Chipotle Mexican Grill Inc – September 15, 2022

Americans love Chipotle. In the highly competitive, quick service restaurant, casual dining space, few eateries promise to deliver flavorful food made with fresh, premium quality, and healthy ingredients, at palatable prices. All drivers which currently top the preferences for consumer choice.

With its menu of burritos, burrito bowls, quesadillas, tacos, and salads, Chipotle Mexican Grill strives to “cultivate a better world” by serving responsibly sourced, classically cooked, real food with wholesome ingredients and without artificial colors, flavors, or preservatives.

After opening its first restaurant more than 25 years ago, Chipotle now owns and operates almost 3000 locations across the United States with a further 44 international restaurants. Despite its widening footprint, the company maintains a steadfast focus on serving high-quality food and still charging reasonable prices, all whilst endeavoring to improve sustainability, promote animal welfare, and refrain from the use of growth hormones. Seeking out ingredients that are raised with respect for animals, farmers, and the environment, remains at the core of its commitment that continues to resonate with customers.

After powering through the covid pandemic with record sales, which it continues to achieve, the company is targeting further growth through a strategy underpinned by continued technological innovation, customer engagement, and expanding access and convenience by accelerating new restaurant openings.

After attending the Culinary Institute of America in New York, Chipotle founder Steve Ells became a line cook and observed the popularity of the taquerías and burritos in San Francisco’s trendy Mission District. In 1993, Ells took what he learned and opened the first Chipotle Mexican Grill in Denver, using an $85,000 loan from his father. The pair initially calculated that the store would need to sell 107 burritos per day to be profitable. After one month, the original restaurant located near the University of Denver was selling over 1,000 burritos a day.

Cash flow from the store saw a second location open in 1995, while a small business loan funded a third. To spur additional growth, Ells’ father invested a further $1.5 million, and external investors provided an additional $1.8 million for the company. In 1998, the first restaurant outside of Colorado opened in Missouri, with Minneapolis following soon after.

Also in 1998, McDonald’s made an initial minority investment in the company. By 2001, McDonald’s had grown to be Chipotle’s largest investor, allowing it to quickly expand, from 16 restaurants in 1998 to over 500 by 2005.

Chipotle went public in 2006, in what was the best U.S.-based IPO in six years, and the second-best IPO for a restaurant after Boston Market, with the money raised from the offering plowed into new store growth. McDonald’s soon fully divested from Chipotle as part of a larger initiative to remove all of its non-core business restaurants.

In 2008, Chipotle opened its first location outside of the U.S. in Toronto, as it topped lists of the fastest-growing restaurant chains serving approximately 750,000 customers per day.

Amongst management changes including founder Steve Ells breaking all ties with the company in 2020, health outbreaks, and an U.S. Immigration and Customs Enforcement audit, the company has since gone on to exceed $7 billion in annual revenue, as it continues to expand its reach.

A leader in the food industry, Chipotle has received global recognition under the guidance of chairman of the board and chief executive officer, Brian Niccol. During his tenure, Chipotle has received honors including being named Fortune’s Most Admired Companies, Fast Company’s The World’s Most Innovative Companies, as well as Newsweek’s America’s Most Loved Companies. Following several executive roles in Taco Bell, Pizza Hut, Proctor and Gamble, Niccol came to Chipotle and quickly accelerated sales growth, whilst driving the company’s brand to focus on increasing visibility, fostering innovation, and encouraging engagement with employees and consumers.

Supporting this focus on brand is chief marketing officer, Chris Brandt, who joined Chipotle in April 2018, since which time he has been included in notable lists such as Business Insiders Most Innovative CMOs and Adweek’s Top CMO. Prior to joining Chipotle, Brandt was executive VP and chief brand officer of Bloomin’ Brands Inc, as well as CBO/CMO for Taco Bell.

Chipotle offers its customer’s a menu centered around five items – burritos, bowls, tacos, quesadillas, and salads. The price of which is based on the diner’s choice of protein, or vegetarian base. Unlike most restaurants and chains, additional optional toppings are offered free of charge. It also offers a children’s menu, while most restaurants sell beer and margaritas in addition to soft drinks and fruit drinks.

In addition, Chipotle makes it easy for consumers to customize their meals so they can maximize their choice and ultimate satisfaction with their meal experience. It also enables consumers to make smarter decisions by transparently breaking down the nutritional content of meals.

Over the years, the chain has experimented with various concepts at a limited number of restaurants, with new items including breakfast foods, meat and plant-based chorizo-type sausages, pozole soup, and even a vegan chicken product, however, in each case the new items were ultimately discontinued. Founder Steve Ells maintained an importance to keep the restaurant’s menu focused for customers, ensuring that by only doing a few things, they can be done better than anybody else.

The vast majority of Chipotle’s food is prepared in each restaurant, with a couple of exceptions which are prepared at a central kitchen in Illinois. Furthermore, none of the restaurants have freezers, microwave ovens, or can openers.

