Value Chain Analysis: Chipotle Mexican Grill

A value chain analysis allows the firm to understand the parts of its operations that create value and those that do not. Primary activities are involved with a product’s physical creation, a product’s sale and distribution to buyers, the product’s service after the sale. Support activities provide the necessary support for the primary activities to take place. A value chain shows how the product moves from raw material stage to the final customer. Each activity examined is rated as equivalent, superior, or inferior, relative to competitor’s capabilities (Ireland, R).

Primary Activities

Inbound Logistics CMG’s (Chipotle Mexican Grill) supply chain is linked closely to the company’s “Food with Integrity” mission statement. The company has

22 independently owned and operated distribution centers with serve restaurants located in a specific geographic region. Chipotle is working with about 50 local, family-owned farms to provide romaine lettuce, green bell peppers, jalapeno peppers, red onions, oregano, and tomatoes to restaurant locations around the country. In California, the company also sources locally grown lemons and avocados. “The produce generally comes from within about 250 miles (up to 350) of Chipotle's distribution centers, with nearly 70 percent coming from within 150 miles, and one-third of the produce arriving from within 50 miles. In America, produce on average travels 1500 miles from where it is produced to where it eaten. Chipotle began its locally grown produce program in 2008, committing to serve 25% of at least one produce item in each of its markets when seasonally available, and increased that commitment to 35% in 2009. In 2010 Chipotle continued to increase their efforts to 50%. With CMG served about 5 million pounds of produce from local farms.” (Arnold, Chris).
Operations At all Chipotle restaurants customers order what type of food they want from burritos, tacos, salads, and other offerings by going through a line. All the food is assembled in front of the customers with the ingredients that they want. Ells stated that he wanted Chipotle to be like a dinner party and have an open kitchen rather than have food made in the back (Subramanian, Ram). This not only adds value to many customers in terms of choosing their ingredients, but they get to know exactly what is going into their food and how it is being handled. Coupled with this are fewer screw-ups with the order leading to a happy customer. There are also many arguments that the speed is improved as employees don’t have to run back and forth and don’t have to type inputs into a machine.
Outbound Logistics In February of 2014 CMG was planning on investing $10 million to revamp its mobile application wanting to add functions that would allow the customer to send mobile payments among other improvements. “The primary benefits are customer convenience and allowing people to engage with us in another way,” said Chipotle spokesman Chris Arnold in an e-mail. “We’ll also be able to push offers or other messages to app users, which could certainly be a useful retention tool.” (Wong, Venessa). The Chipotle app currently offers mobile payment so the efforts did succeed in that sense. That being said the current version of the app has a lower rating on the app store than previous versions (Chipotle Ordering).

Marketing and Sales “I was always quite rebellious and did things my own way,” said Ells. Stephen Ells increased margins and perception by raising price and quality. Mexican food had always been cheap, but now it was different in a good way. The customer could watch the cook create their meal in front of them with the ingredients they selected. Instead of competing in a competing in a mature quick service industry featuring companies such as McDonald’s and KFC Ells opted to compete in the much less mature fast casual industry (Subramanian, Ram). “The fast casual segment saw an 8% rise in the guest count in the twelve month period ended in November 2013, whereas traffic count was flat for quick service restaurants. This consumer shift is primarily due to the fact that people with higher disposable income are inclined more towards quality and hygienic food.” (How Industry). This shows that the healthier food and good branding image is adding value to the customer and causing a clear shift in traffic. Moreover Chipotle creates an atmosphere that is family friendly for kids, parents, and friends going out for a meal. Quick service restaurants provide seating, but lack cleanliness, comfortable seating, and good decoration to create the casual dining experience that Chipotle does.
CMG’s marketing budget increased by about 20-25% years from 2009-2011. That being said that money has not been spent on advertising as one might expect, but on building a brand through various loyalty programs. CMG hired Mark Crumpacker as its first chief marketing officer in 2009. One of the first decisions he made was not to use an outside advertising agency, and also not to rely on traditional media such as television. One loyalty program that Crumpacker and CMG implemented was called “Farm Team.” It quizzed users on sustainability and humane food sourcing and rewarded them when they shared the knowledge with others via social media. Its basic premise was that this was not going to advertise a product, but was going to help build Chipotle’s brand as the “Food with Integrity” restaurant (Subramanian, Ram).
Service One of the main reasons customers flock to Chipotle is because of their sustainability practices with food and with solar panels. Although the service of continuing to practice sustainability does not give physical value to the product or customer in the immediate future in can enhance the overall mission/vision of the company which is one the services that people are paying a premium for by going to Chipotle.

