Latest / The Dutch Investors / #89 | Chipotle Mexican Grill Deep Dive | A Recipe for Success or Disaster?

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#89 | Chipotle Mexican Grill Deep Dive | A Recipe for Success or Disaster? · The Dutch Investors

• 0:08
  SPEAKER_00: Welcome back to a TDI premium deep dive.
• 0:12
  SPEAKER_00: Today we are stepping out of the numbers and getting into the food.
• 0:16
  SPEAKER_00: We're going to talk about a company that didn't just make a new menu, but they basically invented the whole new way to eat.
• 0:24
  SPEAKER_00: Think about restaurants historically.
• 0:27
  SPEAKER_00: You had two main types.
• 0:28
  SPEAKER_00: You had the fast food giants, like McDonald's, places that cared about how many calories they could sell and how fast they could do it.
• 0:36
  SPEAKER_00: On the other hand, you had the fancy, slow, expensive, fine dining.
• 0:41
  SPEAKER_00: What feels totally normal today, walking into a place and seeing someone slicing peppers right there while you wait was a pretty crazy idea 30 years ago.
• 0:52
  SPEAKER_00: Chipotle Mexican Grill is the company that figured out the sweet spot in the middle.
• 0:58
  SPEAKER_00: They exist because people want food that tasted like a chef made it, but they wanted it as fast as a drive-thru.
• 1:07
  SPEAKER_00: Now, as investors, we have to ask the honest question: is this a strong, protected business with a durable, sustainable competitive advantage built on quality, or is it just another food assembly line that's going to struggle with the same problems as everyone else?
• 1:26
  SPEAKER_00: Let's take a closer look at how this Burrito King actually works.
• 1:31
  SPEAKER_00: Let's talk about Chipotle Mexican Grill! To really get what Chipotle is all about today, you have to look at this chef, who actually never wanted to run a burrito place.
• 2:02
  SPEAKER_00: Steve Ells was a serious culinary guy, a real fine dining snob, honestly.
• 2:08
  SPEAKER_00: He went to the Culinary Institute of America, and his big dream was to open a fancy white tablecloth restaurant.
• 2:15
  SPEAKER_00: But man, high-end food costs a ton of money.
• 2:19
  SPEAKER_00: He needed a reliable way to make cash to pay for his dream.
• 2:24
  SPEAKER_00: In the early 90s, he noticed how popular those huge, full-wrapped burritos made with good ingredients were in San Francisco.
• 2:32
  SPEAKER_00: He got a small loan,$85,000 from his dad, and opened the very first Chipotle in Denver, Colorado.
• 2:40
  SPEAKER_00: It was just a converted ice cream shop near the university.
• 2:44
  SPEAKER_00: His original business plan was super cautious.
• 2:48
  SPEAKER_00: He figured if he could just sell 100 burritos a day, he'd break even.
• 2:53
  SPEAKER_00: Well, a few weeks later, he was selling a thousand a day.
• 2:57
  SPEAKER_00: The real aha moment was not opening the door, it was realizing that selling burritos was way more lucrative than running a fancy restaurant ever could be.
• 3:08
  SPEAKER_00: The model, lots of sales, simple menu, was such a cash-generating machine that he totally dropped the high-end restaurant idea and just focused on building more chipotles.
• 3:21
  SPEAKER_00: That's how fast Cassial was born.
• 3:24
  SPEAKER_00: It was a pretty good idea that makes the most money per square foot by cutting the expensive table surface and using that money to buy you better food.
• 3:33
  SPEAKER_00: In the beginning, the look was really basic: stainless steel, plywood, exposed pipes, and it wasn't just a style choice.
• 3:43
  SPEAKER_00: It was just a cheap way to keep startup costs low, while showing off how fresh the food was.
• 3:49
  SPEAKER_00: Once the company got about 15 stores, a massive company noticed them.
• 3:54
  SPEAKER_00: In the late 90s, McDonald's Corporation bought a small piece of the company, which eventually turned into a 90% ownership.
