Listen to the full conversation:
Thorn: Nancy, I want to talk to you about what’s probably the most popular topic among Nation’s Restaurant News readers: the fast-casual Mexican juggernaut Chipotle Mexican Grill. Anytime we write about Chipotle, our readers click eagerly to see whatever it’s doing.
I think there’s a reason for that. In their last quarter, their net income was up by 48 percent, and same-store sales were up by 10.4 percent, which would be great, but that’s after the previous quarter, where their income was up 52.5 percent, and same-store sales were up by 16 percent, and they’ve been on a roll basically since 1998, when they had about a dozen units and McDonald’s bought them. Now they have about 1,800 locations, and I'm still getting emails from publicists pitching me that they have a client that’s going to be the next Chipotle. Do you have any thoughts on what the key has been to Chipotle’s singular success?
Kruse: Obviously, smart management comes into play, and their ability to connect with their customers, particularly digitally. But there are also a couple of less easily quantified factors, like timing. Chipotle came online after the demise of a dinner-house chain called Chi-Chi’s, which you may not remember, but a lot of folks way back in the 1980s and ’90s were introduced to Mexican and Tex-Mex foods in general, and items like burritos in particular, through Chi-Chi’s, which subsequently folded, and…
Thorn: They were brought down I think by tainted scallions.
Kruse: Actually I think there were a number of things that contributed. The food safety issue would be one, but there were management changes, and I think there was a poor unit distribution strategy, and the fact is they simply couldn’t sustain themselves. But they did introduce us to the burrito, for example, and here comes Chipotle, which has a substantial burrito as the basis of its menu. It’s made to order, it’s fresh and tasty, and the doors had really been opened to that kind of item, I think, by Chi-Chi’s.
At the same time that Chipotle was coming on, we were going through a culinary revolution in this country. Steven Ells, who is the founder of Chipotle, a trained chef — he's a Culinary Institute of America alum — and he was able to regard his whole menu from a culinary point of view.
So I think that the timing was right from a couple of perspectives, and frankly, I think the other big factor in Chipotle’s success was just darn luck. As you noted just a couple of minutes ago, McDonald’s made a substantial investment in the operation at a time when it was really in its fledgling state, and it may never in fact have gotten as big as it is without that capital. At the same time, I think McDonald’s made Steve Ells pretty smart in terms of how to run a chain, whether it’s real estate, or purchasing, or marketing, or hiring.
Thorn: How do you think Chipotle has managed to resonate so well with its customers? You mentioned a digital connection, but they also have their message of “Food With Integrity.” Do you think that has a big role to play in their success?
Kruse: I sure do, and I think that they’ve been single-minded and very smart in the way that they have harped on that catch phrase. In fact, just in the last week or so they’ve gone on record as saying that they’ll no longer buy any ingredients or sell any kind of food that has genetically modified organisms — GMOs — present.
They’ve also been very aggressive relative to antibiotic-free livestock and so on. I think that should take an enormous amount of credit for Chipotle’s success. But I think the other thing is, frankly, they were first in in the quick-casual, Mexican or Tex-Mex category. And, again, with a very helpful tailwind from McDonald’s, they were able to take hold.
They’re not the only chain in the business that has had this kind of success story or track record. I would point to Panera Bread. It also pioneered a new segment of the industry, and, by the way, just like Chipotle, it endorses a whole range of social and agricultural practices that are very much in tune with the times. Starbucks absolutely set the world on fire in terms of proving that you could de-commoditize a cup of coffee.
Thorn: And get us to pay $4 for it.
Kruse: Again, Starbucks’ reliance over time on digital communications and its embrace of social and agricultural issues gets it into the same lane in terms of customer interest as Chipotle. And I’d point to Chick-fil-A as well. Not a new chain, not even considered part of the quick-casual segment, but I think they’ve transcended the quick-service chicken category. They have an extraordinary track record; they’ve been making their own commitments to a cleaner menu; they offer best-in-class service. So while I greatly, greatly admire what Chipotle has done, they’re not the only ones who’ve done it.
A young, scrappy upstart
Thorn: That’s a good point, Nancy. Two years ago, Chick-fil-A surpassed KFC as the largest domestic chicken chain in terms of sales. And then of course there’s Subway, the only QSR chain that has successfully marketed itself primarily on freshness and health. And they, actually, to my mind, and also to the mind of my colleague Jonathan Maze, invented the service style that Chipotle has adopted, in which you walk up to the counter, order the food, and then they make it in front of you and you get to specify exactly what’s in it. That was a harbinger of all of the customization plays that the whole fast-casual segment relies on, and quite a few other restaurants in different segments as well.
Kruse: I agree with you, and it seems to me that Subway hasn’t quite taken ownership of that. It really has played a leadership in positioning, and it pioneered that service model that we now take for granted and that Chipotle and lots of others have piggybacked on to. But when I think about what lies ahead, Bret, I think it’s going to be interesting to watch what happens with Chipotle over the next 20 years or so. They are the current hot ticket, but in the 1960s or ’70s, all eyes were on [McDonald’s founder] Ray Kroc, right? He was the hot ticket and everybody wanted to be like McDonald’s then. They want to be just like Chipotle now, but our industry evolves, and I think it’s going to be very interesting to see if Chipotle can maintain its position of leadership and dominance and evolve the way that it needs to in order to keep up with changes from the customer perspective and from the culinary point of view.
Thorn: We've seen Chipotle has already had supply issues with regard to providing the food that it says it’s going to provide. It currently is undergoing a carnitas shortage because it didn’t agree with some of the practices of one of its pork suppliers with regard to access to the outdoors, and I hear of small chicken chains that would like to be serving naturally raised chickens, but they can’t get any because Chipotle has bought them all. And yet Chipotle still continues to market itself as this young, scrappy upstart.
Kruse: I'm glad you brought that up, because it kind of drives me crazy. The brand has really traded on its image as this little guy facing off against corporate giants, and, specifically, of course, they always throw stones at McDonald’s. But the fact is, first of all, they’re not little guys. They’re one of the top 20 chains in the country now, and it seems to me that it’s kind of biting the hand that fed them, because if McDonald’s hadn’t been there at a certain point in Chipotle’s development, we might not be talking about Chipotle today.
Thorn: Do you have any thoughts on what might actually be the next Chipotle? What would they have to do to shift the paradigm?
Kruse: If I really had the answer to that, Bret, I don’t think I would tell you. I think I would be making it work for me.
Thorn: You would’ve cashed that check.
Kruse: That’s right, but I’ll tell you who, among others, I'm watching with a great deal of interest: chef Roy Choi. He is really the cool kid, and has been for some time. He opened up the Kogi Truck in Los Angeles, and in doing so opened up the whole world of Korean cuisine and flavors. He's got this combination of street cred and culinary expertise that he's planning to bring to bear on a new quick-service concept — sort of the next generation of QSR. He's working in conjunction with Daniel Patterson in San Francisco on a concept called Loco’l. I don’t know quite what it’s going to look like, I don’t know quite what the service system will be, but I’ll tell you I think that there will be some very interesting lessons to be learned as Choi gets his concept up and running.
Thorn: I can’t wait to find out what that is.
Kruse: That makes two of us, Bret.
Contact Bret Thorn at [email protected].
Follow him on Twitter: @foodwriterdiary
Nancy Kruse, president of the Kruse Company, is a menu trends analyst based in Atlanta and a regular contributor to Nation’s Restaurant News. E-mail her at [email protected].
