Chipotle unwrapped

Everyone is clamoring to be the next Chipotle. So what are the secrets to success for this industry strongman? We pull back the foil for a closer look.

In 2005, Laura Shunk took her first job, in the training department of Chipotle Mexican Grill. The headquarters, she recalls, was abuzz with discussions of food—not just how to cook it, but where it came from and its impact. Books by Michael Pollan were passed around, and a companywide council weighed the pros and cons of organics.

“Working for Chipotle totally changed the course of my career,” says Shunk, who’s now food editor for the Village Voice, a weekly newspaper in New York City. “It made me feel that the food industry was doing important things, and I wanted to be part of it. For a lot of the people who worked there, they felt they were part of a larger purpose.”

That’s the carefully cultivated brand of Chipotle. It instills in every trainee that the job is a cause as much as a paycheck. It leaves Wall Street equally starry-eyed that a 20-year-old company still can grow comp sales 19.8 percent in the third quarter of 2014 (the latest information available at press time).

How well does the real Chipotle live up to its idealistic image? A closer look reveals a company that’s still revolutionary, but more complex and contradictory than its halo might suggest. Chipotle declined to make any executives available for this story; from interviews with analysts and former employees, sustainability experts and farmers, along with the firm’s own earnings reports and conference calls, here’s a peek beneath the tortilla.

Fastidious food

Chipotle earns its “Food with Integrity” motto, say most sustainability advocates. It spends 34 percent of its sales on food. For the average fast-casual chain, the number is 29 percent, according to SS&G Restaurant Services, an accounting firm with offices in Illinois and Ohio.

Chipotle sometimes uses factory-farmed meat and produce, but 90 percent of its meat in 2013 met its standards for being raised free of pens and stalls, hormones and antibiotics. Nor has it rested on its organic laurels. While Chick-fil-A is just starting to phase out antibiotics, Chipotle is getting rid of genetically modified corn, flour and soy. Says Chicago sustainability consultant Nancy Himmelfarb, “Chipotle is consistently in the position where they are at or ahead of industry expectations with respect to sustainability.”

Its purchases of pork shoulder help keep 500 sustainable farms in business, says Iowa hog farmer Paul Willis, one of Chipotle’s pork suppliers. “They’ve helped create demand for what it is we have.”

But some farmers have met disappointment. In St. Francis, Kan., Mike Callicrate built his business around natural beef. He was dropped by Chipotle after inspectors found he sometimes used antibiotics to treat sick cattle (even though such meat would never end up in a burrito). Chipotle confirms he had violated its protocols. That left him, he says, with “$250,000 worth of inventory and a piece of equipment I’d bought specifically for cutting Chipotle’s steak.”

He’s not the only one to find Chipotle fanatic about its standards. In mid-January, the chain pulled pork off the menus at about 600 locations, after a routine audit found a major supplier wasn’t meeting some of its protocols.

The move highlights another challenge: As Chipotle grows, can it find enough sustainable meat to feed its appetite? It announced in May that it was importing grass-fed beef from Australia, because it couldn’t find enough at home. At the time, founder and co-CEO Steve Ells acknowledged “the gap between what’s available and what’s needed to meet our growing demand.” Over time, he added, “we hope that our demand for grass-fed beef will help provide an opportunity for more American ranchers to adopt a grass-fed program.”

Obsessive operations

Much of Chipotle’s M.O. centers on its kitchens blending cooking from scratch with assembly-line efficiency. Current and former employees say everything gets documented, from a waste sheet that records leftover food at the end of the night to a personal-development journal with checklists and space for notes on weekly discussions with managers.

“They try to mechanize everything and streamline everything,” says Stephen Healy, a former kitchen manager from State College, Pa. “I would input these numbers into a computer, and it would tell me exactly how many minutes were required for each task.”

