The fast food, or quick service restaurant industry (QSR), represents approximately 200,000 restaurants and $155 billion in sales in the U.S. alone, they are one of the largest segments of the food industry (Hoovers, 2011). This segment of the restaurant industry is “highly competitive and fragmented… number, size and strength of competitors vary by region, market and even restaurant. All of these restaurants compete based on a number of factors, including taste, quality, speed of service, price and value, name recognition, restaurant location, customer service and the ambience and condition of each restaurant” (Chipotle, 2010).
The QSR industry is seeing growth due to the fact that today’s society is more strapped for time than ever. According to the American Sociological Review, “more than 50% of American families are dual earner household…multitasking allows parents to accomplish more within a limited amount of time” (Offer & Schneider, 2011). However, with both heads of the house working part-time or full time jobs people have less time to prepare meals and QSRs offer another way for these families to multitask and save time.
In 2011 the QRS industry saw stock values beat the overall restaurant market. Bloomberg U.S. Quick-Service Restaurant Index, gained 13.5 percent while the full service restaurant index dropped by 1 percent (Wolf, 2012).
Competitive Analysis New Entrant Threat While entry into the quick service industry has low barriers (Cambrian Group, 2011) it is highly competitive and has high saturation. Only 40-50% of new entrants will survive their first year and see profits (Paiz et. al., 2011 p.4). While many of players in the QSR industry are franchises, approximately 300,000 (Franchise Direct), Chipotle operates differently. All of their locations are company owned and have relatively low start up costs (“Chipotle Mexican Grill”, 2007). Due to this Chipotle is able to grow their bottom line much quicker than new entrants into the same markets. While others may see low success rate in the first year due to start up costs, Chipotle is able to effectively generate profit and growth quickly. Rivalry
In the sub-category for quick service Mexican restaurants, Chipotle competes with Qdoba, Moe’s Southwest Grill, Baja Fresh, Taco Bell and El Pollo Loco. Mexican quick service accounts for $5 billion of the $20 billion market (Cambrian Group, 2011). At the end of 2010 Taco Bell held the largest market share among Mexican QSRs with 52% of the market and 5,635 locations in the U.S. and 262 locations in 21 foreign countries (Yum! Brands, 2011). Qdoba in contrast holds locations in 42 states for a total of 583 locations (Jack in the Box, 2011). Threat of Substitutions
Chipotle faces 6 major substitutes, McDonald’s, Yum! Brands, Wendy’s/Arby’s Group, Burger King, Jack in the Box (owner of Qdoba), and Doctor’s Associates Inc. (owner of Subway) which occupy 35.5% of the market (Paiz et. al., 2011, p.6). These QSRs offer dine-in, carry-out and delivery services and have been in the market longer than Chipotle (Chipotle, 2010). In addition to this they use a much broader marketing plan which includes, print, radio, and television advertisements which Chipotle does not; relying mainly on radio and billboards (“Burrito Buzz”, 2007).
Chipotle actually “spends less in a year on advertising than McDonald’s Corp. spends in 48 hours” relying mainly on word of mouth (“Burrito Buzz”, 2007). Many of these substitutes have diversified their menus. While Chipotle’s menu is standard in all of their locations others in the industry now offer menu items that focus on consumer preferences. Low carbohydrates, low calorie, and low fat options are showing up more often on menus. Many also emphasize lower-cost, “value meal” menu options, which Chipotle has not yet looked at pursing (Chipotle, 2010). Power of Buyers
The quick service restaurant industry has relatively high price elasticity due to the fact that fast food is not essential to customers and therefore relies heavily on the customer’s choice preferences and disposable income. Changes in customer preferences, general economic conditions, discretionary spending priorities, demographic trends, traffic patterns and the type, number and location of competing restaurants have a moderate effect on the restaurant industry (Chipotle, 2010). One example of customer preferences being a driver in the industry is the “Whole Food-ism Movement” which has put a large focus on organic, antibiotic-free, and non-processed foods (Mansolillo, 2007). Consumers now look for healthier options when eating and an overall healthier lifestyle.
Chipotle has been able to benefit from this movement by carrying on their “Food with Integrity” mission (Chipotle, 2010). Due to economic downturn the strength of the buyers’ power has increased as the industry looks to gain consumers with pricing strategies much like those of McDonald’s “Value Menu” and combination meals even though the cost of commodities have gone up (James, 2010). Customers of QSRs are looking for quality food without high costs. While Chipotle does not have a value menu or offer any type of combination meal much of their success is due to the fact that the customers are willing to pay a higher cost for higher-quality (Chipotle, 2010). Power of Suppliers:
While the Chipotle’s mission is to use naturally raised, sustainable, local and organic products sets the company apart from others in the industry it also creates a larger supplier power when compared with other restaurants in the industry (Cambrian Group, 2011). The pool of suppliers that Chipotle can purchase from is much smaller and thus does not allow for Chipotle to control the prices paid for products. Due to the fact that Chipotle’s purchases are regionalized and in most instances purchased ingredient by ingredient they may experience higher costs in some areas then others. In addition the purchase approach creates the potential for food shortages from suppliers resulting from weather related issues, such as freezes in Mexico and Florida or could lead to temporary spikes in the prices of some ingredients such as tomatoes and avocados (Jennings, 2011). Power of other Stakeholders
There are a number of stakeholders that can affect a company’s profitability. Most companies define who their stakeholders are they typically include customers, employees and shareholder (Enz, 2010). First and foremost government entities, communities, and special interest groups have an impact on the industry as a whole (Wheelen & Hunger, 2010). The restaurant industry can be affected by changes in food safety guidelines, building codes and labor laws just to name a few. Chipotle CEO Steve Ells has also been one of the key individuals that testified to Congress in 2009 to eliminate the use of antibiotics in ranching to try to change current government ranching regulations which in turn could have large affect on the profits of Chipotle and others in the industry (Chipotle Story, n.d.).
Chipotle also understands that their employees are an integral part in creating the environment and culture that the company portrays and a significant stakeholder. The image of Chipotle starts with the people. Due to the high turnover in the fast food industry Chipotle looks for ways to keep quality employees by “empowering, educating, and training to increase internal promotions, cultural sensitivity, and communication skills as well as by providing continuing English language education to all employees who request it” (People Are People Too, n.d). Chipotle has taken steps to appeal to special interest groups that focus on the humane treatment of animals, and eco-friendly processes.
By doing so they have identified a niche market focused on a healthier and more organic approach to quick service food. Being one of the first to focus on such an approach has allowed them to attract a loyal following before their competition. Being one of the first companies of its kind in the fast food industry also means that in order to maintain their current customer base Chipotle must continue to find new ways to set themselves apart from copy cat companies. One of those ways is to ensure that they continue to look for ways to make a positive impact on the environment like the creation of the nation’s first Platinum LEED certified restaurant in Gurnee, IL (Sustainable Design, n.d.). Summary
Chipotle has experienced early success and loyalty because of their unique approach to quick service Mexican food focused on their “Food with Integrity” mission. They have experienced rapid growth and profit even in a period of economic downfall, increases in food costs, and a competitive industry. Moreover Chipotle appeals to society’s desire for a more economically friendly business and a healthier way of living.