in Denver storefront, not far from the University of Denver Campus and popular with students. He named it Chipotle Mexican Grill, after the dried pepper common in Mexican cooking. A trained chef and graduate of the Culinary Institute of America, Steve's idea was for Chipotle to be a cash cow too help him finance a "real," upscale restaurant. Chipotle, however, began branching out: first to several locations in and around Denver, then eventually nationwide. In 1998, McDonald's bought a 91 percent stake in Chipotle; this was followed by a 2006 initial public offering in which McDonald's retained 69 percent of the stock and 88 percent for voting rights. By the end of 2005, there were about 500 Chipotle outlets generating approximately $600 million in sales annually. Currently, about 15,000 people are employed by Chipotle. Steve Ells still serves as the chairman and CEO. What accounts for the success? For starters: a simple menu, skilled cooking techniques, fresh preparation, served quickly, and a "cool" setting. The menu is described as "fast casual" and is at first glance rather limited: only tacos and burritos. (As the only real change in over a decade, salads were very recently added.) Steve notes, however, that there is a wide variety of flavors to choose from, and by focusing on a couple of things, Chipotle has been able to ensure that they do them very well. He argues that too big a variety leads to too much pre-preparation or processed ingredients, and notes that since its earliest days, Chipotle items are always made-to-order. He admires and tries to emulate In-N- Out burger, a 50-year-old chain that sells only fries, hamburgers, and milkshakes, but offers high quality for which people are willing to pay premium. He also admired Steve Jobs of apple, and feels that one can learn a lot from Jobs's "passion for not accepting mediocre stuff." There are some other factors at work here as well. The pork used by Chipotle comes from pigs raised naturally, without hormones, on family farms. In 2005, Chipotle switched its dairy purchasing policy: Since then, all sour cream comes from cows that are not given hormone rBGH. The restaurants use fresh avocados, tomatoes, and peppers, prepared from scratch. And Chipotle believes in the "open kitchen" format: People can see for themselves that the food is fresh. Steve's term for Chipotle's vision is "food with integrity." He notes that he loves seeing high school students going into a Chipotle, spending a couple of dollars more for a meal than they might elsewhere, and maybe getting a bottle of water instead of a soda. Chipotle's has never advertised as a place for kids or teenagers to eat. In fact, it does very little advertising. Steve feels that advertising the "food with integrity" vision won't work; to use his term, it would "be too preachy." 

Rather he lets the food quality, value, and convenience do the talking. The open kitchen also helps promote Chipotle's freshness and quality. He estimates that no more than 5 percent of his customers know about "food with integrity." The rest come in because they like the taste or the value, or just because "the place looks cool." But Steve believes that "food with integrity" can mean much more. He points to the popularity of organic food stores such as Whole Foods. People respond positively to organic, sustainably grown vegetables, humanely raised meats, and fewer preservatives. At Chipotle, he has considered switching over to all-organic produce, but does not want to price a dining experience at Chipotle out of the average fast-food customer's range. According to one estimate, going organic overnight would make the retail price of a burrito jump to $15. Nevertheless, switching to natural pork increased the price of carnitas from $4.50 to $5.50, but sales also went up. Totally organic perhaps a long-term goal, and there are certainly interim steps. About 30 percent of its beans are organic, though other vegetables are generally not. About 60 to 70 percent of the chicken and about 40 percent of the beef is sourced naturally, as well as all the pork. The sour cream is still not organic, though it is hormone-free. The other thing to keep in mind is that as Chipotle grows, it gets more power in the supply channel. As a tiny chain, it was unable to get natural chicken thighs from high-end supplier Bell and Evans, but at its current size, it can do so today. Though today's Chipotle would seem to be among the leaders in providing healthy fast food to the public, Steve feels that he is still lagging behind. His goal is for all Chipotle restaurants to offer only organic, pesticide-free ingredients, lacking preservatives and artificial flavors and colors, and all natural, humanely raised meat. He would be even more delighted if every restaurant were to follow the same vision. Let's call this the "all-organic concept" for short, recognizing that organic is only a part of the whole vision here. 

QUESTIONS:

 If you were advising Steve Ells, what could he have done to evaluate the all-organic concept? Is the concept viable at all? How would he be able to estimate the price elasticity (that is, how high does price have to get before he begins losing significant numbers of customers)? Given the fierce competition in this industry, is his concept pleasant but unrealistic? 

Or does the organic position provide Chipotle with sustainable competitive advantage? Specifically, consider the challenges posed by competitors such as Taco Bell that are adding to their product lines and trying to move into "healthier" Mexican food product space. How protected is Chipotle from this kind of competitive action, now or in the future?

Answer rating: 100% (QA)

If I were advising Steve Ells on evaluating the allorganic concept I would suggest conducting market ... View the full answer