Latest / The Dutch Investors / #38 | The story of Chipotle Mexican Grill | What can we learn from its success and failures?

Transcript

#38 | The story of Chipotle Mexican Grill | What can we learn from its success and failures? · The Dutch Investors

• 0:00
  SPEAKER_01: Hey everyone, welcome back to the Dutch Investors.
• 0:03
  SPEAKER_01: If you love breaking down business stories and figuring out what makes companies tick, you're in the right place.
• 0:09
  SPEAKER_01: Today we're unwrapping the story of Chipotle Mexican Grill, the place where you go when you're craving some quality but but affordable Mexican food.
• 0:20
  SPEAKER_01: But the story of today isn't just about food.
• 0:23
  SPEAKER_01: Chipotle went from one single restaurant in 1993 to a company pulling in over$11 billion a year, with over 3700 locations.
• 0:34
  SPEAKER_01: This is a story about ambition, scaling smart, nearly losing it all, and fighting back.
• 0:42
  SPEAKER_01: We'll talk about how Chipotle got started, a huge mistake, how Chipotle nearly destroyed its brand, and what we can learn from all of it.com.
• 1:00
  SPEAKER_01: But for now, grab a burrito, some guac, and let's unwrap it.
• 1:05
  SPEAKER_01: Vamos!
• 1:10
  SPEAKER_00: Literally melting your mouth tender.
• 1:18
  SPEAKER_00: And this is gonna be in your bowl.
• 1:20
  SPEAKER_00: This is it!
• 1:22
  SPEAKER_01: Chipotle was one of the very first companies I analyzed for our TDI members.
• 1:28
  SPEAKER_01: It's not only a great company, but it also has very useful lessons we can all learn from.
• 1:34
  SPEAKER_01: Believe it or not, Chipotle wasn't supposed to be such a large and successful company.
• 1:40
  SPEAKER_01: In fact, Steve Ells, the founder, never even intended to start a Mexican chain in the first place.
• 1:47
  SPEAKER_01: Back in 93, Steve Ells was a young chef who had a single dream.
• 1:53
  SPEAKER_01: Opening a fancy, fine dining restaurant.
• 1:56
  SPEAKER_01: Quite a bit different from a chipotle.
• 1:59
  SPEAKER_01: But opening a fine dining restaurant on your own is expensive.
• 2:03
  SPEAKER_01: So he needed a way to make money first, and his solution was a burrito shop near the University of Denver.
• 2:10
  SPEAKER_01: And the blueprint was pretty simple.
• 2:13
  SPEAKER_01: Fresh ingredients, back before that was trendy, a small focused menu, because too many choices slow things down and make it unnecessarily difficult, and fast surface, without feeling like fast food.
• 2:26
  SPEAKER_01: The food is made with fresh ingredients.
• 2:29
  SPEAKER_01: And by his smart placement near the university, the students loved it.
• 2:35
  SPEAKER_01: The place was packed almost daily, and within a few months he opened two more locations.
• 2:42
  SPEAKER_01: But as basic economics teach us, growth costs money.
• 2:47
  SPEAKER_01: So Else took out a$1.8 million loan from the bank and got$80,000 from his father.
• 2:54
  SPEAKER_01: But all of this success didn't go unnoticed.
• 2:58
  SPEAKER_01: The Yellow Big M took notice, and just a few years later, McDonald's wanted in on the success.
• 3:06
  SPEAKER_01: Which brings me to the next chapter of Chipotle.
• 3:10
  SPEAKER_01: In 1998, McDonald saw potential in Chipotle and dropped$360 million for a 90% stake in Chipotle.
• 3:20
  SPEAKER_01: And with McDonald's on board, it was kinda like rocket fuel.
• 3:24
  SPEAKER_01: Or a management team on hot sauce.
• 3:26
  SPEAKER_01: Chipotle exploded to 500 restaurants in just 7 years' time.
• 3:32
  SPEAKER_01: And they learned a lot.
• 3:34
  SPEAKER_01: They learned how to scale quickly and more importantly, profitable.
• 3:39
  SPEAKER_01: They learned how to lock in and optimize supply chains, and they learned how to pick the best locations.
• 3:46
  SPEAKER_01: By 2006, so about 8 years later, Chipotle was ready to go public.
• 3:52
  SPEAKER_01: The IPO launched at$22 a share and doubled on the first day to$44.
• 3:59
  SPEAKER_01: A massive success.
• 4:01
  SPEAKER_01: And just like that, McDonald's cashed out.
• 4:05
  SPEAKER_01: They sold their entire stake for$1.5 billion.
• 4:10
  SPEAKER_01: Not bad, right?
• 4:12
  SPEAKER_01: Except that stake would now be worth over$50 billion.
• 4:18
  SPEAKER_01: So they left$48 billion on the table.
• 4:21
  SPEAKER_01: Talk about missed opportunity costs, huh?