• 4:05
  SPEAKER_00: This was basically the rocket fuel era.
• 4:08
  SPEAKER_00: With McDonald's help, Chipotle learned how to go from 16 restaurants to over 500 restaurants in just seven years.
• 4:17
  SPEAKER_00: But they were a terrible fit, honestly.
• 4:19
  SPEAKER_00: McDonald's wanted Chipotle to act like a normal fast food chain.
• 4:23
  SPEAKER_00: They pushed for things like drive-throughs, breakfast, and even renaming it Chipotle Fresh.
• 4:30
  SPEAKER_00: But Else refused.
• 4:32
  SPEAKER_00: He thought a drive-thru would ruin the cool theater of watching your food being assembled, and that breakfast would just make the simple menu more confusing.
• 4:42
  SPEAKER_00: And this conflict of interest eventually led to a clean breakup.
• 4:46
  SPEAKER_00: In 2006, McDonald sold its entire stake for around$1.5 billion during Chipotle's IPO.
• 4:55
  SPEAKER_00: Today that same stake would be worth over$40 billion.
• 5:00
  SPEAKER_00: A legendary mistake in investing.
• 5:03
  SPEAKER_00: Chipotle came out as a really unique company, a national chain that owns every single store itself, refusing to franchise it, so it can keep total absolute control over the customer experience.
• 5:18
  SPEAKER_00: Chipotle's business model is pretty smart, though a bit more complicated than one might think.
• 5:24
  SPEAKER_00: They make money, obviously, by just selling a few things burritos, bowls, tacos, drinks, and salads, using only about 50 common ingredients.
• 5:37
  SPEAKER_00: The simple menu is actually why their operations run so smoothly.
• 5:43
  SPEAKER_00: Since they don't use freezers or can openers, everything has to be prepped fresh daily.
• 5:49
  SPEAKER_00: And that might sound like a pain, but it's the main reason why people love chipotle.
• 5:56
  SPEAKER_00: Customers are happy to pay a little extra, historically, just over$10 a meal, because it feels like they're getting a healthy fast food option.
• 6:05
  SPEAKER_00: Where the money comes from is straightforward.
• 6:08
  SPEAKER_00: Over 99% of their sales these days are just from foods and drinks, but inside the actual restaurant.
• 6:16
  SPEAKER_00: But the real magic is in the store level economics.
• 6:20
  SPEAKER_00: A typical chipotle brings in around$3 million in sales each year.
• 6:25
  SPEAKER_00: At its best, the profit margin for the restaurant itself is about 25%.
• 6:31
  SPEAKER_00: That means for every$100 they sell, the store keeps roughly$25 after covering the cost of food, staff, and rent.
• 6:42
  SPEAKER_00: Let's walk through what makes chipotle tick, starting with the costs.
• 6:47
  SPEAKER_00: Food and ingredients are the biggest slice of the pie, often hitting 30% of revenue.
• 6:54
  SPEAKER_00: Chipotle intentionally spends more than competitors because they prioritize integrity.
• 7:00
  SPEAKER_00: Think of it, Chipotle buys a massive 400,000 pounds of avocados daily and insists on proteins raised to specific animal welfare standards.
• 7:13
  SPEAKER_00: The next biggest cost is obviously labor.
• 7:17
  SPEAKER_00: Around 25% goes to labor.
• 7:20
  SPEAKER_00: Because their model is hands-on, chopping, grilling, and assembling everything by hand instead of using automated fryers, Chipotle feels the sting of rising wages more than a typical fast food place.
• 7:33
  SPEAKER_00: Lastly, the throughput machine.
• 7:36
  SPEAKER_00: This is a real advantage.
• 7:38
  SPEAKER_00: They are not just selling burritos, but they're selling speed.
• 7:42
  SPEAKER_00: The whole system is engineered for maximum throughput, which is how many customers they can push through the line during busy lunch and dinner rushes.
