Keeping Investors Informed
Introduction
This is a Case Analysis of Chipotle Mexican Grill (CMG), referring to an episode in 2012, when their 2011 financial results were published and investor confidence was undermined by concerns over competition, planned price increases and an apparent slowdown in outlet growth. These concerns were fuelled by claims by a share market leader, that a key competitor had an obvious edge. In this analysis, I explore the event, the likely causes and outcomes.

I see this case as a delicate balancing act between business idealism and investor confidence. Chipotle Mexican Grill is a Colorado-based fast food chain.

CMG was founded in the 1990s by Steven Ell, in Colorado. By 1998 he had opened 16 restaurants. A $60 million investment by McDonalds fast food chain allowed CMG to grown to a chain. In 2006, the company became publicly listed. By June 2012, the company owned 1316 restaurants, including four in Canada, three in the United Kingdom, one in France and the rest in the USA. The restaurants were all company-owned, unlike CMG’s competitors whose larger chains were funded to a large degree by franchising.

In 2009, Montgomery F Moran was appointed co-CEO. The company decided to use ethically produced meats and organic food supplies and to reduce their overheads and their carbon footprint by using solar panels, and explored sustainable transportation. The company’s marketing and advertising was altered to target consumers of ethical products. They launched loyalty programs and replaced TV advertising with on-line, cinema and live presentations on their sustainable methods.

CMG successfully countered the higher food costs with operational efficiencies. The main product of CMG was the ‘fast casual’ meal; dine in or takeaway food, with restaurant preparation.

After the company published its 2011 results their stocks slumped significantly. Wariness of increased prices, competitor threats and slowing down of same-store sales created tension in the share market, requiring explanation. The principals of CMG, Steven Ells and Montgomery F Moran, had to respond.

The three key issues for investors were:
a slowdown in the number of stores – this could have been put in context for investors and not seen as a danger.
CMG’s announcement that it would be putting prices up. Once again a communications problem, with a pre-emptive announcement causing concern.
increasing competition from very similar chains – a valid concern, exacerbated by comments from an analyst and misinformed by some basic assumptions.

I think the main assumption, by investors and observers, was the similarity between CMG and its competitors, with a lack of clarity about the business models of the three companies. The two competitors were largely funded by franchising, while CMG owned all of their restaurants. Also, Taco Bell is a quick service chain, like McDonalds, while CMG and Qdoba offer fast casual food, involving more preparation.

I feel that CMG’s marketing didn’t help. The loyalty programs focused on the consumers, but did not build their public brand and did not inform shareholders and share market analysts. So, they were vulnerable to the bottom-line vision of Jeff Einhorn and a pool of investors who did not grasp the difference between CMG and Taco Bell. The slowdown in the rate of new restaurants could be explained by the different business model, where the chain is entirely company-owned and expansion is not funded by franchising. 

I believe that CMG handled the matter well. They immediately (and wisely) backed off the price increases for the short term. The company was in a stable financial state, so they would weather the storm. They knew it would take until the next year’s results for investor confidence to fully restore. The tactic of paring back operational costs to sustain the higher food costs shows a healthy respect for the bottom line and investor returns. 

I am not sure that the alternative solutions would have been entirely palatable to the CMG principals. One alternative would be to slow down the move to sustainability and use lower cost, but acceptable, ingredients. The firm could still maintain its ethical image through move to solar power and more sustainable transportation. Another option would be to revert to traditional advertising to raise brand awareness.

I would endorse the use of sustainable energy and transportation. I would also look at a smaller restaurant model to keep overheads down. These all support the company’s sustainable image but serve in practical way to contain costs.

Their ‘no gimmicks’ marketing/advertising campaign needs to be extended to promote the CMG brand publicly. Investors still need value for their investment by way of public confidence in the brand. I think these measures will maintain operational and supply chain efficiency overall. 

I would add a few more items to the menu, consider a delivery option and focus on its fast and efficient service. I would also recommend expanding the overseas operation. These are all practical business changes, but they are all newsworthy and would help boost CMG’s brand and promote an image of progress for CMG.

Taco Bell, and its Cantina Bell range, and Qdoba are the key competitors. Taco Bell really serves the quick service market and is a very popular fast food taco chain. It had 5679 restaurants in 2011, 27 percent of which were company owned with the rest owned by franchisees. Taco Bell offered a quick service menu and their product was cheaper than that of CMG, at a consistent $5.99 per taco. While the product did not have the ethical underpinning of CMG’s, the Cantina Bell menu was added to attract the more discerning consumer.

Qdoba is also a very successful chain. Founded in Colorado, in 1995, it was acquired by the Jack-in-the Box chain in 2003 and the brand expanded quickly. In 2012 it had 600 restaurants, 350 franchisee-owned and the remaining are company-owned.

The decision makers are the principals, Steven Ells and Montgomery F Moran. However, their decisions are also governed by their investors. It is Ells and Moran’s responsibility to keep their investors informed and on-side with future planning.

Conclusion
The 2011 results showed that the company was in a stable financial position, easily capable of paying off any debts from cash held management and in a strong position for future growth. In light of this, I imagine the share market mistrust would have resolved with the next year’s results. The unique nature of the company’s sourcing and marketing would have become more familiar to the investors and the deferred decision on pricing would have allayed the fears of CMG being priced out of the market. I see the company in a position of steady growth for the next 5 years at least. The sustainable and ethical nature of CMG will match public awareness and will meet increasing public support in the following years.