The following is an excerpt from his new book, “The Chipotle Effect,” slated for publication in 2012. Visit the website to get the full copy of “The Chipotle Effect.” Reprinted with permission by the author.
You may hate the title of this book, especially if you are involved with a fast casual restaurant that is not named Chipotle. It’s not especially politically correct of me to name my book after the booming fresh Mexican food chain, but I’ve always been a person who spoke his mind and pushed the envelope — even while others were getting comfortable and complacent. So this is no different.
The fact is that Chipotle remains shorthand for “remarkable success” in a segment of the restaurant industry that is growing at a dizzying pace, despite the tumultuous economic conditions of the past few years. In 2010, according to a report by Chicago food industry research firm Technomic, the top 100 fast casual chains increased sales 6% in 2010 to $18.9 billion. While that may not seem like a big jump, remember that during the same period most other players in the restaurant world were flat or watching sales crater.
In this book, I will make the case that a large part of that astonishing growth has been due to fast casual’s ability to adapt to the changing lifestyles of Americans, including our embrace of social networking and mobile technology. And whether you love them or hate them, no company embodies the strategic embrace and tactical engagement of the new consumer to fuel growth like Chipotle. Heck, in a July 29, 2011, article, FastCasual.com even ran an article titled, “Who will be the Chipotle of the pizza industry?” So even if you don’t agree that this Denver-based company is the bellwether of change in our industry, you can’t ignore them. So let’s look at what Chipotle has done right and how it’s changed the restaurant business.
Chipotle may not have fired the first shot in the fast casual revolution, but the fresh Mexican chain is certainly the most famous of the founding fathers. Launched by Steve Ells in a space near the University of Denver in 1993, the restaurant grew quickly, opening its second location in 1995 and continuing its expansion — first with a loan from Ells’s father and later with a $1.8 million Small Business Administration loan. Ells, who had no business background, had clearly tapped into an unmet need among diners for healthful, fresh Mexican cuisine, and the Chipotle brand began to take shape: sustainably sourced ingredients, a simple menu, and impeccable quality.
In 1999, Ells opened his first restaurants outside of Colorado, but it was interest from McDonald’s Corporation that was the magic bullet for the company’s growth. The fast-food titan first approached Ells in 1997 and became a minority investor a year later. Contrary to popular belief, McDonald’s did not buy Chipotle but did become its largest investor, sinking more than $360 million into the chain over seven years and helping Chipotle make use of its proven distribution system. By 2005 the chain had more than 500 company-owned restaurants, and in January of 2006 it made its initial public stock offering (IPO), the stock doubling in value on the first day of trading.
In 2006, McDonald’s divested itself of its Chipotle holdings, earning about $1.5 billion on its investment. Today, the company has restaurants in 38 states and Canada, was the third-fastest-growing restaurant chain in 2010 according to Nation’s Restaurant News, and was ranked as the best fast-food Mexican chain in 2011 by Consumer Reports. Most recently, the company hired award-winning chef Nate Appleman to create new menu items and spearhead the creation of a new fast casual Asian concept restaurant, ShopHouse Southeast Asian Kitchen, which opened in Washington, D.C., in the summer of 2011.
In my humble opinion, Chipotle was simply in the right place at the right time with the right product. But this does not mean that their success has been due to pure luck. You can have the right place, time, and product going for you, but you have to know how to leverage them. True, the company was not the first “Fresh Mex” concept, the first burrito player, or the first creative brand builder. But they knew how to grab the gold when the opportunity came. Having watched the mistakes of their predecessors, they were able to develop an in-store and external brand that tapped into what their customers cared about: freshness, quality, sustainability, a sense of humor, and above all, a sense that they were breaking out of the “slightly more upscale fast food” mold of chains like La Salsa and Baja Fresh.
Among other things, Chipotle’s success is another nail in the coffin of the “first mover advantage.” There have been many companies and people in history who have come late to the dance and yet prevailed as the leader in their industry. It’s not always the first mover who winds up “owning” the category; another player who enters the market later and takes advantage of the pioneer’s mistakes often rises to the top.
Want more? Check back next week for another selected chapter from Barron’s new book, “The Chipotle Effect.”