• 7:51
  SPEAKER_00: After fixed costs, like the building and staff are covered, every extra person through that line is essentially pure profit.
• 8:00
  SPEAKER_00: The move to digital has given them a huge operational upgrade.
• 8:04
  SPEAKER_00: Initially, online orders threatened to slow down the mainline.
• 8:08
  SPEAKER_00: Their pivotal innovation was creating the second make line, a mirror image of the mainline, but tucked away in the back and only for app and delivery orders.
• 8:20
  SPEAKER_00: And this smart move allows them to serve two groups of customers at the same time.
• 8:25
  SPEAKER_00: Today, digital sales make up nearly 40% of their total revenue, backed by a loyalty program with 40 million active members.
• 8:34
  SPEAKER_00: Now, a couple things that are worth mentioning here is that the direct ownership model has its pros and cons.
• 8:41
  SPEAKER_00: The high capital intensity allows for total control over safety and quality, but obviously comes with its own downsides.
• 8:50
  SPEAKER_00: The second make line, essential for digital scaling, but it doubles the complexity of the kitchen.
• 8:56
  SPEAKER_00: The fact that they only use about 50 ingredients is a great marketing hook, but it creates massive supply chain vulnerability.
• 9:05
  SPEAKER_00: Lastly, the Chipotle lanes.
• 9:08
  SPEAKER_00: The drive-thru for Chipotle for digital orders delivers 30-second pickups but needs more real estate.
• 9:16
  SPEAKER_00: You simply need more real estate to let cars drive around your Chipotle.
• 9:20
  SPEAKER_00: Now let's head on over to Chipotle's mode.
• 9:24
  SPEAKER_00: Or lack thereof.
• 9:26
  SPEAKER_00: We've looked at how Chipotle built the business, but what keeps it safe?
• 9:32
  SPEAKER_00: Management claims their mode is food with integrity.
• 9:35
  SPEAKER_00: But let's be real, a burrito is not sticky, besides I guess the sauce.
• 9:41
  SPEAKER_00: A customer can walk across the street to Taco Bell or Kava with zero effort.
• 9:48
  SPEAKER_00: Chipotle's actual advantage is a mix of strong brand and efficiency of scale.
• 9:55
  SPEAKER_00: Historically, they've positioned themselves as the antithesis to big corporations like McDonald's of traditional fast food.
• 10:04
  SPEAKER_00: Chipotle is more than just a logo, and food with integrity is more than just a statement.
• 10:10
  SPEAKER_00: Campaigns like the animated short The Scarecrow turned a simple rap into a moral choice.
• 10:18
  SPEAKER_00: And this powerful branding lets them charge just a little more.
• 10:23
  SPEAKER_00: Chipotle has raised prices many times to handle inflation, and for a long time their core, higher income customers, those making over 100k a year, didn't flinch.
• 10:35
  SPEAKER_00: But the playing field is getting crowded.
• 10:38
  SPEAKER_00: This chipotle effect has led to a lot of copycats.
• 10:42
  SPEAKER_00: We're seeing Mediterranean concepts like Kava and salad places like Sweet Green pop up with nearly identical business models.
• 10:50
  SPEAKER_00: Kava in particular is a fast riser, growing its revenue four times faster than Chipotle, though it's starting from a much smaller size.
• 11:01
  SPEAKER_00: Skeptics worry Chipotle's brand advantage is too fragile.
• 11:06
  SPEAKER_00: The 2015 E.
• 11:07
  SPEAKER_00: coli crisis showed that the fresh supply chain is also a risky one, and when trust evaporated, so did the brand strength.
• 11:17
  SPEAKER_00: Now we see a new issue: the skimping scandal.
• 11:22
  SPEAKER_00: Social media platforms like Reddit and TikTok are full of customers claiming shrinkflation, smaller scoops for your money.
• 11:30
  SPEAKER_00: And if your whole promise is integrity and generous portions, then a viral perception that you're skimping can destroy your competitive advantage faster than any rival can.
