How They Started (22 page)

Soon, Steve began testing out recipes on friends. College friend Monty Moran, a newly minted lawyer who would eventually become Chipotle’s co-CEO, tasted Steve’s first burrito.

“Steve prepared it for me at his house,” Moran told
ColoradoBiz
magazine. “[He] had created the Chipotle burrito. He even had the mini basket with the basket liner. He prepared it wrapped in foil just like they are today. He was like ‘Here’s what I’m going to do.’ And by the way, you should have tasted that first burrito.”

“When I told my friends and family that I was leaving Stars to go open a burrito shop in Colorado, they thought I was crazy, but I had a very strong vision for the way Chipotle was going to look and taste and feel.”

For the name of his eatery, Steve looked no farther than one of the menu’s signature ingredients: the chipotle, a smoked, dried jalapeño pepper. It symbolized how Steve planned to elevate humble food items by using ingredients in uncommon ways, just as the jalapeño is transformed into a delicacy by being dried and smoked.

Steve’s burrito concept impressed his father, a former pharmaceutical executive, who provided an initial investment of $85,000. Steve began scouting sites and noticed several national fast-food chains were checking out a small corner storefront near the University of Denver campus. The big players passed on the long-abandoned former Dolly Madison ice cream parlor because of its small size—just 880 square feet—and its rundown condition.

But for Steve, it seemed the perfect spot to try out his concept with collegiate diners without committing to a big rent. After extensive work to upgrade and remodel the interior, he opened the first Chipotle Mexican Grill on the site in July 1993.

Steve and his father had calculated that the store needed to sell 107 burritos per day to make a profit. In the first weeks, with no funds left for marketing, it was tough to lure customers to try a restaurant type they’d never seen before. Some people would wander in only to turn around again at the unfamiliar food, but Steve did everything in his power to entice them to stay.

Some eventually did, and soon the restaurant was meeting its initial burrito-sales target just off of word of mouth from enthusiastic customers. A few months later, sales exploded after the
Rocky Mountain News
gave Chipotle a rave review. Chipotle soon far exceeded its sales target and began selling 1,000 burritos daily. The company was doing 10 times its projected business plan three months after opening.

The initial menu was simple—just tacos and burritos. Steve knew he was strong on culinary knowledge but weak on business experience, so he wanted a simple business model. However, customers could make 65,000 different combinations of ingredients by calling out their requests as they walked down the restaurant’s meal assembly line. This ability to keep the menu simple while still offering customers many choices proved a key factor in Chipotle’s success: the concept was easy to operate, yet allowed each diner to have a unique meal.

The company was doing 10 times its projected business plan three months after opening.

Business was booming, and Steve soon added a second Denver unit in 1995. At this point, Steve was still thinking of Chipotle as a funding machine for his highbrow restaurant.

The third unit opened that same year, funded by a bank loan backed by the US Small Business Administration. Five more Denver restaurants followed in 1996, growing the chain to eight units.

Chipotle quickly became a trendsetter in a national shift by many American diners toward better-quality fast food. This restaurant format came to be known as “fast-casual,” signifying a fast-food method of serving, but food quality more on the order of a casual, family sit-down restaurant.

The choice of a former ice cream shop for the first restaurant ended up influencing the entire chain’s design. The interior of the store was bare-bones with an industrial, factory feel, including exposed ductwork in the ceiling. Steve kept this rustic-industrial feel (which he’s described as “raw” and “funky”), with many stores sporting corrugated metal walls, halogen lighting, exposed ducts, steel posts, and concrete floors. A legendary perfectionist, Steve worried over every detail that went into the restaurant’s ambiance.

Steve aimed for an aesthetic that would feel both durable and timeless, while at the same time exuding a cool factor that signaled the chain was a cut above ordinary fast food. The style also partly evolved out of necessity: cheap hardware-store supplies such as corrugated metal sheets were used in the first store as a way of saving money.