Central to Chipotle’s success has been its concerted efforts to create a brand with a demonstrated purpose of cultivating a better world. Catering to more conscious consumers, demanding healthier, more transparent, and socially responsible actions from the companies they purchase from, Chipotle’s strategy focuses heavily on being successful, whilst creating a bright future through accountability and integrity.

Chipotle’s ethos is based on serving high-quality food while still charging reasonable prices. In keeping with its “Food with Integrity” mantra, the company endeavors to serve only meats that are raised under its established criteria, in an effort to improve sustainability and promote animal welfare. Furthermore, by refraining from the use of non-therapeutic antibiotics or added growth hormones, Chipotle brands its meats with the registered trademark, “Responsibly Raised®.” It also seeks to use responsibly grown produce, by suppliers whose practices conform to the company’s Food With Integrity standards and priorities concerning environmental considerations and employee welfare.

Amplifying technology and innovation to drive digital growth and productivity at its restaurants and support centers is also part of Chipotle’s fundamental strategy. It is currently rolling-out technology that is designed to optimally schedule employees based on labor requirements on both the front and digital make-lines, which is expected to provide significant opportunities for sales growth. Management not only continues to focus on improving efficiency for in-store orders and increasing order accuracy and timeliness for digital orders, it aims to be at the forefront of emerging food technologies.

To help achieve this, in April 2022, Chipotle announced the launch of Cultivate Next, a $50 million venture fund run by Curt Garner, the restaurant chain’s chief technology officer. Initial investments in the fund have included Hyphen, a food service automation platform that could help deliver on-time, accurate orders for digital customers, along with Meati Foods, which produces a plant-based protein made from mushroom roots. Ultimately, the company is looking to make investments that will increase both customer access to Chipotle, as well as improve the working experience for employees.

In its last quarter, the chain opened 42 new restaurants across 32 locations, and it expects to add a further 235 to 250 restaurants by the end of the year, as it targets an aggressive goal of achieving 7,000 restaurants across North America. In addition, the company continues to make progress in improving its economics in Europe. Strong results at five new locations in the UK over the last 18 months have provided confidence that Europe could be another layer to Chipotle’s growth story in the future.

Chipotle continued its impressive performance in 2022 driven by the ongoing recovery of in-restaurant sales, price increases to cover cost inflation, and successful menu innovation. During the second quarter, Chipotle continued to lead the restaurant industry in growth for both comparable store sales and new restaurants. Total revenue reached another record at $2.2 billion, an increase of 17.0% compared to 2021, driven by a 10.1% increase in comparable restaurant sales, as well as new restaurant openings.

While the benefit of menu price increases was offset by inflation across the menu, primarily due to higher costs for avocados, packaging, dairy, beef, and chicken, operating margins still increased marginally from 13.0% to 15.3%, as operating expenses came in marginally lower on prior periods. The exceptional performance resulted in a record net income for the quarter at $259.9 million.

Looking ahead, Chipotle is anticipating comparable sales growth in the next quarter with further planned price increases in August, in the mid to high-single digits. Whilst for the full 2022 year, consensus estimates have total sales increasing 16% to $8.74 billion, while earnings per share estimates are forecasted to jump 30% at $32.84 per share.

The fast-casual, quick-service, and casual dining segments of the restaurant industry are highly competitive with respect to, among other things, taste, price, food quality and presentation, service, location, convenience, brand reputation, cleanliness, and ambiance of each restaurant. Chipotle’s competition includes a variety of restaurants in each of these segments, including locally-owned restaurants, as well as other national and regional chains. Competition from food delivery services, which offer meals from a wide variety of restaurants, has also increased in recent years, particularly during the covid pandemic, and is expected to continue to increase.

However, Chipotle’s main competition comes from restaurant formats that claim to serve higher quality ingredients without artificial flavors, colors, and preservatives, and that serve food quickly and at a reasonable price. As a result, it maintains a strong commitment to ensuring high levels of quality and safety in its restaurants, along with using reliable suppliers that meet strict specifications. Furthermore, 25 independently owned and operated regional distribution centers purchase carefully based on quality, price, and availability, along with the suppliers’ understanding of and adherence to the company’s mission.

In light of worldwide supply chain issues, Chipotle has sought to increase, where practical, the number of suppliers for its ingredients to help mitigate pricing volatility and reduce its reliance on one or several suppliers, which could create shortages. In addition, it also closely monitors industry news, trade tariffs, weather, exchange rates, foreign demand, and other world events that may affect its ingredient prices.

Thanks to food prepared from scratch using fresh ingredients including humanely grown meat, coupled with large portion sizes and reasonable menu prices, Chipotle has become a favorite fast food for many Americans. And with comprehensive plans to boost already record revenues and earnings through automation to optimize operations, along with an accelerated footprint expansion, there is also a lot to like for investors.