Chipotle: Ole; McD's taco, burrito brand looks to expand beyond its 'Mexican Grill' menu

Nation's Restaurant News, Jan 28, 2002 by Amy Zuber

Chipotle, which holds the front-running position as a growth vehicle for McDonald's Corp.'s new brands, remains focused on refining its menu and decor to ready itself for more rapid expansion in the years ahead.

Although Chipotle is tight-lipped with its sales figures and growth plans, Steve Ells, it's founder, president and chief executive, describes the concept's basic unit economics as "strong and sound" with greater growth potential than management originally planned.

"We think we can open double the amount of stores than we initially thought in the U.S.," says Ells, who declines to disclose numbers but confirms that the chain is generating double-digit comparable-sales increases.

The Denver-based chain, which specializes in selling customized burritos, fajitas and tacos in a counter-service environment, plans to open about 75 new restaurants this year, which is the same number of stores it opened in 2001, according to Ells.

"I think we will see that number ramp up at some point in the future," he says. "For the past eight years, we have really made sure not to grow too fast. Right now we are comfortable with 75 restaurants or so a year, but as we get better, we will continue to ramp up that number."

Ells, who trained at The Culinary Institute of America, is passionate about the food he serves in his restaurants. One of his ongoing projects involves "making sure the raw ingredients are as good as they can be."

While Chipotle's menu has changed little since the first restaurant opened in 1993, Ells makes frequent upgrades to the food. Last year the chain switched to free-range pork with no antibiotics and now uses that product in a menu item called carnitas, which continue to generate sales increases despite a $1 price hike, according to the company.

Ells declines to detail his most recent improvement targets, which could range from upgrading the chili peppers and lettuce to improving the oregano or rice.

"I work on the ones that will have the most impact," Ells says. "We have great raw ingredients, but we can always do better. We can always challenge conventional wisdom, and pork is a great example of that."

One target could be chicken, which is Chipotle's biggest-selling protein, leading the pack ahead of pork and steak.

"I'm always trying to research possibilities for higher-quality ingredients, and chicken is no exception to that," Ells admits. "One advantage we have is that our chicken supplier packs it right after it is slaughtered, and then it is put in the distribution system that day, which means we don't need to do deep refrigeration or have it partially frozen. Our chicken is truly fresh, and we have been very efficient at cutting our distribution times."

McDonald's Corp., which now owns a majority stake in Chipotle, has been particularly helpful with improving the chain's purchasing and distribution, according to Ells.

"Suppliers have bent over backward to help us get what we want and what is not always commonly available out there," Ells explains. "We wouldn't have that kind of clout without McDonald's."

Chipotle had only 15 restaurants when McDonald's purchased a minority stake in the company in 1998. Since that time the Oak Brook, 111.-based concern has expanded beyond its namesake burger brand with the acquisition of Donatos Pizza and Boston Market, which, after emerging from bankruptcy protection, has begun adding new restaurants.

Last year McDonald's also purchased a minority stake in the 100-unit Pret A Manger cold-sandwich chain, based in London. As McDonald's retools Boston Market and Donatos Pizza in preparation for expansion, Chipotle has emerged as the quickest growth vehicle.

"They have been growing Chipotle very aggressively," notes restaurant analyst Joe Buckley of Bear Stearns in New York. "It is not surprising, given the portfolio they have. Boston Market is in a turnaround mode with company remodeling and trying to improve its existing business. Donatos faces a very competitive pizza market. But Chipotle has clearly differentiated itself in the fast-casual sector, which has a much more open playing field."

Chipotle's growth is boosted by McDonald's real-estate know-how, and franchising could be in its future. Two of McDonald's longtime burger franchisees are experimenting with operating a Chipotle.

Steve Bates, a three-unit McDonald's franchisee who has been with the system for 30 years, took over in May 2001 an existing Chipotle in Kansas as part of a test to see how the two companies can integrate resources.

"Both businesses complement each other," says Bates, whose company, Bates Management, is based in Overland Park, Kan. "I saw Chipotle as a great concept and wanted to get in on the ground floor and help it grow. In all honesty, both businesses are very similar in philosophies. The key issue is the integrity of the food and ensuring that the quality is there with a friendly environment and a clean restaurant where people feel comfortable."

Bates says he was introduced to Chipotle in 1997 when the chain opened its first store in Kansas -- which just happens to be the same location he now operates.