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Why would Chipotle move to California?

The move will be costly, and could be risky, but there are benefits for the company and its new CEO Brian Niccol, says RB's The Bottom Line.

The Bottom Line

Burrito chains apparently prefer California to Denver.

On Wednesday, Chipotle Mexican Grill somewhat surprisingly announced plans to move its corporate headquarters away from Denver to Newport Beach, Calif.

In so doing, it followed smaller rival Qdoba, which moved to San Diego late in 2016 only to be sold a year later.

Indeed, headquarter moves have become surprisingly common in recent years. In addition to Qdoba, Carl’s Jr. and Hardee’s owner CKE Restaurants decided to move to Tennessee, and Jamba Juice moved from California to Texas. Meanwhile, McDonald’s has moved its corporate headquarters from the Chicago suburb of Oak Brook, Ill., to downtown Chicago.

Such moves can be costly, because all moves cost money. They can also be risky.

In 2016, shortly after naming David Pace CEO, Jamba Juice decided to move its headquarters from Emeryville, Calif., to Frisco, Texas. The company cited operating costs and cost of living among the reasons for the move.

We’re guessing that Pace’s familiarity with the area also had something to do with it. Pace spent two years as an adjunct professor at the Cox School of Business at Southern Methodist University in Dallas, just down the road from Frisco.

Yet that move has been a near disaster for Jamba. Most of the company’s corporate staff didn’t follow. Executives left the company. And the chain has struggled to file its quarterly earnings reports, several of which have been delayed. Jamba has received multiple notices from Nasdaq over the late reporting—risking the company's Nasdaq listing in the process.

Chipotle’s move is another in which CEO familiarity appears to be a factor. Brian Niccol, named CEO in March, is from Southern California.

The area is the home of several restaurant chains, including Taco Bell, where Niccol and Chipotle’s new Chief Marketing Officer Chris Brandt both worked. If I’m Yum Brands, I probably start paying bonuses to key Taco Bell workers immediately.

There were apparently few indications among local economic development officials in Denver that Chipotle was considering a move, according to local reports.

And only last December, Chipotle said it signed a lease to consolidate its Denver operations into a single skyscraper downtown.

Similarly, economic development officials in Newport Beach had no idea that Chipotle was moving to their town, according to the Los Angeles Times.

All of that suggests the company opted to make the move in part because that’s what it took to get Niccol, considered one of the top candidates for the job when Chipotle was looking for a successor to Steve Ells, its founder and former CEO.

But there is also this: Niccol wants to change the culture at Chipotle. Moving headquarters rips the bandage off. While the company will offer relocation assistance to some workers, it will clearly force numerous changes in the executive office, enabling Niccol to put his stamp on the company he is taking over.

Indeed, it’s clear now that early concerns Ells would be too much of an influence over the company he founded at the expense of the new CEO were not big concerns at all.

How much this costs Chipotle remains to be seen. The cost of living in Newport Beach is 25% more than it is in Denver. A person who makes $50,000 in Denver would have to make $62,347 in Newport Beach, according to Smartasset.com. Much of that higher cost of living is in the form of housing.

At the same time, Ells founded the chain in Denver, but in recent years he spent much of his time in New York, where Chipotle had a satellite headquarters.

In this case, Niccol is consolidating the two headquarters into one facility in California, with a satellite in Columbus, Ohio.

The cost of living in Columbus is 6% lower than it is in Denver, and 26% lower than it is in New York City.

What this will mean for the rest of Chipotle’s executive staff is uncertain. Brandt and Marissa Andrada, named chief human resources officer in April, probably had some inkling of this plan before they were hired.

But there is also CFO Jack Hartung and Chief Restaurant Officer Scott Boatwright, both of whom were with the company when Niccol was hired.

Either way, it’s clear now that Brian Niccol is making his mark on Chipotle Mexican Grill.

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