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The resounding success of a simple recipe

By bmvtyea | Bernie-flow | 19 May 2021


Operating restaurants is an arduous task. The margins are small, the consumer is very sensitive to the price and reaching a competitive differential is complicated. Unlike the technology and know-how needed to build fighter planes, there are no major barriers to entry to set up a restaurant. Anyone who knows how to cook and has a starting capital can open yours. However, making this a profitable business is another matter.


Well, Steve Ells did it and here's how. Ells was a trained cook, studied at the Culinary Institute of America, and later worked as a cook for the renowned chef Jeremiah Tower in California. Steve longed to have his own restaurant aimed at the high-income public. To go in search of his desire, he resigned and moved to Colorado.


When he arrived in Colorado he borrowed about $ 80,000 from his father and decided to open a small Mexican restaurant, which would serve as a lever to raise capital for his future upscale restaurant. From that starting point was born the Chipotle Mexican Grill, whose main product is the burrito, a kind of pancake that can be stuffed with meat, chicken, cheese and vegetables. Ells and his father calculated that they would need to sell 107 burritos a day to arrive at the break-even, that is, the point where the business stops making losses.


In the beginning, conducting the operation was quite amateurish and there was not even a business plan. The first few days of operation were relatively slow, but they gradually shifted.


The unit was close to the University of Denver and, with the return to school, sales improved. The first month was better than expected and the restaurant quickly started selling more than a thousand burritos a day.


Within months, Ells was able to pay his debt to his father and decided to open another unit, also in Denver. The business proved to be very profitable and two years later he opened his third Chipotle. In a few years, with its rapid growth, the restaurant caught the attention of McDonald’s, which, in 1998, invested in the Ells chain. In subsequent years, McDonald’s continued to inject capital into the business, until it eventually became the company's controller.


McDonald’s bet on the chain was extremely successful and, in 2018, the company opted for the IPO of Chipotle, which rose about 100% on its first trading day.


What is the formula for this success? Well, a number of factors, one of which is your stock. The chain offered a limited number of ingredients, which facilitated stock management and reduced losses, in addition to reducing the time spent by the customer to choose the content of his burrito.


Another curiosity is that Chipotle, unlike the other big fast-food chains, does not operate in the franchise model, only with its own stores. That's because your model is so profitable that there is no need for franchises. In addition, integration with online sales channels is much more complex when you have franchisees. There is also the difficulty related to the control of health demands, which was already a serious complication for the company. At the end of 2015, there was an outbreak of the bacterium Escherichia coli, which severely damaged the image of the network and caused the shares to fall by about 67%.


After that episode, Chipotle invested hard in sanitary measures and control of its ingredients, and the shares have more than recovered. To give you an idea, since its IPO, Chipotle's shares have appreciated more than 940% in dollars. An important lesson that the company's success teaches us is that sometimes the simplest path is the best.

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