• 11:43
  SPEAKER_00: So who is at the grill?
• 11:45
  SPEAKER_00: Let's talk about the people and incentives for a second.
• 11:48
  SPEAKER_00: Chipotle's leadership has totally changed over the last 10 years.
• 11:53
  SPEAKER_00: Initially it was led by the founder, Steve Ells, a brilliant visionary who struggled with the operational issues after the 2015 crisis.
• 12:04
  SPEAKER_00: The turnaround phase was driven by Brian Nickel, now CEO of Starbucks, who brought a disciplined marketing focus from Young brands.
• 12:15
  SPEAKER_00: Now the main operator is Scott Boldright, who has been with the company since 2017.
• 12:22
  SPEAKER_00: So Chipotle has moved past the visionary era and is now focused on operational perfection.
• 12:29
  SPEAKER_00: When Scott Baudright became CEO, it was a practical rather than exciting move.
• 12:35
  SPEAKER_00: He's not really focused on the menu anymore, but on fixing the kitchen's efficiency, primarily through back-of-house technology.
• 12:43
  SPEAKER_00: In the past, growing sales meant opening new stores.
• 12:48
  SPEAKER_00: Bodright believes they can actually manufacture sales by speeding up the surfing line with high efficiency equipment.
• 12:56
  SPEAKER_00: Think dual-sided grills that have the cooking time for chicken and slicers that replace hours of manual chopping.
• 13:04
  SPEAKER_00: He's turning every location into a high-throughput factory.
• 13:09
  SPEAKER_00: But there is a big but employees.
• 13:13
  SPEAKER_00: If all this new tech makes the job harder or more stressful, they could see a drop in employer retention, which was historically a strength.
• 13:23
  SPEAKER_00: And the guest experience will definitely suffer.
• 13:27
  SPEAKER_00: Something to balance here.
• 13:36
  SPEAKER_00: They are pretty big.
• 13:38
  SPEAKER_00: How much more room is there to grow?
• 13:40
  SPEAKER_00: There's still plenty of room, we think, but it's definitely not going to be at the same pace as before.
• 13:47
  SPEAKER_00: It's pretty fast, profitable, and efficient, but it's lost the underdog charm it once had.
• 13:53
  SPEAKER_00: Let's touch on incentives.
• 13:56
  SPEAKER_00: We always look for alignment.
• 13:58
  SPEAKER_00: Do management's incentives match ours as investors?
• 14:03
  SPEAKER_00: Looking back, their bonus structure was weighted towards three key areas.
• 14:09
  SPEAKER_00: Comparable restaurant sales, which make sure they can't hide declining sales in older stores just by opening new ones, restaurant cash flow percentage, a direct reward for managing costs without cutting quality, and site assessment requests, encourages aggressive yet smart expansion towards the 7,000-store unit goal.
• 14:35
  SPEAKER_00: The current CEO has about$11 million in stock, which is, looking at the base salaries, quite a lot.
• 14:44
  SPEAKER_00: However, there is a real risk here, and you could call it the Starbucks effect.
• 14:51
  SPEAKER_00: When Brian Nichol suddenly left for Starbucks, it shocked the market.
• 14:56
  SPEAKER_00: It brings up the issue of the key man.
• 14:59
  SPEAKER_00: Was the successful turnaround due to a good operational system?
• 15:04
  SPEAKER_00: Or was it about Brian Nickel, just about one man?
• 15:08
  SPEAKER_00: Scott Bowdright now has to prove that the strong culture of throughput is part of the company's DNA and doesn't rely on a single visionary to function.
• 15:20
  SPEAKER_00: Only time will tell.
• 15:23
  SPEAKER_00: So what could kill this business in, say, 10 years from now?
• 15:27
  SPEAKER_00: Let's touch on three bare cases.
• 15:30
  SPEAKER_00: First, reputational fragility.
