Source | Harvest Capital, Wang Xiaomen

Perhaps Chinese consumers are not very familiar with Chipotle, but it is a company in the restaurant industry that cannot be ignored. Its market value ranks only below McDonald's and Starbucks, making it the third-largest global chain restaurant brand.

Chipotle, short for Chipotle Mexican Grill, was founded in 1991 and went public in 2006. It positions itself as a casual Mexican fast-food chain, with its main products being salads, burritos, rice bowls, and tacos. Its restaurants operate similar to Subway's assembly line.

Looking back at Chipotle's development, 2015 can be seen as a watershed moment for its modernization.

Before 2015, Chipotle's business model was positioned as an upgraded version of Subway. However, in 2015, the company was fined $25 million for food safety issues. After a new CEO took office the same year, the company vigorously developed its digital business, focusing on improving its online sales platform. By actively expanding its online business, Chipotle appeared more composed than other American restaurant chains when the COVID-19 pandemic struck.

Following the COVID-19 pandemic, Chipotle's performance quickly rebounded, with its P/E ratio reaching as high as 166 times in 2020. Its market value approached nearly $80 billion with a P/E ratio of 65 times, while McDonald's and Starbucks had P/E ratios of around 24 times during the same period.

Chipotle's Total Market Value and P/E Ratio Changes from 2016 to July 202207:

Data Source: Company Annual Reports, Compiled by Harvest Capital

Compound Annual Growth Rates (CAGR) of Chipotle's Revenue and Net Profit Since Going Public

Data Source: Company Annual Reports, Compiled by Harvest Capital

Changes in Chipotle's Store Count Since Going Public

Data Source: Company Annual Reports, Compiled by Harvest Capital

Chipotle has maintained continuous growth and steadily enhanced profitability since its listing in 2006. Its net profit growth rate has surpassed its revenue growth rate and store count growth rate. This indicates that while continuously expanding its store count, Chipotle has also been improving store performance. Its stock price has risen from $45 at the time of its IPO to $2905 currently, representing a 65-fold increase over 18 years.

We will dissect the driving factors behind Chipotle's high growth to provide insights and inspiration for the restaurant industry:

- 01 -

Product: Healthy, Delicious, and Affordable

Mass appeal + Simple preparation

1、Healthy, delicious, and affordable:

Since 2000, Americans have been paying more attention to dietary health, especially young people who are increasingly concerned about calorie and nutrient intake. However, organic foods and vegetables in the United States are usually priced higher, making it challenging for low-income young people and students to find healthy and affordable options.

Chipotle promotes a concept of freshness, naturalness, and nutrition, offering products made only with organic ingredients, providing a healthy choice for young people. Unlike Subway, which, though healthy, may lack in taste, Chipotle's burritos and rice bowls meet the taste and texture preferences of young people.

In terms of price, Chipotle's average meal costs around $10, equivalent to the hourly wage of the minimum wage in the United States, giving it a significant price advantage (McDonald's Big Mac is about $6 each, assuming an adult consumes 1.5-2 hamburgers per meal, which corresponds to approximately $9-12 per meal).

Chipotle's Main Menu and Key SKUs

Source of information: Company's official website

Selection of meal types: Burrito, Bowl, Salad, Crispy corn/soft corn/soft flour tortillas

Choice of protein or vegetarian options: Chicken/Steak/Beef chunks/Beef strips/Pork strips/Ground pork and chicken/Tofu (vegetarian option)

Staples: Cilantro-lime brown rice/Cilantro-lime white rice/Black beans/Pinto beans

Toppings/Sauces: Mexican vegetables/Fresh tomato salsa/Red chili sauce/Green chili sauce/Sour cream corn salad/Cheese/Guacamole

Only 53 ingredients can be combined to create over 100 custom meal options.

2、Mass Appeal

Chipotle's main Mexican cuisine has a good mass base in the United States. Moreover, there are many Mexican immigrants in the United States, providing an excellent consumer base.

With the rise of the trend of young people paying more attention to healthy eating after 2000, Chipotle's healthy diet is also deeply favored by young people. Its main consumer groups are students, young white-collar workers, and middle-class office workers. According to company statistics, more than 50% of its consumer groups are post-2000s.