The obsession with details traces back to Ells. Unhappy with every tortilla warmer on the market, he had engineers spend four years devising a new one. The finished product takes a few seconds to spit out a lightly-toasted tortilla, while using less energy than before. 

These days, Chipotle is focused on speeding up customer service—and it’s succeeding. Its fastest store, located in Chicago, can serve 350 customers an hour at lunchtime, while the average store manages only 120.

It dubs its solution the Four Pillars of Throughput. The idea: Keep servers at their posts by designating two extra workers to replace trays of food and make sure every order is complete. When the rush is over, the crew often meets to discuss what worked and what could be done better. “Chipotle reminds me of the Japanese model of continuous quality improvement,” observes analyst Phil Mangieri with Restaurant Research in Fairfield, Conn.

Leaving nothing to chance, the company admits to using security cameras to keep an eye on how well restaurant teams are performing, though a spokesman says the cameras are primarily for security. “We use our security system to identify how well we’re doing, and report it back to our field teams,” Ells has said. Overall, the program added an extra 14 transactions an hour during the second and third quarters of 2014.

Pressured people

It takes a special person to succeed under Chipotle’s high-octane service model. Job applicants are rated on 13 qualities, such as being “conscientious,” “highly enthusiastic” and “motivated.”

For those who meet the mantra of “top performer,” the rewards can be quick trips up the corporate ladder. Ninety-six percent of hourly managers and 85 percent of salaried ones come from internal promotions. “Restaurateurs”—high-performing managers who can oversee several stores—can earn $106,000 or more, including bonuses, for promoting new general managers beneath them.

“The culture that Monty [Moran, co-CEO] has instilled gets employees to buy into the notion that working at Chipotle is not just a job for today, it could be a career,” says Brian Sozzi, CEO of Belus Capital Advisors.

But for workers who don’t grow into the mold, the culture isn’t always so gratifying. On the job-review website Glassdoor, workers rate Chipotle 3.4 points out of a possible 5—equal to the average company, but slightly higher than fast-casual competitors such as Panera Bread and Five Guys.

A common employee complaint, on Glassdoor and elsewhere, seems to be understaffing. Chipotle spends 21 percent of sales on labor, compared to 29 percent at the average fast-casual chain. Several workers speak of general managers pressured to keep labor costs in line, because their bonuses are tied to them.

One worker is Leah Turner, a former kitchen and service manager in Parker, Colo. In a lawsuit, she writes that she was asked to check labor costs in the payroll system three times a shift. The system automatically clocked her out, at 12:30 a.m., but she often was assigned to clean and restock, as well as attend after-shift meetings. Her attorney Karen O’Connor says, “We’re alleging they set labor budgets so strictly across the board that they were essentially forcing managers to order off-the-clock work.”

Chipotle responds that its employee handbook forbids such practices. A spokesman says that, while individual restaurants sometimes are short-staffed, “we pay employees for all of the hours they work.”

Healy, though, tells a similar story. Besides being asked to work off the clock, he got frustrated with working 12-hour days—especially when the regional office refused to let him put up hiring signs. In September, he and five other workers walked out, leaving a sign on the door that spoke of “borderline sweatshop conditions.”

Chipotle quickly brought in out-of-town workers to reopen the store. A company spokesman says its problems were isolated and have been addressed.

In recent quarters, the chain has boosted staffing ratios. “We have more crew on the roster,” said CFO Jack Hartung. “So, it gives the manager a lot more flexibility and a lot more ability to schedule the right people at the right time.”

Pay for perks

If you bought a share of Chipotle stock five years ago, you’d have seen it climb 630 percent by the end of 2014. So why are so many large investors upset?

Their gripe is the $49 million earned by Chipotle’s two CEOs in 2013: $25 million for Ells and $24 million for Moran. It made Ells the highest-compensated CEO in restaurants, according to the AFL-CIO’s Paywatch, on a par with the heads of Lockheed Martin and Yahoo. Chipotle’s proxy statement lists other perks, such as $50,093 for CFO Hartung to commute from his hometown to Denver and up to $25,000 for schooling for Moran’s children.

