Chipotle strategic analysis


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Strategic Analysis assignment for University of Virginia MOOC.
Executive Summary style.
1500 words.

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Chipotle strategic analysis

  1. 1. Chipotle Strategic Analysis Competitive Position, Analysis, and Recommendations David James
  2. 2. Table of Contents I. Executive Summary............................................................................................... 2 Introduction Competitive Analysis Environmental Trends Influencing the Industry Industry Structure and Dynamics Organizational Capabilities Sustainability of Competitive Position II. Recommendations................................................................................................. 5 III. Appendix................................................................................................................ 6 Exhibit 1: Growth Comparisons Exhibit 2: SWOT Analysis Exhibit 3: Strategic Groups Exhibit 4: Competitor Financials References
  3. 3. CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 2 Executive Summary Introduction Chipotle Mexican Grill is a restaurant chain in the fast-casual sector, focusing on serving food sourced from sustainable farming practices—including meat product that is responsibly raised in humane ways without antibiotics or hormones. “Food With Integrity” is the phrase that captures the firm’s philosophy.[1] Research firm Technomic Information Services defines "fast-casual restaurants" as meeting the following criteria:  Limited-service or self-service format  Average meal price between $8 and $15  Made-to-order food with more complex flavors than fast food restaurants  Upscale, unique or highly developed decor  Most often will not have a drive thru The fast-casual sector is positioned between fast food restaurants like McDonalds and table-service casual dining experiences like Denny’s or IHOP. The sector aims to provide a higher quality experience than fast food and more convenience than a table dining service.[2] Competitive Analysis Exhibit 2’s SWOT Analysis reveals that among Chipotle’s strengths are strong brand image and a loyal customer following that Chipotle leverages to spread word-of-mouth viral marketing campaigns, such as “The Scarecrow” video, with its associated mobile game. Chipotle’s marketing expertise gives it a distinct competitive advantage—in less than a week after the campaign release, the video had attracted 3.1 million views on YouTube, almost 20,000 likes, and more than 4,000 comments. It was picked up by countless media sources (Slate, the Christian Science Monitor, NPR).[3] Strategic Groups—as depicted in Exhibit 3—show that the fast-casual dining sector has found a niche that overlaps some established table-service diners like Denny’s and IHOP. Chipotle offers a similar quality for about the same price, but with a much higher convenience factor both in terms of throughput time and menu personalization options. Exhibit 4 shows a list of competitors from the fast-casual space as determined by Google Finance and shows that Chipotle has significantly higher market capitalization, revenues and income than rivals. It also has zero debt, meaning that unlike most competitors, earnings are not used to service interest on debt. Environmental Trends Influencing the Industry According to one NRA (National Restaurant Association) survey, 43% of American adults report that they are not using restaurants as much as they would like in their daily lifestyle. This translates into three key trends that Chipotle can exploit: 1. Consumers are showing a growing interest in the origins of their food and how it is raised. Based on its own research, Chipotle believes that as consumer awareness of ethical farming practices and
  4. 4. CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 3 responsible animal welfare rises, it will nurture higher long-term demand for sustainably grown foods.[4] 2. The US Census Bureau states that 25% of the US population is of Hispanic descent, amounting to over $600B purchasing power. Restaurants like Chipotle that offer Southwestern cuisine are well positioned to extract value from this strong demographic.[5] 3. The target “Generation-Y” demographic has entered the workforce at a challenging economic time and many will rely on dual income. Time-saving, healthy and ethically sourced convenience foods are proving an attractive option.[6] Industry Structure and Dynamics The NRA forecasts 2014 restaurant industry sales will be $683.4B, up 3.6% from 2013. According to research firm Technomic, the fast-casual segment leads growth within the US restaurant industry with an 11% increase over 2013. With efficient service, attractive atmosphere and fresh, "made for you" appeal, fast-casual restaurants cater to the needs of today's consumer. Exhibit 1 shows that Chipotle enjoys the highest growth rate among peer leaders. Consideration of Porter’s Five Forces, as applied to the fast-casual industry, reveals that the limited number of suppliers for Chipotle’s ethically raised food gives suppliers more pricing power than those servicing other restaurants. This places a higher cost burden on Chipotle. However, as the recent menu price hike shows, customers are willing to pay higher prices for Chipotle’s offerings without complaint, suggesting buyers have low bargaining power.