3、Simple Production without Losing Personalization

Chipotle's selected SKUs, such as wraps and rice bowls, are easy to make. Following the assembly line model popularized by Subway in the United States, consumers only need to select four main ingredients – meat, staple food, vegetables, and sauce – to complete a meal. The operation only requires about four people at the counter to complete the production of a meal with simple operations.

However, the simple process does not mean a loss of personalization. Chipotle's products can evolve into hundreds of different SKUs through various combinations by consumers. Compared to the traditional fixed-ordering method of fast food, Chipotle's personalized ordering method better suits the needs of modern consumers (McDonald's significantly enhanced the personalized ordering effect in its restaurants after 2003, greatly improving consumer experience).

Chipotle Meal Preparation Area

Source of information: Company's official website

- 02 -

Embracing Digitization Actively

Digital Marketing, Store Transformation, Cutting-Edge Technology

Performance Changes of Chipotle from 2017 to 2021

Data Source: Company Annual Reports, Compiled by Harvest Capital

1、Digital Marketing

After experiencing food safety issues in 2015, Chipotle replaced its CEO with Niccol, the former CEO of Taco Bell.

After the new CEO took office, the company began to vigorously develop its digital business, focusing on improving its online sales platform. It actively expanded its online business, making Chipotle appear more calm and composed compared to other American restaurant chains when the COVID-19 pandemic struck.

In 2020, the pandemic had an impact on global restaurant companies, but Chipotle was one of the few companies that continued to grow. In 2021, its performance improved significantly. The key reason behind this was the emphasis on online marketing and delivery business.

Chipotle vigorously developed its online ordering business through its mobile app, with revenue from online ordering increasing from 9% before 2016 to 46% in 2021.

Additionally, thanks to the concentration of online traffic, Chipotle carried out various targeted marketing activities for member users, such as collaborating with athletes to share dishes on the app and displaying the calorie values of each dish, continuously enhancing its image as a "healthy" symbol in consumers' minds (many restaurants now mark specific calorie counts on their menus, inspired by Chipotle).

*Social media-friendly, initiated the "lid flip" challenge, viral spread of the activity

Due to the fact that a large portion of its members are post-2000s, Chipotle's healthy image, combined with various marketing activities targeting young people, has a natural propensity for sharing, achieving very good dissemination effects. By 2019, the loyalty program membership had reached 17 million (about 6,500 members per store), while McDonald's loyalty program membership reached about 30 million (about 2,100 members per store). By the end of 2021, Chipotle's membership had reached 24.5 million (with single-store membership increasing to 8,000).

2、Delivery Business and Store Transformation

Online ordering business provided Chipotle with a large number of delivery orders, which was the main reason for its significant revenue and profit growth in 2021. After the pandemic, Chipotle improved its existing store models. The original kitchen area had only one assembly line, which was responsible for both in-store and delivery orders.

Since 2020, consumers' habits of ordering online have gradually formed, even after the pandemic, there are still a large proportion of delivery orders (including drive-to-store pickup). Based on this, the company added an additional assembly line in the back kitchen specifically for delivery and drive-to-store pickup services, and added drive-to-store pickup windows to the store, upgrading to the Chipotlane store model. Among the 215 new stores opened in 2021, 174 were dual assembly line Chipotlane stores, which can contribute an additional 20% in revenue compared to the original store model.

3、Actively Expanding Cutting-Edge Digital Technology

After benefiting from digital transformation, Chipotle continues to invest. In 2021, it launched its first digital kitchen and is currently developing a robot for frying tortilla chips (tortilla chips are one of its very important SKUs). In response to food safety issues, Chipotle has started to trace the origin of all major ingredients using RFID technology.

In April 2022, the company launched its own investment fund, focusing on investing in technology companies related to the restaurant industry.

- 03 -

Conclusion of Chipotle's Success Factors

Chipotle's success lies partly in its correct product selection, choosing categories that are most in line with the preferences of today's young people and are highly standardized and easy to operate.

At the same time, due to its earlier acquisition by McDonald's, although the two ultimately parted ways due to different development philosophies, it cannot be denied that Chipotle was deeply influenced by McDonald's standardization mindset. This has allowed Chipotle to maintain a highly standardized and replicable store model while adhering to its strategy of direct operation.

On the other hand, through digital layout, Chipotle helped itself to rise against the trend during the downturn of the restaurant industry in the pandemic period. This is the core driving force behind Chipotle's rapid recovery and further rapid growth after the pandemic.