• 15:34
  SPEAKER_00: A single high-profile food safety incident could be terminal for a brand that charges a premium for integrity.
• 15:42
  SPEAKER_00: And in the digital era, news travels at the speed of light, and the punishment at the cash register is immediate.
• 15:50
  SPEAKER_00: 2.
• 15:51
  SPEAKER_00: The skimping feedback loop.
• 15:54
  SPEAKER_00: If customers continue to feel that the value proposition is declining, higher prices for less food, traffic will enter a secular decline.
• 16:04
  SPEAKER_00: In 2025, we already saw a glimpse of this with comparable sales dipping into negative territory.
• 16:12
  SPEAKER_00: 3.
• 16:13
  SPEAKER_00: Labor and the automation race.
• 16:16
  SPEAKER_00: Chipotle is a human-intensive business.
• 16:20
  SPEAKER_00: If wage inflation continues to outpace their ability to raise prices, margins will compress.
• 16:28
  SPEAKER_00: They are betting a lot of money on Autokedo and hyphen, which is basically robotic make lines, to save them.
• 16:36
  SPEAKER_00: But they are still in the prototype phase.
• 16:39
  SPEAKER_00: If the robots don't work, the margins might not hold.
• 16:44
  SPEAKER_00: Now the bull case is equally compelling.
• 16:46
  SPEAKER_00: The 7000 unit horizon, for example.
• 16:49
  SPEAKER_00: Chipotle is currently at roughly 4,000 stores.
• 16:53
  SPEAKER_00: The runway in North America is still large, especially in smaller towns where they are starting to penetrate.
• 17:08
  SPEAKER_00: 2.
• 17:09
  SPEAKER_00: The efficiency flywheel.
• 17:11
  SPEAKER_00: Automation like the augmented make line can build a ball five times faster than a human.
• 17:17
  SPEAKER_00: If fully rolled out, this doesn't just cut in labor, it explodes the capacity for digital sales during peak hours.
• 17:26
  SPEAKER_00: Lastly, international optionality.
• 17:30
  SPEAKER_00: For decades, chipotle has been mostly a domestic story.
• 17:35
  SPEAKER_00: But today, they are finally moving into Mexico and the Middle East through franchise-like development agreements.
• 17:42
  SPEAKER_00: If the burrito ball translates globally as well as the Big Mac, the current valuation certainly doesn't look bad.
• 17:51
  SPEAKER_00: Over the past decade, the market has highly valued chipotle as a quality business that rarely seems cheap.
• 17:59
  SPEAKER_00: After the pandemic era peak of over 100 times earnings, the valuation has settled to an earnings multiple between 25 and 30.
• 18:08
  SPEAKER_00: This makes sense for a company growing by 8% annually and keeping a 25% restaurant margin.
• 18:15
  SPEAKER_00: But there is no room for error.
• 18:17
  SPEAKER_00: Paying 30 times earnings is a bet that 2025 traffic dip was just a temporary blip and not the start of the ending.
• 18:26
  SPEAKER_00: The Chipotle chain has been through major crises, a corporate split, a health scare, and a global pandemic.
• 18:35
  SPEAKER_00: Each one that you survive should make you stronger.
• 18:39
  SPEAKER_00: Our question whether to invest in Chipotle comes down to do we want to own a company that has no real sustainable competitive advantage and is dependent on consumer food preferences?
• 18:53
  SPEAKER_00: Besides, barriers to entry are extremely low in this industry, and the pricing power in this industry has proven to be limited.
• 19:02
  SPEAKER_00: Chipotle does have a success formula, however, with a sensitive public image.
• 19:07
  SPEAKER_00: It's a brand built on integrity that has centralized operations for safety.
• 19:13
  SPEAKER_00: Let us know your thoughts on the company.
• 19:15
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• 19:22
  SPEAKER_00: That's a wrap on Chip Oldlay.
• 19:25
  SPEAKER_00: Until next time, stay curious, keep learning, and happy investing!