[7] The threat of entry into the market is high, since no specialized expertise is required, sunk costs are low, and startup capital is modest compared to other industries. However, Chipotle’s first- mover advantage has helped it build close relationships with ethical suppliers and gain control of resources that presents a barrier to imitators. Threat of substitution exists from other types of fast-casual restaurant that offer specialty baking, like “Panera Bread”, or special-order burgers like “Smashburger”, but neither offers the unique combination of healthy, ethically-made food that Chipotle’s customers crave. Organizational Capabilities Chipotle has a carefully crafted people culture that emphasizes hiring and training the right employees for performance. The hands-on training and promotion from within, develops strong, empowered teams. Food is prepared fresh and in small batches throughout the day and the focused menu provides preparation time efficiencies.[8] The “Four Pillars of Great Throughput”[9] is an internal process that helps manage order transaction time and provides Chipotle with operational efficiencies that are difficult for competitors to match:  Aces in their places—top servers on the front lines  The linebacker—replenishes food and supports the Aces  The expediter—bundles orders, prepares chips and drinks  Mise en place—“everything in its place” (French), meaning all ingredients and utensils are ready to hand.
  5. 5. CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 4 Sustainability of Competitive Position Chipotle uses a Differentiation Strategy that generates rents from higher consumer willingness to pay—as evidenced by the recent price rise that did not impact record earnings. Other evidence suggests the competitive position for Chipotle is sustainable:  Differentiated product positioning  Operational efficiencies  People culture based on performance  Growth that far outpaces the fast-casual sector and the restaurant industry in general  Growing sector with large target audience
  6. 6. CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 5 Recommendations Chipotle should focus on the following areas to improve its competitive position:  Continue strengthening relationships, and defining long-term contracts with existing suppliers of ethically grown and raised product. This will raise barriers to entry, making it more challenging for followers to enter Chipotle’s differentiated niche.  Source new ethical suppliers, so that as Chipotle continues to grow, it can meet demand and ensure the entire menu is ethically sourced.  Raise the bar for what the market expects a sustainable restaurant to offer, for example: - Ramp up the use of recycled and green materials in store construction, and focus on recycling store waste to produce compost for locally grown herbs, for example. - Consider ways of recycling water used in cleaning processes and repurposed for restroom flushing. Changes such as these will raise expectations of what a restaurant must do to be trusted as a provider of sustainable ideals and values. It will deepen customer loyalty and align even closer with the values of the target customers—making it much more unlikely that customers will seek alternatives since the emotional bond will be strengthened.  Leverage the success of the Scarecrow campaign and work on more innovative content marketing projects. As a media publishing empire, Red Bull used its content marketing prowess to help it sell over 5.3 billion cans of energy drink in 2013[9]. Chipotle can follow their lead by opening a media division to focus on targeted content to change perceptions about sustainable living.  Use the “Food With Integrity” philosophy to diversify into other food segments such as chicken and bakery-café.  Home delivery is an area worth considering for Chipotle, especially with giants like Amazon getting involved in the space, and having the potential to influence mainstream perceptions about convenience of service.
  7. 7. CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 6 Appendix Exhibit 1: Growth Comparisons Exhibit 2: SWOT Analysis Strengths Weaknesses  Brand loyalty  High margins  Menu personalization options  Social & content marketing mastery  Performance based culture  Career incentives  Close supplier relationships  Limited menu  Not authentic Mexican food  Higher costs associated with sustainable ingredients Opportunities Threats  Capitalize on “Fast-Casual” sector growth  Home delivery  Menu diversification  New restaurant categories  Media powerhouse  Raise the bar to bolster a stronger “green” message  Insufficient sustainable suppliers to cover demand  Relatively low barriers to entry for new entrants with strong stories  Bad PR e.g. 2010 audit revealed illegal workers  Loss of trust if “Integrity” message is violated 0 2 4 6 8 10 12 14 16 18 US Restaurants Fast-casual Segment Panda Express Panera Bread Chipotle 2012 - 2013 Growth Comparisons (%)
  8. 8. CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 7 Exhibit 3: Strategic Groups Exhibit 4: Competitor Financials Valuation Financial ratios Operating metrics Margins Income statement Company name Earnings per share Mkt Cap Total debt to equity Return on avg equity Operating margin Revenue Net income CMG Chipotle Mexican ... 11.34 20.89B 0 23.52 16.57 3,214.59 327.44 FRGI Fiesta Restaurant... 0.53 1.19B 46.77 10.65 5.64 551.34 9.26 JACK Jack in the Box Inc. 2.1 2.29B 78.45 18.69 9.28 1,489.87 82.61 DENN Denny's Corporation 0.26 547.77M 2,052.82 1,237.57 10.03 462.59 24.57 DPZ Domino's Pizza, Inc. 2.69 4.09B 17.41 1,802.22 142.98 COSI Cosi Inc -0.66 22.79M 0 -136.61 -13.35 86.33 -11.44 PZZI Pizza Inn, Inc. -0.22 65.32M 41.6 -18.11 -3.93 41.86 -1.12 PZZA Papa John's Int'l... 1.57 1.82B 119.79 42.92 7.4 1,439.02 72.98 NROM Noble Roman's, Inc. 0.04 31.88M 32.91 6.64 37.85 7.53 0.87 FRSH Papa Murphy's Hol... -0.12 150.33M 501.11 11.06 80.5 -2.59 MRFD Morgan's Foods, Inc. -0.28 20.21M 3.56 86.87 -0.14
  9. 9. CHIPOTLE STRATEGIC ANALYSIS DAVID JAMES JULY 2014 8 References [1] Chipotle 2013 Annual Report pg 3. [2] Wikipedia: [3] Anne Handley: lesson-from-chipotle-s-scarecrow-video-and-it-s-not-to-start-with-a-billion-dollars-and-fiona-apple. [4] Annual Report pg 4. [5] [6] consumers-article-1.950366. [7] [8] Annual Report pg 6. [9]