Chipotle External Analysis

Restaurant Industry: Chipotle Mexican Grille, Inc. TABLE OF CONTENTS Chipotle Overview3 Industry Overview3 Key Macro External Forces4 Five Competitive Forces4 Major Factors Causing Fundamental Changes4 External Analysis4 Key (or Critical) Success Factors4 APPENDIX – 14 APPENDIX – 24 External Factor Evaluation (EFE) Matrix4 APPENDIX – 34 Competitive Profile Matrix (CPM)4 APPENDIX – 44 APPENDIX – 54 Content Topics4 Bibliography18 Chipotle Overview Chipotle Mexican Grill, Inc. is a “fast-food service restaurant” under limited service category.

It was formed in 1993 and went public in 2006. It has the largest market share in the Mexican-type food segment with a net income of more than $126M in 2009 (Mergent online, 2010). The company spans over 35 states and has over 1000 restaurants across the U. S. and in parts of Columbia district, Canada and England. Chipotle’s menu consists of burritos, tacos, burrito bowls (a burrito without the tortilla), salads, and a variety of extras such as guacamole, salsas and tortilla chips seasoned with lime and kosher salt, cheese, lettuce.

The company claims that with its varieties of extras, it’s able to expand its menu offerings to over 65,000 choices (Hoover, 2010). Industry Overview The U. S. fast-food industry is expected to generate total revenues of $184. 0 billion in 2010, which is equal to a 0. 32% share of the economy. Over the next five years (2010 to 2015), the revenue for the industry is expected to grow at a rate of 2. 5% per year to $208. 2 billion (Appendix 1 – Table 1). Due to the projected improvement of the domestic economy, the number of establishments and the number of enterprises are forecasted to increase at a rate of 1. % and 1. 3% per year, respectively. This means that new entrants will enter the market at a slower rate than the existing fast-food chains increase their branches (IBISWorld, 2010). The industry concentration, which is the combined market share of the top four chains, is low. The major players are McDonald’s Corporation (12. 7% of market share), Yum! Brands, Inc. (9. 7% of market share), Wendy’s/Arby’s Group, Inc. (6. 6% of market share), and Starbucks Corporation (5. 9% of market share) (Appendix 3 – Figure 1). The combined market share of these four firms is 34. 9%.

Since the industry life cycle is very close to a mature stage in the domestic market, many operators are looking to expand to unsaturated markets such as Asia and the Middle East. As a result, the trend toward globalization is high and is expected to increase over the coming years (IBISWorld, 2010). A study done by IBISWorld Industry Report found that “Households that make less than $50,000 per year spend 36. 6% of their food budget on dining out. Households that make between $50,000 and $75,000 per year spend 42. 4% of their food budget on dining out, while households that pull in more than $75,000 per year spend 45. % of their food budget on dining out” (2010).

The same study found that almost half of the food budget is spent on eating out by people who are 18-25 years of age. People who are 25-30 years old spend 44. 8%, and those who are 35-50 years old spend 42. 3%. The 50-65 years of age category spends 42. 8%, and those who are 65 or older spend 37. 0% of their food budget dining out. It is true to say that “every age group and income level eats fast-food” (IBISWorld, 2010). (Appendix 4 – Figure 2) Since the domestic fast-food market is almost saturated, the competition has ecome intense. Operators are competing based on price, food quality, style/presentation, variety of foods, and quality of service. Moreover, the barriers to entry in this industry are low. This is because new operators can enter the market with low startup cost. Capital outlays can be minimized by leasing premises and equipment rather than buying outright. Franchising is another mechanism that allows new entrants to keep startup costs to a minimum (IBISWorld, 2010). Some operators opt for a multi-branding strategy to obtain economies of scale. For example, Yum!

Brands, Inc. owns three of the world’s best known fast-food franchises, which are Kentucky Fried Chicken (KFC), Taco Bell, and Pizza Hut. With a multi-branding strategy, a firm can combine its brands into the same location in order to increase sales and improve operating efficiency. In terms of industry profitability, it appears that profit margins have a tendency to fall. This is because competition is high and customers tend to buy low-priced high-value items. The average gross margin and net profit margin is 37. 1% and 14. 3%, respectively (MSN Money, 2010).

Key Macro External Forces Socio-cultural Today’s society is becoming increasingly more health conscious. Consumers are aware of calories, obesity, sodium content and fatty food intake issues. Many restaurants have responded to the healthy eating trend by expanding the number of healthy food choices on their menus. A study found that American fast-food chains increased their healthy menu items by 65% during the second quarter of 2009 to the second quarter of 2010 (Midday, 2010). Another important social factor is the desire to be socially responsible.

