Call it the "new pizza."
Just heat up a tortilla, pile on rice, beans, and whatever else you crave, wrap it up, and you're out the door.
As simple to make as its cheesy predecessor, the once humble burrito—previously the domain of mom and pop taquería joints in places like San Francisco's Mission District—has been reinvented and embraced by a new generation in which all things Latino aren't merely accepted as part of the American experience, they even have bling.
Just ask the folks lining up at Chipotle Mexican Grill, the most successful and perhaps the hippest of a collection of "fast casual" Mexican restaurants that together have swallowed up about 20 percent of the $11 billion quick-service restaurant market. Chipotle generates more than $1 billion in annual sales and has a stock market value of over $4 billion. Shares have more than quintupled in price since the company went public in 2006, though the stock has slipped some 20 percent since late last month as the overall market has tumbled on recession worries.
But the flood of burrito lovers hasn't abated. "Everybody who eats there just keeps going back, and they bring their friends," Dean Haskell, senior vice president of equity research at Morgan Joseph in Nashville, says of Chipotle's remarkable 12.4 percent sales growth at its restaurants open at least a year, more than double what Haskell had estimated for the third quarter. (Total sales were up 35.6 percent to $286 million.) "They have a great concept."
Chipotle is succeeding thanks to an elegantly simple business model, one its 42-year-old founder and CEO, Steve Ells, can sum up in a single sentence: "Focus on just a few things, and do them better than anybody else," he says of a menu that contains only three items: burritos, tacos, and salads. (The last was added only in 2005.)
Tough cookies. Of course, Chipotle's taquería-style format, in which 16 basic ingredients are displayed in front of customers on a glass-covered assembly line, affords a panoply of variations on its Mexican theme. Yet as anyone with a sweet tooth will quickly discover, there's not a sopaipilla, cup of flan, or even a cookie to be had in the joint. Restaurant analysts say that such additions at the end of the food line could instantly boost sales by 10 percent or more, something impressed upon Ells by executives at McDonald's, which until last year owned a majority stake in Chipotle.
But the company's single-minded founder has steadfastly rebuffed the idea. "We've had 10 years of double-digit comps in a row, and we've done that without cookies," he says. "So why start now? I see only the downside to adding cookies."
That's not to say that Ells refuses to tinker with a good thing. Trained at the prestigious Culinary Institute of America, Ells started his first Chipotle in 1993 near the University of Denver as a "cash cow" to help fund a "real restaurant." The shop was so busy that he quickly added four more eateries and then, with McDonald's financing, took the concept nationwide. Ells has continually upgraded Chipotle's basic ingredients and tweaked its recipes.
Take the time he called then company director Mats Lederhausen out of an important meeting. "He was screaming on the other end of the phone, 'I've found it! I've found it!' " the former McDonald's executive recalls of the eureka moment when Ells figured out what was wrong with the taste of Chipotle's black beans. " 'They're not cutting the oregano in the right sizes!' "
"So?" Lederhausen said.
Ells then launched into a diatribe about "how the size of the oregano, when it mixes with the water, oil, and salt, doesn't embed the right taste layers in the beans," Lederhausen recalls. "Sure enough, the next time I tasted the beans, they were better."
Ells had a similar revelation seven years ago while trying to figure out why Chipotle's shredded-pork carnitas weren't selling as well as its grilled chicken or steak. On a trip to an Iowa hog farm that raised animals in the open, rather than in pens, he made a discovery: Because they put on more fat living out in the open, their meat was tastier.
Although the meat was more expensive, Chipotle soon switched to the free-range-pork supplier. "The ability to invest in higher-quality food as you increase sales is the thing that really drives the business," Ells says of a resulting doubling in carnitas sales.
Where's the pork? The idea has since been expanded into Chipotle's "Food With Integrity" initiative, which has adopted everything from humanely raised pork to hormone-free sour cream. Ells says that most of his customers don't know—and probably don't even care—whether the pork in their burrito is naturally raised, "but the higher-quality ingredients ultimately result in better-tasting food. No one else in the business can do that because their economic models are different."
To be sure, most purveyors of fast food, and even those in the more upscale "fast casual" category, have pursued a strategy of using the lowest-cost ingredients possible. In fact, "their labor costs are usually higher than their food costs," explains Chipotle Chief Operating Officer Monty Moran. "But for us, it's the other way around."
While Chipotle pays competitive wages, starting at around $8.10 an hour, Ells and Moran have focused aggressively on serving customers quickly—increasing revenue per employee and pushing up average sales volumes to about $1.7 million per store annually. "That's pretty much unheard of in the industry," says Al Baldocchi, a restaurant consultant and longtime Chipotle director.
You can see the difference in Chipotle's kitchens, which despite requiring food preparation far more complex than the deep-fried, automated processes typical at most fast-food restaurants, are pictures of efficiency. "The grill area is right behind the chef's table, which is right behind the front line," Moran says of the streamlined setup. "So the people on the line just turn around when they need something, and it's ready."
Meanwhile, the company has taken full advantage of one of the economy's most important labor sources: Latinos, who now represent 80 percent of Chipotle's workforce. Eschewing part-timers and college students in favor of full-time, permanent employees, Moran has recently put a new, multitiered store management system in place that provides a path for line workers to move up. The result: one of the lowest employee turnover rates in the industry, "which is going to save a lot of money in the long run," notes analyst Haskell. "You get better people. And as they move up, their success just breeds more success."
So is Chipotle a "buy," after all?
"Well, let's just say this," Haskell says. "When they open up a store here in Nashville, I'll be first in line for a burrito."