• 4:24
  SPEAKER_01: And for the next 9-10 years everything was pretty good.
• 4:28
  SPEAKER_01: Until 2015 hit.
• 4:32
  SPEAKER_01: Reports started popping up about foodborne illnesses at Chipotle locations.
• 4:38
  SPEAKER_01: E.
• 4:38
  SPEAKER_01: coli.
• 4:41
  SPEAKER_01: Over 500 people got sick.
• 4:44
  SPEAKER_01: It was a PR, an operational nightmare.
• 4:48
  SPEAKER_01: Cells crashed by$600 million and the stock dropped 60%.
• 4:55
  SPEAKER_01: Suddenly people weren't thinking about how great the burritos were, they were wondering if they'd get food poisoning too.
• 5:02
  SPEAKER_01: The brand, once anonymous with fresh, was suddenly a punchline.
• 5:07
  SPEAKER_01: But there are things we can learn from this.
• 5:10
  SPEAKER_01: Let me try to sum up some of the steps Chipotle implemented to fix this.
• 5:15
  SPEAKER_01: Of course we now know it worked, but back then no one knew it would work at all, so firstly, they shut down all restaurants to get to the bottom of the problem.
• 5:26
  SPEAKER_01: Makes sense?
• 5:27
  SPEAKER_01: They went on national TV to apologize repeatedly, paid for medical costs for all of those affected, and he completely, and by he I mean the CEO, completely overhauled the entire food safety process.
• 5:43
  SPEAKER_01: He wanted to make sure it could never happen again, and he wanted the world to know it.
• 5:49
  SPEAKER_01: Kind of trying to get any goodwill or save any bits of the Chipotle brand and trust that was left.
• 5:57
  SPEAKER_01: Easy to see in hindsight that it worked, but at that time investors didn't want anything to do with Chipotle.
• 6:04
  SPEAKER_01: It wasn't an overnight recovery, but eventually it did work.
• 6:08
  SPEAKER_01: Chipotle rebuilt trust and customers came back.
• 6:12
  SPEAKER_01: Which brings me to the next chapter of Chipotle, the comeback.
• 6:17
  SPEAKER_01: After the 2015 crisis, Chipotle had two options: fade away like so many once hot brands do, or fight its way back with discipline, transparency, and real change.
• 6:30
  SPEAKER_01: But change costs money, but they chose the hard road, the right one, if you ask me.
• 6:36
  SPEAKER_01: It came from rebuilding the fundamentals, boring stuff like improving operations, rebuilding the supply chain from the ground up, and focus on quality, keeping things efficient, yet clean and safe.
• 6:50
  SPEAKER_01: In 2018 they brought in Brian Nickel, former Taco Bell CEO, as the new captain.
• 6:57
  SPEAKER_01: Now Taco Bell and Chipotle are not the same company, you're absolutely right, but Nickel brought something Chipotle desperately needed: operational expertise and a very strong marketing playbook.
• 7:10
  SPEAKER_01: So why does Chipotle stand out and is still alive today?
• 7:15
  SPEAKER_01: Well I think it comes down to three big reasons.
• 7:18
  SPEAKER_01: Maybe four.
• 7:19
  SPEAKER_01: If you ask me, it comes down to three big reasons.
• 7:23
  SPEAKER_01: One, they improved operations and quality.
• 7:26
  SPEAKER_01: They standardized kitchen procedures, reduced inefficiencies, and improved training.
• 7:31
  SPEAKER_01: They made sure every burrito ball looked and tasted the same.
• 7:35
  SPEAKER_01: Chipotle was also one of the first chains to really push the no artificial additives or responsibly sourced meat.
• 7:43
  SPEAKER_01: Their slogan, food with integrity, made them stand out.
• 7:47
  SPEAKER_01: 2.
• 7:48
  SPEAKER_01: Simple but smart.
• 7:50
  SPEAKER_01: The menu is small, but very efficient.
• 7:53
  SPEAKER_01: It's burritos, bowls, tacos, and salads.
• 7:57
  SPEAKER_01: That's basically it.
• 7:59
  SPEAKER_01: No distractions, just the food people want.
• 8:03
  SPEAKER_01: And they were very good and fast with making what they offered.
• 8:09
  SPEAKER_01: 3.
• 8:10
  SPEAKER_01: Digital ordering.
• 8:11
  SPEAKER_01: Chipotle bet big on online sales and mobile ordering and it paid off.
• 8:17
  SPEAKER_01: They invested heavily in mobile ordering, pickup lanes, what they call Chipotle, and delivery.
• 8:24
  SPEAKER_01: Today, over 35% of sales come from digital orders.
• 8:28
  SPEAKER_01: And during the pandemic, this move kept them afloat.
• 8:32
  SPEAKER_01: And all of this combined, among a few other things, worked.
• 8:37
  SPEAKER_01: Fast forward to today, and Chipotle is doing over 11 billion in annual revenue, with operating margins around 17%.
