Chipotle Mexican Grill, maturing or declining?

Fast Food Consumption and the Rise of Chipotle Mexican Grill


Fast food consumption has risen dramatically in recent years. Many companies have invested in this industry and achieved mainstream success as a result of its steady and growing market. Chipotle Mexican Grill, which began as a burrito restaurant in 1993, is one of these companies. As a new business, the owner set a goal of selling only 107 burritos per day in order to be profitable, but ended up selling 1000 burritos every day. This success enabled the company to grow to at least 16 outlets by 1998. The fast-food business had already gained much popularity and the market was ever expanding due to increase in consumer demands. At that time, Chipotle success was attracting outside investors. McDonald's made a minority investment in the company and became Chipotle's largest investor by 2001. The company had begun the steps to becoming mature. It had over 500 restaurants around the county by 2005. Further growth was realized when the company made a public offering in 2006 which made its stock to rise by 100% and the revenue generated funded extra growth. After McDonald's divested from the company in 2006, Chipotle bought back all of its outlets and went public in 2007 as a 100% company owned (Stock & Wong, 2015). The company was still maturing as it realized increased sales every year and expanded to foreign territories like Canada, Germany, UK and others. By 2011 it was the best Mexican fast food chain and the company was now mature because it had already passed all emerging and growth phases related to industry growth. The sales became stable and its growth slowed down.


The Decline of Chipotle


However, the company was negatively impacted in 2015 by the outbreak of E. coli and Salmonella where several Chipotle restaurants were involved. Investigators found several health violations and the company faced criminal investigation and prosecution. This started the path for the decline of Chipotle. Bad public image meant many customers defected to other fast food chains and its sales began to crumble although some corrective actions saw an increase in sales. As of today, the company is in decline due to its increase in health violations and pending lawsuits especially from its employees for alleged wage theft. The future of the company remains uncertain. Chipotle can now be classified as declining industry because of the decline in the number of customers and lack of innovations like drive-through windows. It lacks clear direction which has led to its founder and CEO to step down (Stock & Wong, 2015).


Advantages and Disadvantages of Vertical Integration vs. Outsourcing


The Porter's theory of National Advantage was developed in order to help businesses understand their competitive position in international markets. It an effective way for businesses to analyze their national competitiveness. The Porter's model is in the shape of a diamond because all the factors that affect international business competition bear a resemblance to the shape of a diamond. The factors include the factors of production, the demand conditions, related and support industries and firm strategy, structure and rivalry (Porter, 2008). Chipotle has had situations that required both vertical integration and outsourcing. Vertical integration is when the company is expended into other stages of production like merging with distributors and suppliers. Outsourcing is the opposite of vertical integration. It involves contracting outside suppliers or distributors to perform a certain task instead of the company doing it internally. Based on Porters determining factors, the advantages and disadvantages of vertical integration and outsourcing can be explained.


Transaction Costs


Transaction costs - one of the main advantages of adopting vertical integration is a reduction of transaction costs that exist across the supply chain. Having subsidiary companies with central management significantly lower transaction costs if the system is inexpensive to use. In outsourcing, transaction costs are high because of large numbers of middlemen involved in the acquisition of materials as well as in distribution (Gilley & Rasheed, 2000).


Asset Investments Can Focus on Specialization


Asset investments can focus on specialization - in regard to Chipotle Mexican Grill, investing in its special ingredients provides a competitive advantage over other companies by internally focusing on product specialization (Rothaermel, Hitt, & Jobe, 2006). In outsourcing, product specialization does not exist due to varieties of inputs which can also be obtained by other competitors. It will be difficult to develop a unique brand that differentiates the company from other competitors.


Flexibility


Flexibility - outsourcing offers flexibility which is important for businesses in case they need to change product design (Gilley & Rasheed, 2000). Vertical integration offers limited choices in the supply chain but a business that outsources from third parties can make any intended changes when they need them without any maintenance costs.


Cost Control


Cost control - as an advantage of vertical integration, there is significant cost control especially during the distribution of products. Owning all distribution and transportation chains gets rid of the middleman hence removing a step in the process. Transportation costs are also lowered. In outsourcing, there is no cost control because the distribution costs are determined by the outsourced companies. There are high chances of getting ripped off because there is no inspection of how the tasks are being performed (Rothaermel, Hitt, & Jobe, 2006).


Evaluation of Chipotle's Strategic Position using Boston Consulting Group's Growth-Share Matrix


The Boston Consulting Group's Growth-Share Matrix is a planning model that was developed in the early 70's and is based on a company's products or services and uses graphical representations for them for the purposes of deciding which products it will keep, forego or invest more money in. the company's products or services are classified into four categories in a square matrix. The categories are dogs, cash cows, stars and question marks (Hax & Majluf, 1983). This classification is based on the market share and growth as compared to the biggest competitor.


