Friday, February 16, 2007

Chipotle: Fast Food with 'Integrity'

Steve Ells, founder of the red-hot Mexican-food chain, on his aim to make the focused menu as all-natural as possible, and why it's worth the expense

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February 16, 2007

Steve Ells, founder and chief executive of Chipotle Mexican Grill (CMG), is not a man on a mission. He's actually on two of them: one, to run the hottest fast-food chain in the nation; two, to offer what he terms "food with integrity" to the mass market.

The innovative restaurateur, who has done to traditional Mexican food what California Pizza Kitchen (CPKI) did earlier to Italian, is unquestionably succeeding when it comes to his business aims. His Denver-based company, spun off from McDonald's (MCD) last October after eight years as a subsidiary, reported on Feb. 15 it earned $41.4 million in 2006 on $882.9 million in revenue. That's up from $37.7 million in net earnings in 2005 on sales of $627.7 million. More impressive, its same-store sales rose 13.7%, its ninth straight year of double-digit increases.

Chipotle shares were priced at $22 apiece in January, 2006, when McDonald's sold a minority stake in an initial public offering. The stock closed on Feb. 15 at $61.30.

Au Naturel

When it comes to feeding America better food, though, Ells is further behind. Ells would like Chipotle, and every restaurant for that matter, to be using only natural ingredients. Ideally, each kitchen would prepare sauces from scratch with pesticide-free vegetables and spices, for instance, rather than buy ready-made sauces that come with preservatives and artificial flavors and colors.

Today, all of the pork Chipotle sells in its burritos and tacos comes from hogs raised naturally on family farms, without antibiotics or hormones. But while Chipotle uses fresh avocados, tomatoes, and peppers, almost none of its produce is organic. It's simply too expensive, says Ells.

Chipotle's menu isn't necessarily low-calorie. Each 13-inch flour tortilla, the size used to wrap a burrito, packs 330 calories alone. That's more than the 300 calories in a McDonald's cheeseburger. "You certainly could argue that Chipotle doesn't have as much leafy greens in it as it probably needs to," Ells concedes.

His dual objectives may be complementary, however. As Chipotle grows—the 573-unit company is opening a new location every four days—it gains clout with suppliers. It didn't pay for Bell & Evans, for example, to supply Chipotle with all-natural chicken thighs when Chipotle had fewer than 200 outlets five years ago. It does today.

Though Ells has run Chipotle since 1993, when he opened a cramped outlet in a Denver storefront, he does not see himself as a suit. After majoring in art history at the University of Colorado, Ells trained at the Culinary Institute of America. Today, Chipotle employs more than 15,000 people. Ells points out, though, that he has never taken a course in business or marketing.

Sitting in an exposed-brick conference room in Chipotle's headquarters, not far from his office cubicle, Ells talked recently with BusinessWeek Senior Correspondent Michael Arndt. Ells, 41, was wearing blue jeans, a black zippered fleece over a white T-shirt, and salsa-red Vasque running shoes. An edited transcript follows:

This is a generalization, but do you sense that Americans care more about what they eat today?

Yes. The thinking is changing. It has to change.


People understand that as a country, we are not as healthy as we should be, that a lot of our health issues are probably related to diet, and that we could be a lot healthier and happier if we just ate the right foods.

Whenever I go into a Whole Foods (WFMI) anywhere in the country, the parking lots are packed, the checkouts are packed. People all over are loving what I would say is this reinvention of the grocery store. What a great atmosphere it is inside, first of all. And you're bombarded with great quality food: sustainably grown produce, humanely raised meats. Awesome stuff. It's great to see there's a demand for that, and people are paying a lot of money for that.

Of course, some people can't afford that. How do you deal with that issue at Chipotle?

We're looking into all organic produce, for example. But if you look at the price difference between organic and non-organic in the grocery store, it can be pretty dramatic. We want everybody who goes out for fast food to be able to afford Chipotle. As we work with suppliers over time, we can add food with integrity and keep the price under control.

Pardon the pun, but is there a chicken-and-egg aspect to this? That there's little supply because there's little demand because there's little supply?

We've certainly got enough all-natural pork. Today, more than 60% of our chicken is naturally raised, and we're well on our way to having enough all naturally raised chicken. We're 40% all-natural on beef. Almost 30% of our beans are organic.

Where are you with organic vegetables?

Fringe right now, for sure. But organic isn't necessarily the only step. There are interim steps before going 100% organic. One example would be dairy. We don't have organic sour cream right now, but we just asked our suppliers to switch from making sour cream from cows that were given hormones known as rBGH. Now our sour cream is 100% rBGH-free.

How much more does Chipotle cost than the typical fast-food restaurant?

Our average check, per transaction, is approximately $8.50. So, a buck or two? We have a lot of high school students that come in now. It's affordable to them. Now maybe they won't get a soda; they'll just get water, which is probably better for them anyway. It's great to see high school students willing to pay a little more. And we've never positioned ourselves as a place for kids. And if you don't advertise to them, there's more respect.

Chipotle spends remarkably little on advertising. Why?

Advertising isn't believable. We want to prove to people that we have great quality food. We do this by having this transparent format, this open kitchen where you actually see real food, rather than telling customers our food is fresh. And fresh isn't even enough; it's just the starting point.

Only 5% of our customers probably know about food with integrity. The rest come in because Chipotle tastes great, or they like spicy food, or they think it's a great value, or it's convenient, or the place looks cool. That's awesome; I love that.

I would like to have advertisements telling people about food with integrity on television, and plastered on billboards and in all the big magazines and national newspapers. But I don't think people want to hear it that way. That might be too preachy.

Your menu is very small, basically just tacos and burritos. Do you look at your menu and think it's getting old and you need some new items?

I don't. First of all, there is a variety of flavors. But it's important to keep the menu focused, because if you just do a few things, you can ensure that you do them better than anybody else. If I were cooking at a restaurant, I could cook one thing and do it very, very well. If I had to cook 10 things, no. I'd hit a point where something's got to give. You'd sacrifice in terms of pre-preparing or going with processed ingredients so you can deliver more variety.

And I don't know how much variety there really is on a fast-food menu even with a lot of items. To me, it all tastes the same. I really admire In-N-Out Burger. It's 50 years old and all it sells are fries and burgers and shakes, and it's the very best in the category. It might cost a little more, but people are willing to pay more for quality.

What other companies do you admire?

Apple (AAPL). I've watched Steve Jobs' introduction of the iPhone multiple times, and it's an hour-and-a-half long. I admire his passion for not accepting mediocre stuff. People don't ask for this stuff, but when they see it, they go, "Oh my God, it's what I always wanted."

Thinking about the Apple disciples—I'm not even going to call them customers—it's as if they have ownership in the product, and they do the selling for the company. There's also this sense that once people convert, they're like, "I can't believe what I have been putting up with all these years." I hope there is going to be some tipping point when we all say, "My God, why are we putting up with this fast food?" Not that I want everybody to eat at Chipotle every day, but great food is something that everybody should have access to. And people should demand this from every place they eat.

Chipotle: Fast Food with 'Integrity'