More restaurants are going green by choosing local ingredients, meats, and vegetables over those shipped from thousands of miles away. A study reports that around 80% of Americans consider themselves to be environmentally conscious. The same study found that over 60% of Americans prefer to eat at eco-friendly or green restaurants (Hubpages, 2010). This is why some restaurants incorporate green business in their marketing strategies. Economic According to IBISWorld Industry Report, the revenue for the fast-food restaurant industry in the next five years (2010 to 2015) is projected to grow at a rate of 2. % per year to $208. 2 billion (2010). Although this industry is expected to grow; a change in aggregate disposable income could negatively affect its revenues. During the recession, consumers tend to be more selective about how they spend their disposable income. Some are cutting back on eating out and electing to save money by eating in. Those who still eat out during the recession tend to choose lower-priced, value items. This trend has led to an intense competition between restaurants in order to convince customers that they can get the most bang for their buck at their establishment.

Legal-political-regulatory There are many regulations involved in the food industry. One in particular is the food safety law. In California, this law requires all employees who handle food in a restaurant to earn a California Food Handler Card. Under the law, employees are required to take a training course followed by a test, at a cost of $15 per course (CRA, 2010). The extra time spent training the staff and the fee for the test itself certainly increases the cost of doing business for restaurateurs. The new nutrition-labeling law also plays a significant role in the food industry.

According to the Association of Corporate Counsel, the law requires “nutrition labeling for standard menu items sold by chain restaurants with 20 or more locations doing business under the same name and offering substantially the same menu items” (2010). In addition to having each food item tested, menus may have to be reprinted to include the required nutritional data. The cost of complying with this new regulation could prove quite costly for some companies. Technological Many in the food service industry have incorporated a Point-of-Sale (POS) system.

This system typically uses a touch-screen display to allow kitchen staff to view orders that are placed at the front counter or drive through in real time. The POS system can also be used to manage inventory and collect relevant data on consumer purchasing habits. Some restaurants have adopted an online ordering system that allows customers to place and pay for orders online. While others have joined the wave of mobile applications, giving consumers the ability to place and pay for an order from virtually anywhere at any time. Five Competitive Forces Bargaining Power of Suppliers: Low

Suppliers in the fast-food industry have low bargaining power. This is because most of the larger fast-food chains such as McDonald’s and Yum! Brands, Inc. get their ingredients from a number of various suppliers. These companies have dominance over their relationship with suppliers. For instance, Chipotle has set specific standards for raw materials and ingredients and will only deal with a select few quality suppliers. However, the company has been trying to increase the number of suppliers to mitigate price volatility and shortages of supply (ISBISWorld, 2010). Potential Entry of New Competitors: High

Barriers to entry in fast-food service segment are relatively low. As previously noted in the Industry Overview, start-up costs can be kept to a minimum by taking advantage of franchising opportunities and opting to lease space/equipment in lieu of buying. Hence, the industry has seen an increase in the number of new entrants. However, it is somewhat difficult to enter and compete on a large scale, mostly because of market saturation. A new operator would have to invest heavily in forging relationships with suppliers and gain access to valuable raw materials, which could pose a significant barrier to entry (IBISWorld, 2010).

Potential Development of Substitutes: High There’s been a consistent decrease in the fast-food industry’s revenue stream as today’s health conscious consumer is seeking out healthier dining-out options. They’re looking for quicker snack options at beverage outlets (non-alcoholic) or choosing prepared foods from grocery stores. Consequently, the threat of substitutes is high (IBISWorld, 2010). Bargaining Power of Consumers: High As noted in the Industry Overview, the fast-food industry is virtually saturated. There are numerous existing restaurateurs and new ones entering the market frequently.

Consumers have lots of choices when determining where to spend their dinging-out dollars. Today’s diners have the option to switch between restaurants as their preferences change and their budgets dictate. Rivalry Among Competing Firms: High The scope of competitive rivalry for Chipotle is in the domestic Mexican fast-food segment. Other players in the quick-service non-Mexican category include international chains like McDonald’s, Yum! Brands, Wendy’s and Burger King. Direct competitors include Qdoba Mexican Grill, Taco Bell, El Pollo Loco and Baja Fresh (Yahoo Finance, 2010). These are mainly privately-held companies.

In order to stay competitive firms must continuously seek to differentiate themselves from their rivals in order to attract and retain customers. Major Factors Causing Fundamental Changes Change in Consumer Attitudes The limited-service restaurant segment accounts for a large part of the fast-food service industry in the U. S. Despite its major contribution to overall industry revenue, this segment has experienced a decline in the last few years. This can be partially attributed to the fact that consumers are becoming more concerned with convenience and value for their money. They are also focusing more on making healthier lifestyle choices.

Hence, their inclination has been more towards non-alcoholic beverage outlets or prepared foods from grocery stores in lieu of fast-food (IBISWorld, 2010). Economy/ Recession According to IBISWorld, baby boomers, a group that constitutes a major percentage of earnings for fast-food businesses, are looking for more convenient dining-out options. Those with less disposable income, such as homeowners facing foreclosure and/or unemployment, are seeking out establishments that offer more value for their money. Therefore, it’s important for restaurants to be reasonable in terms of pricing.