Dogs


Dogs - this is the business unit with the smallest market share in an industry that is mature. Its growth rate is very small because it does not generate a strong cash flow. They are referred to as cash traps because they hold up money that has little or no prospect. As of 2013, Chipotle Mexican Grill was already a mature industry. Over the years, Chipotle has tried to develop its menu by investing in desert and coffee and cookies for breakfast. However, there is stiff competition from coffee giants hence the market share is very small. A lot of cash is needed to carry out marketing strategies to promote and increase the sales. However, Chipotle stopped serving coffee and dessert with the CEO saying they are too complicated. These are dogs for Chipotle. As of 2011, the only restaurant that served breakfast was only one, the Dulles airport restaurant (Kaplan, 2011).


Stars


Stars - stars are the business units that generate large amounts of cash because they have a large market share. They are known to require high investment capital. If a company matures with a star as the market leader (market growth rate declines), then the star automatically transforms into a cash cow. Bowls and salads are part of the menu at Chipotle. (Hax & Majluf, 1983) The market share for this product was still high as of 2013. As part of their strategy in 2013, extensive marketing campaigns were needed to maintain their advantage and satisfy the large market share. They can be referred to as the stars of Chipotle.


Cash Cows


Cash cows - they generate large amounts of cash that are greater than the market growth rate and consume very little cash. Cash cows are the leaders in a mature industry and they should be utilized maximally to extract the profits while investing very little cash on them. They are the leading generators of income for the company and the cash is used for covering all expenditures and turning question marks into market leaders. For Chipotle Mexican Grill, the burrito has been existing since its inception. It has gone through development stages depending on the tastes and preferences of the customers. It has been Chipotle's leading generator of income over the years due to its popularity. As of 2013, the market growth rate for burritos was very low hence it generated very high profits with the number of customers being served per day stabilizing at around 800,000 (Vasavda, 2016). It can be referred as Chipotle's cash cow. For the cash invested, Chipotle developed a cooking strategy in late 2013 in making all the ingredients of the burrito vegan-friendly. The cash invested in these was insignificant compared to the cash influx after sales.


Question Marks


Question marks - these are the business units that require large investments because they are growing at a very fast rate despite the fact that they have a very low market share. They have the ability to gain a larger market share and grow into a star, then eventually a cash cow when there is a decline in the market growth rate. If not, they degenerate into a dog when the company matures.


Strategy Implementation Approach


There are different approaches that Chipotle can use in implementing its strategies. However, depending on effectiveness cultural approach is the best to use. This approach includes all levels of the company in strategy implementation. All the barriers that exist between management and employees are partially broken down and all the gaps between them bridged by this approach. This is because each employee of Chipotle can be involved in the strategy formulation and implementation process. The main decision still remains with the manager, but the views of other employees are put into consideration as the information is used to fine-tune the strategies. This approach ensures enthusiastic implementation by all employees of the company hence high chances of success (Gupta & Govindarajan, 1984).


To determine the success of the strategies after implementation, two measures are applicable; quality measures and outcome measures. The metrics for these measures are a number of customers, profit, revenue and cash flow. Outcome measures focus more on whether the outcome of the strategies meet the set targets and determine the impacts of all activities. The percent increase in the number of customers after implementation is an example of an outcome measure. Quality measures estimate the effectiveness of all expectations. They show the accuracy, competence and responsiveness of the implemented strategies. The quality of the strategy determines its success in increasing the company's cash flow (Francos-Santos, et al., 2007).

References


Francos-Santos, M., Kennerly, M., Micheli, P., Martinez, V., Mason, S., Marr, B., & Neely, A. (2007). Towards a definition of a business performance measurement system . International Journal of Operations & Production Management, 784-801.


Gilley, K. M., & Rasheed, A. (2000). Making more by doing less: an analysis of outsourcing and its effects on firm performance. Journal of Management, 763-790.


Gupta, A. K., & Govindarajan, V. (1984). Business unit strategy, managerial characteristics, and business unit effectiveness at strategy implementation. Academy of Management Journal, 25-41.


Hax, A. C., & Majluf, N. S. (1983). The use of the growth-share matrix in strategic planning. Interfaces, 46-60.


Kaplan, D. A. (2011, September 12). Chipotle's growth machine. Retrieved from Fortune: http://fortune.com/2011/09/12/chipotles-growth-machine/


Porter, M. E. (2008). Competitive advantage: Creating and sustaining superior performance. Simon and Schuster.


Rothaermel, F. T., Hitt, M. A., & Jobe, L. A. (2006). Balancing vertical integration and strategic outsourcing: effects on product portfolio, product success, and firm performance. Strategic management Journal, 1033-1056.


Stock, K., & Wong, V. (2015, February 2). The builders of a $22 billion burrito empire—the founder, his father, his college buddies, key execs, and a couple of pig farmers—open up about how they won the fast-food future. And yes, they dish about McDonald's. Retrieved from Bloomberg: www.bloomberg.com/graphics/2015-chipotle-oral-history/


Vasavda, N. (2016). The Burrito Behemoth: Chipotle Mexican Grill and Its Model for Success. Discussions.

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