How They Started Page 15

  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.

  Fan-antics and other un-marketing

  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.”

  Under the Golden Arches

  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.

  Leaving McDonald’s behind

  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.

  Growth without franchising

  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.

  Testing the waters overseas

  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.

  Confronting controversies

  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.

  The “healthy” positioning of Chipotle’s food has also come under fire. The Center for Science in the Public Interest has pointed out that with over 1,000 calories, a giant Chipotle burrito is essentially two meals’ worth of food. But the negative flak Chipotle has received has made no dent in public enthusiasm for the chain’s cuisine.

  Where are they now?

  By August 2011, Chipotle’s stock had grown by more than 500 percent since its IPO in 2006, to nearly $290 a share. The restaurants serve about 800,000 customers per day and take in an average of about $2 million apiece. The company saw more than 10 consecutive years of double-digit growth in comparable-store sales that ended only with the 2008 recession, and by early 2012 it had recovered to see six consecutive quarters of positive same-store sales growth. In 2011, Chipotle ranked #54 on Fortune magazine’s list of the 100 fastest-growing companies. In 2010, Steve’s own pay topped $14 million in cash and stock.

  As Chipotle’s success grew, Steve became more involved in philanthropy around his pet cause: sustainable, organic food. Over the last couple of years, the company gave over $2 million to organizations including The Nature Conservancy, Jamie Oliver’s Food Revolution, Family Farmed.org, and the Niman Ranch Scholarship Fund. The Chipotle Cultivate Foundation was established in 2011 to continue this work.

  Rather than putting energy into a big, international rollout of Chipotle, the company has focused on creating a second fast-casual concept that could duplicate Chipotle’s American success. ShopHouse Southeast Asian Kitchen offers Thai, Vietnamese and Malaysian cuisine, while employing Chipotle’s fresh-and-natural ethos and production-line delivery methods.

  The ShopHouse name was registered in early 2011, and the first restaurant opened in September 2011 in Washington, DC. The name came from inspiration Steve found from trips abroad, eating in Asian shophouses, a style of family business in which the owners operate a business on the ground floor of a two-story building and live upstairs. The staple menu items are “bowls” and Vietnamese-style baguette sandwiches known as bahn mi, seasoned with a choice of mild or spicy curry sauce or a tamarind vinaigrette. As at Chipotle, customers can customize their order as they move down the service line.

  “I always believed that the Chipotle model would work well with a variety of different cuisines,” Steve said at the announcement of ShopHouse. “Chipotle’s success is not necessarily about burritos and tacos, but rather about serving great, sustainably raised food that is delicious, affordable, and convenient.”

  Gatorade

  Making liquid gold out of dehydration

  Founders: Robert Cade, Dana Shires, Harry James Free and Alejandro de Quesada

  Age of founders: 37 (Robert)

  Background: Medicine

  Founded in: 1965

  Headquarters: Chicago, Illinois

  Business type: Sports drink

  Gatorade is now a PepsiCo “mega brand” generating $7 billion in annual sales for the drinks giant; but it wasn’t always the case. Spin back to the 1984–85 NFL season. There were high expectations for the 2012 Super Bowl-winning New York Giants that year too. But a third of the way into their schedule, the Giants stood at a mediocre 3-3 record. Then a curious thing happened. After beating their archrival the Washington Redskins, the Giants’ nose guard Jim Burt picked up the team’s cooler of Gatorade as the game clock expired and poured it over head coach Bill Parcells.

  Fans, teammates and media were shocked. Most saw it as a sign of disrespect. In fact, it was just a bit of playful revenge on Burt’s part after Parcells had chided him all week that he would struggle against the Redskins’ offensive line. But it was also intended as a celebration of the team’s success.

  Luckily for Burt, Parcells had a sense of humor and smiled as he was showered with the energy drink. And when the Giants won again the following week, Burt persuaded teammate Harry Carson to join him in another Gatorade bath. Because Parcells was known for being quite superstitious, the dunks continued. And the Giants had thus initiated a celebration that defied the traditional boundaries of coach and player. Little did they know then what an impact it would have on Gatorade and the wider world of sports.

  Sports drinks overshadowing sport

  The following season, as the Giants stormed to their eventual Super Bowl win, the media followed the unique tradition of soaking coach Parcells in a “Gatorade bath.” Suddenly a sports drink was overshadowing their wins. Games were being watched just for that moment when the cooler was tipped over Parcells’s head.

  The tradition soon spread across professional and amateur sports alike. There it was, at the end of every broadcast game, a Gatorade-branded cooler hefted over the coach’s head. And so in perhaps the most remarkable example of viral advertising in corporate history, what began as a little-known sports drink developed on a tiny budget in its creators’ spare time grew into a dominant global brand with a name synonymous with success.

  The Gatorade story has its roots in the 1960s, when the University of Florida freshman football squad was having a tough time. In August 1965, 25 of the first-year Gators were admitted to the university’s hospital with dehydration and heat exhaustion. In fact, this was a nationwide problem, as late-summer heat claimed the lives of a number of young football players. Dewayne Douglas, an assistant coach for the Gators, mentioned his concerns to his friend Dr. Dana Shires, a research fellow at the University of Florida who worked under 37-year-old associate professor of medicine Dr. Robert Cade.

  Douglas spoke to Dana about his team’s troubles. Even those who weren’t becoming ill were suffering. Some tried to rehydrate by drinking lots of water, but were experiencing stomach cramps. Those who consumed too much salt got leg cramps. A desperate Douglas asked if Robert and his team could look into why so many of his players were suffering from heat-related illnesses.

  As a specialist in kidney disease, Robert had a lot of experience in mixing rehydration solutions, and though he had other priorities at the time, he agreed to investigate the matter. Joining Robert and Dana were fellow researchers Dr. Harry James Free and Dr. Alejandro de Quesada, the latter having recently arrived from Cuba with just $5 to his name. To the four of them, Douglas’s
request was intriguing for the riddle that it posed; not one of them dreamed they would get rich from their little side project.

  Sweat and tears

  Robert and Dana began by focusing their attention on the composition of sweat. Not much was known about it at the time, but after several months of research Robert and his team determined that the players were losing electrolytes and carbohydrates that weren’t being properly replenished. Using these findings, they then spent $43 developing a beverage containing sodium and potassium that would move through the body quickly to help re-balance the players’ carbohydrate and electrolyte levels. To make it tolerable to drink, the doctors squeezed 20 lemons into the concoction, on Robert’s wife’s recommendation.

  But developing the drink was in some ways the easy part. Next the team had to convince the Gators’ head coach and athletic department to let them test it on the players. They faced a prevailing attitude of “tough it out” in those days. Many teams didn’t even provide water on the sidelines, instead believing that dehydration would toughen up their players.

  Joining Robert and Dana were fellow researchers Dr. Harry James Free and Dr. Alejandro de Quesada, the latter having recently arrived from Cuba with just $5 to his name.

  Thankfully Gators’ coach Ray Graves didn’t subscribe to this school of thought, having endured it himself as a player two decades prior. Graves didn’t understand the science Robert and his team pitched to him, but he agreed to try it nevertheless.

  With the coach’s blessing, Robert and his team recruited two freshmen to be their guinea pigs. After their two-hour practice sessions, they would accompany Robert back to the lab where the researchers took blood and urine samples, recorded body temperatures and analyzed sweat wrung from the players’ gloves. In return, Robert took the players out for a steak dinner—the only major development cost Robert incurred, as everything else was done in the university lab.