• 8:46
  SPEAKER_01: Very solid for a restaurant chain.
• 8:49
  SPEAKER_01: Now, let's break this all down into a few lessons we can learn from, especially from the story of Chipotle and how they almost died.
• 8:59
  SPEAKER_01: Lesson 1.
• 9:01
  SPEAKER_01: Great ideas usually start small.
• 9:04
  SPEAKER_01: Steve Els never planned on building a global company.
• 9:09
  SPEAKER_01: He just needed a way to fund a fine dining restaurant.
• 9:12
  SPEAKER_01: But when something works, it can scale in ways you didn't even expect.
• 9:18
  SPEAKER_01: Lesson 2.
• 9:19
  SPEAKER_01: Management is everything in restaurants.
• 9:24
  SPEAKER_01: Every company faces problems, but how they handle them makes all the difference.
• 9:29
  SPEAKER_01: Chipotle didn't just slap a band-aid on their food safety crisis, they rebuilt the entire system.
• 9:36
  SPEAKER_01: They did more than they needed to.
• 9:38
  SPEAKER_01: If you could have spotted this during these uncertain times and trusted the management team, this would have been a big green flag, the way they handled it.
• 9:48
  SPEAKER_01: Yes, it could have still gone wrong, but what a turnaround they made.
• 9:53
  SPEAKER_01: Chipotle doesn't have patents or network effects like a tech company, but what it does have is a tight grip on execution.
• 10:02
  SPEAKER_01: The real mode brand loyalty.
• 10:04
  SPEAKER_01: And which is done by management.
• 10:06
  SPEAKER_01: Don't underestimate how powerful that can be.
• 10:10
  SPEAKER_01: Lesson 3.
• 10:11
  SPEAKER_01: If something appears to be working well, let it run.
• 10:15
  SPEAKER_01: McDonald's selling the stake too soon is a perfect example of why patience matters.
• 10:21
  SPEAKER_01: If you've got a solid company and they're doing the right things, management is capable, and you see the growth runway, holding on for the long run, can be far more profitable than quick profits.
• 10:34
  SPEAKER_01: It's also a great example of hidden opportunity costs.
• 10:37
  SPEAKER_01: While missing out on the roughly$48 billion is very painful, it doesn't show up on McDonald's financial statements.
• 10:45
  SPEAKER_01: But just imagine McDonald's holding their stake till now.
• 10:49
  SPEAKER_01: It's around 25% of their current market cap.
• 10:52
  SPEAKER_01: Quite a lesson on letting your runners run.
• 10:55
  SPEAKER_01: McDonald's made a great profit, they made a great early bet, but they did cash out too soon in hindsight.
• 11:02
  SPEAKER_01: Classic opportunity cost.
• 11:04
  SPEAKER_01: And as investors, knowing when to hold on can be just as important as knowing when to exit.
• 11:11
  SPEAKER_01: And lastly, lesson 4, adapt or get left behind.
• 11:16
  SPEAKER_01: Covid could have killed Chipotle.
• 11:18
  SPEAKER_01: The E.
• 11:18
  SPEAKER_01: coli virus, the brand damage, could have also killed Chipotle, like so many other restaurants.
• 11:25
  SPEAKER_01: Think of Red Lobster or Sabarrow, the mall pizza king.
• 11:30
  SPEAKER_01: Or what about Boston Market, once the pioneer of home style fast food?
• 11:35
  SPEAKER_01: Or maybe even Quisnos.
• 11:37
  SPEAKER_01: At its peak, it had over 4500 locations.
• 11:40
  SPEAKER_01: But Chipotle adapted, times changed.
• 11:44
  SPEAKER_01: Chipotle initially didn't want to do drive-throughs and orders.
• 11:48
  SPEAKER_01: Chipotle could have also ignored digital sales, ordering through the app and then picking it up later or letting it deliver, but instead they embraced it.
• 11:58
  SPEAKER_01: Now online orders drive a huge part of their business.
• 12:02
  SPEAKER_01: Companies that keep up with the trends survive.
• 12:05
  SPEAKER_01: The ones that don't, well, it's a stupid pun, but it's a wrap.
• 12:10
  SPEAKER_01: Sorry, just had to throw a little wordplay in there.
• 12:14
  SPEAKER_01: Chipotle's journey has been anything but boring if you ask me.
• 12:18
  SPEAKER_01: From a single burrito shop in Denver to an$11 billion Mexican restaurant chain.
• 12:25
  SPEAKER_01: It's a story of growth, mistakes, and opportunity cost.
• 12:30
  SPEAKER_01: It's a company I like to follow, and I analyzed it when I had had a market cap of$80 billion.
• 12:36
  SPEAKER_01: It's about$65 billion today, so who knows?
• 12:40
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• 12:49
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• 12:52
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• 12:59
  SPEAKER_01: That's it for today.
• 13:00
  SPEAKER_01: Until next time, stay curious, keep learning, and happy investing.