Discontent boiled over at Chipotle’s May stockholder meeting, when 77 percent of shareholders voted against its executive-pay plan. CtW Investment Group, which led the challenge, was joined by pension funds such as the California State Teachers Retirement System.

“Essentially, you’re treating them as Sun Kings,” says Michael Pryce-Jones, senior corporate government analyst with CtW. “They can’t justify this benchmark, compared to what any other company could pay to attract away this talent.”

A Chipotle spokesman points out that $20 million of Ells’ compensation was in stock and options, the value of which soared 75 percent that year. “Our leadership only benefits when all of our shareholders benefit,” he says. But he adds that the board has heard investors and is reviewing compensation programs.

Beyond burritos

How long can Chipotle defy the laws of financial gravity, which state that the bigger you get, the slower you grow? “At some point, they’re going to max out how much they can get through their line,” says Darren Tristano, executive vice president of Chicago researcher Technomic.

By year’s end, Chipotle expects to be nearing 2,000 stores—half the number it believes the U.S. market can support. The company itself is trying to deflate expectations, forecasting that 2015 comp sales will fall into single digits.

Which might be why it’s taking a calculated bet: that it can export its model into other cuisines. In the past four years, it’s opened nine ShopHouses, a Southeast Asian concept, and partnered with two Denver restaurateurs on their pizza concept, with two locations and two planned this year. Both the layouts and the limited menus mark their Chipotle DNA.

In its first joint Pizzeria Locale in Denver (the original is a full-service spot in Boulder), diners pick toppings as they move down the service line. A custom-designed oven cooks pizza in two minutes. Says partner Bobby Stuckey, “There’s a lot to be learned from Steve and Monty and the whole team at Chipotle, from their culture, with their staff to the whole idea of speed and throughput.”

Can Chipotle hit second and third home runs? This time around, it’s not the only player on the ballfield. Several quick-service chains have launched fast-casual pizza competitors. PizzaRev, backed by Buffalo Wild Wings, already has 20 locations described by one reviewer as “the Chipotle of pizza.” Can the original Chipotle catch up?

“It’s a tricky situation,” says Atlanta marketing consultant Laura Ries. “You do want to get national as quickly as possible to block competitors, but you have to be careful. You risk losing your consistency.”

But don’t count Chipotle out, she says. After all, it created the formula the others are cloning. And there’s that sense of mission, which always has looked beyond burritos. “We’re making real cooking available with really great ingredients in a setting that’s pleasing, and ultimately through a service format that lets people get exactly what they want,” Ells has said. “So I think this is the new fast food.”

By the numbers

  • 1,724 - Stores (all company-owned)
  • 190-205 - Forecasted Chipotle store openings in 2015
  • 17 - Chipotle restaurants outside the U.S.
  • 1993 - Year the first Chipotle restaurant opened in Denver
  • $800,000 - Cost to open a new store
  • $2.4 million - Average unit volume per store

Food by the numbers

  • 350 miles - Distance whitin which "local produce" used in a Chipotle restaurant is grown
  • 20 million - Pounds of locally grown produce Chipotle served in 2014
  • 11.5 million - Pounds of organic produce and beans served in 2014

Financials by the numbers

  • $3 billion - Sales in 2014 (Q1 thru Q3), a 28% increase
  • 17% - Increase in same-store sales in 2014 (Q1 thru Q3)
  • $25.1 million - Compensation for Chipotle's co-CEO Steve Ells (2013)
  • 24.4 million - Compensation for Chipotle's co-CEO Monty Moran (2013)
  • 77% - Percentage of shareholders who declined to approve pay increases for Chipotle's co-CEOs in 2014

All sources: Chipotle, AFL-CIO Paywatch, Bloomberg, SS&G Restaurant Services

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