While each Chipotle restaurant is designed to fit its site, all the units have a few common elements, including the use of natural construction materials. Each Chipotle restaurant also has a sculpture by noted Colorado artist Bruce Gueswel, who creates pieces in the style of ancient Mayan culture. Gueswel’s wife, Cyndi, was a college roommate of Steve’s and introduced the two.

Steve aimed for an aesthetic that would feel both durable and timeless, while at the same time exuding a cool factor that signaled the chain was a cut above ordinary fast food.

Gueswel’s art was included in the very first store. The art sets a Mexican mood and communicates to diners that the food is not your typical fast food. Gueswel also designed the eateries’ chairs and other furnishings.

From the beginning, Chipotle spent little on marketing. Sales grew mostly through word of mouth—rabidly positive word of mouth. Over the years, diners have started fan blogs, sent photos, and made YouTube videos chronicling their passion for the chain’s food. Early on, local food bloggers and Chipotle fan bloggers started posting about a new store’s progress. By the time a store opened, everyone in town already seemed to know about it, and huge crowds turned out.

The company built close relationships with fans by corresponding with them by email through its website and by using social media platforms. It excels at creating simple, catchy slogans, which appear on plain white backgrounds in rough-printed black letters. Typical slogans are: “Mystery-free meat,” “Burrito—or body pillow?” and “Served hot. Not heated.”

Fresh, casual Mexican food became a national craze in the 1990s, and competitors sprang up fast. California-based Baja Fresh had a head start on Chipotle, opening in 1990. In 1995, copycat concept Qdoba started in Chipotle’s home town of Denver. The trend caught the attention of major players in fast food, and soon all three chains were being courted by the big brands.

In Chipotle’s case, Steve was looking for money to grow the 16-unit chain, which he now saw had national potential. At this point, Steve realized he wanted to focus his attention on growing Chipotle rather than opening a fine-dining restaurant. In the hunt for investors, Steve decided to approach McDonald’s in 1997 through a Chipotle board member who had contacts at the world’s largest chain. The timing was perfect: sales were flat at the burger giant, and the company was looking for new ways to grow.

A year of negotiations later, McDonald’s made its first investment in a brand other than its own, becoming the majority owner of the budding chain by 2001. At one point, McDonald’s controlled 92 percent of Chipotle’s stock. While some restaurant-watchers thought it an odd pairing, Steve chose McDonald’s—after talking to many potential partners—because executives there were excited by the company’s prospects and even supportive of Chipotle’s natural food values.

Chipotle lost no time capitalizing on the McDonald’s Corporation’s deep pockets and experienced site-selection team to begin a major expansion push. The first Chipotle stores outside Colorado opened in 2002, in Kansas City and Minneapolis. Other cities followed shortly after.

While some restaurant-watchers thought it an odd pairing, Steve chose McDonald’s … because executives there were excited by the company’s prospects and even supportive of Chipotle’s natural-food values.

Though now operating under the wing of a brand known for its institutional-grade food, Steve kept striving to improve Chipotle’s food quality. In 1999, he read a report about Niman Ranch, a network of 60 or so small US farms and ranches that raise pigs humanely in open fields or deeply bedded barns, without antibiotics.

In 2000, all Chipotle stores began using naturally raised pork, a change that necessitated raising the price of pork burritos by $1. While critics said this would kill business, instead customer reaction was enthusiastic, and sales rose despite the price hike.

Through the years, Steve would continue to raise standards for food quality, adding programs to begin purchasing sustainably raised, antibiotic-free chicken in 2002 and naturally raised beef and dairy products in 2004. In 2008, the chain began buying organic black beans. Steve dubbed this philosophy “Food With Integrity.” The emphasis on organic and sustainable ingredients became a major point of differentiation that won Chipotle a loyal audience and helped it trump competing chains.

While Chipotle thrived with McDonald’s, other fast-Mexican chains didn’t fare as well. Wendy’s International, owner of the Wendy’s hamburger chain, bought Baja Fresh for $275 million in 2002. Four years later the company sold it off for just $31 million after seeing poor performance. Qdoba was purchased in 2003 by burger chain Jack in the Box, which still owns it today. Qdoba has roughly 500 stores.