The fast-food industry is also highly dependent on labor. The industry has experienced a rise in its labor costs such as wage, benefits, compensation and last but not the least, granting unemployment compensation. There has been an increase in the level of regulation for minimum wage by Federal and State Governments and also nutritional content of meals by Food and Drug Administration (IBIS, 2010). Industry Saturation/ Globalization As noted in the Industry Overview, the industry life cycle is nearing maturity in the domestic market. Many operators are being forced to expand to unsaturated markets such as Asia and the Middle East.

As a result, the trend toward globalization is expected to increase over the coming years (IBISWorld, 2010). External Analysis Economic Forces Struggling Economy – Threat In the last two years the U. S. economy has experienced the worst downward spiral since the Great Depression. The unemployment rate rose from just under 6% in 2008 to more than 9% in 2009 (CountryWatch, 2010). Tough economic times forced many consumers to embrace penny-wise spending habits. Some speculate that even if the economy makes a strong recovery, the trend toward frugality will be difficult to reverse (ProgressiveGrocer. com, 2010). Appendix 1 – Table 2) In an effort to stretch their dollar further, some diners are choosing a fast-food value menu over the slightly more expensive casual-dining experience. This is highlighted in Charles’ 2008 article which explores why McDonald’s introduced a premium value menu. The fast-food giant’s senior vice president and chief marketing officer for the UK and Northern Europe declared, “As people fall out of the casual-dining sector, we hope to catch them with our premium offerings” (p. 3). Social, Cultural, Demographic, and Natural Environmental Forces Aging Population – Opportunity

According to a recent article in Restaurant News, the baby boomer generation will be critical to the restaurant industry’s growth in the next 10 years. (Appendix 4 – Figure 3) The article cites a statistic from the Bureau of Labor Statistics Consumer Expenditure Survey which indicates $2 of every $5 spent dining out can be credited to baby boomers (Francese, 2010). While most other age groups are shying away from dining out during the recession, baby boomers have actually shown an increased propensity for dining out (Glazer, 2009)

Social Responsibility – Opportunity The weak economy is causing consumers to think more intently about their purchasing decisions. In addition to analyzing the quality of a product or service, customers are considering what type of social statement the purchase will make. There’s a growing trend toward supporting businesses that are socially responsible. In the summer of 2009 Time Magazine conducted a poll which included 1003 participants. Almost 40% responded that they bought a product or service based on the company’s social or political values (Stengel, 2009).

Environmentally Friendly – Opportunity Restaurant owners are also taking note that consumers are concerned about the affect the products they buy have on the environment. KFC, one of the major players in the fast-food industry, is undertaking a “Renew, Reuse, Rejoice” initiative. The company is replacing foam and paper products with reusable plastic products. KFC hopes this new packaging will give customers more control over how the containers are reused and eventually disposed of (QSR, 2010). Health/Government – Opportunity & Threat

In addition to being good corporate citizens and environmentally friendly, restaurateurs must also address the public’s increasing awareness of the correlation between dining out and obesity. Many chain restaurants are now creating low-calorie menu items to appease the health conscious consumer and address new federal regulation requiring calorie count information on menus (Sasso, 2010). After facing criticism from public-health advocacy groups, Darden Restaurants, parent company of well known chains such as Red Lobster and Olive Garden, has introduced lower-calorie choices at many of its establishments (Pedicini, 2010).

Competitive Forces Major Competitors – Strengths/ Weaknesses In her article, “Fast –casual catches on”, Kelly Liyakasa contends that the fast-casual dining segment is experiencing the greatest growth in the restaurant industry (2010). According to IBISWorld, an online industry report database, major players must compete on the basis of price, location, dining experience, and customer service (2010). The top ten competitors in the casual-dining arena include Darden Restaurants, Pantry Inc. , Cheesecake Factory, Inc. and Chipotle Mexican Grill, Inc. (Mergent Online, 2010). Appendix 2 – Table 3) (This section intentionally left blank) Key (or Critical) Success Factors There are over 250 key success factors for the restaurant industry.

Below is a summary of some of the most important as identified by IBISWorld (2010): Customer Loyalty: Ability to attract new customers and keep the current ones. Customer loyalty is critical if a restaurant is to succeed in today’s economy. Customer loyalty can boost sales and profits. A study shows that a 5% increase in customer loyalty can boost lifetime profits per customer by as much as 95%. Omega Management Group Corp, 2010). Global Expansion: Global expansion is considered a growth strategy for the food industry, especially because the domestic segment is saturated. Labor: This industry is labor intensive. Labor input is used in all areas of the business, from order-taking to delivery. Therefore, access to a well trained and versatile staff is important. Technology: Capacity to implement new technology in order to increase productivity and decrease the cost of labor.

Atmosphere: Ability to create a pleasant environment and an enjoyable dining experience Location, location, location: Prime locations near key markets Inventory Control: Ability to keep excess supply orders and food/stock wastage to a minimum Pricing: Pricing model aligned with portion control process in order to minimize costs and maximize profit margins on menu items Government Regulations: Ability to comply with changing government regulations related to food safety and handling Customer Service: A knack for knowing what the customer wants and providing it

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