Case: Chipotle Mexican Grill8 In 1993, Steve Ells opened a burrito-and-taco restaurant in a 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, Steves idea was for Chipotle to be a cash cow to help him finance a real, upscale restaurant. Chipo- tle, however, began branching out: first to several locations in and around Denver, then eventually nationwide. In 1998, McDonalds bought a 91 percent stake in Chipotle; this was followed by a 2006 initial public offering in which McDonalds retained 69 percent of the stock and 88 percent of 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 bur- ritos. (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 fifty- year-old chain that sells only fries, hamburgers, and milkshakes, but offers high quality for which people are willing to pay a premium. He also admires Steve Jobs of Apple, and feels that one can learn a lot from Jobss 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 the hormone rBGH. The restaurants use fresh avoca- dos, tomatoes, and peppers, prepared from scratch. And Chipotle believes in the open kitchen format: People can see for themselves that the food is fresh. Steves term for Chipotles 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. Chipotles 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 wont 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 Chipotles freshness and quality. He estimates that no more 8Information from this case was obtained from Anonymous, Chipotle: Fast Food with Integrity, BusinessWeek.com, February 16, 2007; Anonymous, Chipotles Chef Has His Payday, BusinessWeek.com, January 27, 2006; Marc Gunther, Can Fast Food Be Good Food?, cnnmoney.com, September 13, 2006.

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 av- erage fast-food customers range. According to one estimate, going organic over- night 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 is perhaps a long-term goal, and there are certainly interim steps. About 30 percent of its beans are organic, though other vegetables are gen- erally not. About 60 to 70 percent of the chicken and about 40 percent of the beef is sourced naturally, as well as all of 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 todays 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, lack- ing 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. Lets call this the all-organic concept for short, recognizing that organic is only a part of the whole vision here. 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?