While competitors struggled or were forced to tread water under corporate rule, Chipotle made the most of its relationship with McDonald’s. The corporate parent provided cash for rapid expansion and helped Chipotle open doors as it entered new markets. With the financial backing of McDonald’s, Chipotle continued to grow and had over 500 units as it prepared to go public in late 2005.

The chain also added menu items during the McDonald’s years, introducing Burrito Bowls—the burrito without the tortilla—in response to customer demand in 2003. Chipotle sold seven million of them in the first year. In 2005, Steve developed a new recipe for vinaigrette dressing that allowed the company to package ingredients from its service line as salads.

Chipotle did well during this time, with 2004 sales hitting $470 million. Chipotle also reached profitability during this time period, going from a $7.7 million loss in 2003 to a $6.1 million profit in 2004, then jumping to $30.2 million in net profit in 2005.

The company improved its processes and increased “throughput” (the speed at which it could move customers through stores), which allowed stores to serve increasing numbers of customers. The average receipt grew slightly as well, to over $8 per customer, an unusually high figure in fast food. A typical store brought in nearly $1.4 million in annual revenue in 2004, up from just over $1 million the prior year. Today, revenue per restaurant tops $2 million.

By 2006, McDonald’s was changing its growth strategy and aimed to divest several chains it had acquired, including Chipotle. Steve was also chafing a bit under what he described as the company’s “typical thinking and bureaucracy,” so it was a mutually agreeable decision to part ways. In 2006, Chipotle went public in one of the hottest IPOs since 2000: the stock doubled in price on opening day. In sharp contrast to the steep loss Wendy’s took on Baja Fresh, McDonald’s sold its interest in Chipotle for a cool $1 billion against its initial $330 million Chipotle investment. By 2010, Chipotle’s store-count would double and top 1,000 units.

Fears that Chipotle would suffer without the buying power of McDonald’s proved unfounded. In fact, the company’s profitability stayed strong even after the 2008 economic crash. While other chains—including its former parent—turned to price-slashing and dollar menus to keep customers, Chipotle stuck with its pricing and kept margins up.

Chipotle had picked up its first few franchisees during its time with McDonald’s. Three McDonald’s franchisees took an interest in the concept and opened Chipotle restaurants, too. But ultimately, Steve decided he didn’t want to go the franchising route. The franchises were eventually bought back, and today Chipotle is entirely company-owned.

This is a stark departure from the approach of most fast-food chains, which rely heavily on franchising to fund their growth. By retaining ownership of all the Chipotle units, Steve kept more control over how the brand was presented to the public. Instead of selling franchises, he created a “restaurateur” program that rewards managers for excellence, including $10,000 bonuses if they mentor another employee to become a manager. The program cut employee turnover, saving the chain greatly on recruiting and training costs. The same program also created long-term career opportunities for employees while developing top-performing employees into future leaders for the company.

Despite its smash American success, Chipotle has only dipped its toe into international markets. Two Toronto outlets opened in 2008 and 2010. In May 2010, Chipotle opened its first restaurant in London, on Charing Cross Road. The biggest change to the concept came in the packaging, with Chipotle managers quickly realizing they needed new packages with Queen’s English spellings to appeal to British diners. The food remained virtually unchanged.

Taking a decidedly measured approach to international growth, a second UK unit opened in 2011, on London’s famed Baker Street. Paris and Munich have been mentioned by Steve as possible future expansion markets, as the company develops managerial talent in the region.

Despite its strong company culture of social responsibility, Chipotle has nevertheless faced criticism at times for its practices. In December 2010, after an audit of the Minneapolis restaurants by US Immigration and Customs Enforcement, 450 employees were fired for presenting fraudulent citizenship documents, a move that led to labor protests.

In May 2011, Steve’s commencement address at the graduation ceremony of his alma mater, University of Colorado Boulder, was met with protests over the chain’s decision not to join in the Campaign for Fair Foods, which seeks to improve farm-labor conditions. Steve said Chipotle didn’t feel a need to support the cause.