Chipotle Mexican Grill, Inc.: “Food With Integrity”
I. Key Problem
What Steven Ells began with a small taqueria in Denver, Colorado in 1993, one may not have foreseen this venture to become the fastest growing restaurant chain in the last decade. By 2006, Ells’ idea made its initial public offering with 535 restaurants throughout the world. Things were going tremendously well for CMG until late afternoon on October 18, 2012 when Ells finished receiving the company’s third quarter results. While data indicated an overall satisfactory outcome, it was the competition from Yum Brands’ Taco Bell and their recent launch of the Cantina Bell menu that would result in what seemed to be the onset of a major problem. Taco Bell had now become a major competitor to Chipotle since the launch of their new Cantina Bell menu allowing them to enter into the fast-casual segment in offering similar ingredients and items as Chipotle had. At the same time CMG paid a significant amount more for their products forcing them to charge a higher price on their menu items. Taco Bell, however, now offered similar items for half the price. The bottom line: competition was the root of this problem. The fact that Chipotle menu prices were higher as compared to that of Taco Bell’s new menu would lead to consumers or normally loyal customers to give the Cantina Bell menu a try. After the launch of the Cantina Bell menu in the summer of 2012, CMG stock significantly declined just after third quarter results were announced. To add insult to injury, Jeff Einhorn, a hedge fund leader, presented at the Value Investors Conference in New York City proclaiming that CMG was an attractive stock for short-sellers because of the considerable competition from Taco Bell. He further stated, “23% of Chipotle customers had already tried Taco Bell’s Cantina Bell menu…and two-thirds of those customers indicated they would return. What’s more, the customers most likely to return to Taco Bell were also those most likely to eat at Chipotle, a dynamic that indicates to me that Chipotle is most at risk of losing its frequent customers.” This message led to CMG’s stock falling by more than 4% within hours of the conclusion of the presentation. The announcement of projected increases in food costs on the part of CMG also contributed to the competition between them and Taco Bell. While Chipotle stood by its belief that it is “Food with Integrity” because of better ingredients, the Cantina Bell menu produced something similar while lowering the cost a customer would have to pay for a meal, therefore, causing further competition between the two. II. Relevant Theory
By looking at the items offered on the Cantina Bell menu versus those on Chipotle’s menu, I determined that they both have a competitive advantage. Chipotle is a premium product offered at a higher price where it reaches a broader market share that is willing to pay more money. On the other hand, Taco Bell’s main strategic course is cost leadership which enables them to reach a broader market share with a lower price for the desired item.
As shown on Example 1 the Competitive Advantage and Economic Value Created are somewhat different between the two companies. Since Chipotle offers a better quality of ingredients, consumers are willing to pay a higher price. As a result, creating a higher Value (V) for a burrito is at the same time creating a greater economic value (Value-Cost.) Meanwhile the economic value created by Taco Bell is smaller since the value of their product is less and consumer’s maximum willingness to pay will be lower. Example 1
Since Yum Brands launching of the new Cantina Bell menu, this new organic ingredient-driven list of selections has been a pretty obvious attempt to compete with fast casual giant Chipotle. This is what has become the major concern for Chipotle...