Support Activities
Procurement One of the main selling points of Chipotle’s brand is its “Food with Integrity” mission statement formalized in 2001. After reading an article of an Iowa farmer who raised pigs without antibiotics or confining them; Ells took it upon himself to learn more about concentrated animal feeding operations (CAFOs). After visiting several CAFOs Ells decided to use open range suppliers. By 2000 Chipotle had open range pork suppliers, chicken in 2002, and naturally beef soon after. “In 2012 100% of CMG’s pork, 80% of its’ chicken, and 50% of its beef were classified as naturally raised meat. 40% of CMG’s beans were organically grown, and all of the sour cream and cheese and from cows that were not given recombinant bovine growth hormone.” (Subramanian, Ram).
Human Resource Management Chipotle is renowned for jobs that pay livable wages, rather than the welfare-eligible pay most fast food workers earn.

Chipotle quickly moves workers from starting pay levels into higher paying management jobs. Starting pay for “crew,” the people who make the burritos, averages about $10.50 an hour ($21,000 a year) with benefits such as meals, insurance, and 401k (Chipotle: Careers). Chipotle claims that 98% of its managers, started as crew. Another program Chipotle run is the Restaurateur program in which a person looks over a restaurant or several restaurants. Chris Arnold, Director of Public Relations for Chipotle said that before this program whenever they promoted a manager they were taking them out of the environment in which they had the most impact (Cultivates Quality Restaurant Managers). In other words, Chipotle created this program to allow for more company hiring from within without moving employees away from where they have a proven success record. This strategy of high wages and hiring from within is gives employees incentive to give their

best.
Technological Development In 2009 CMG entered into a partnership with an energy company agreeing to install solar panels in its restaurants. The aim was to be the largest producer of solar energy in the restaurant industry in the next five years. In speaking about this topic Ells stressed how that not only was CMG’s effort focused on providing food from sustainable resources, but also use that same kind of thinking for all areas of business. Ells believes that sustainability creates value for the consumer even if it is not directly related to the industry. CMG wanted to reduce traditional energy consumption between 11am and 7pm reducing the company’s carbon footprint. CMG first obtained LEED certification (Leadership in Energy and Environmental Design) by using on site wind turbines and cisterns for rainwater harvesting. A Chipotle restaurant in Illinois was the first restaurant to obtain the highest level of certification (Subramanian, Ram).
Firm Infrastructure By 1998 Ells had opened 16 Chipotle restaurants. The company quickly grew to more than 500 restaurants primarily using a $360 million investment from McDonald’s. In 2005 McDonald’s sold its equity for 1.5 billion. According to Ells they parted ways because they aim for a different kind of experience and culture altogether although they did learn from each other. The great brand image and quality ingredients led to a successful, yet slowly implemented increase in prices from 2011 to the third quarter of 2012. Contrary to many players in the restaurant industry CMG has elected not to franchise and owns their stores (Subramanian, Ram).

How does Chipotle Stack Up?
Inbound Logistics at CMG is superior relative to competition. Competitors may bring food to more restaurants, but Chipotle brings food from local farmers to distribution centers in a sustainable manner that no other competitor can claim (Arnold, Chris). Operations at Chipotle are equivalent. Yes, the making of the product in front of the customer adds value to the consumer, but the many competitors do this already. The one major selling point to having it made in front of the consumer is having the product made exactly as the consumer wants it all the time. Outbound Logistics is equivalent to competitors. Most competitors have an app to order ahead of time and most, like Chipotle, lack the full customizability that they would get by going through the line (Chipotle Ordering). Marketing and Sales is superior as Chipotle. While quick serve and fast casual restaurants create sales Chipotle has created a brand that has allowed them to charge high prices relative to competition and remain successful (Subramanian, Ram). For Service Chipotle is superior. Their mission is sustainability. They want you to buy their product over others for the purpose of building a sustainable world and favoring sustainable products and by doing so the customer enable Chipotle to continue servicing the sustainability mission (Subramanian, Ram).
Procurement at Chipotle is superior. By continuing to purchase organic and from open range farms at rates no other restaurant can claim they are out pacing competition (Subramanian, Ram). Human Resource Management at Chipotle is superior. Many competitors’ employees view their jobs as dead end with no opportunity for advancement, but the opposite is true at Chipotle who hires most managers from within the firm impact (Cultivates Quality Restaurant Managers). Technological Development is superior. By incorporating solar panels onto the restaurants Ells is showing that he wants to be sustainable in all business practices whereas many competitors fail to be sustainable for even food (Subramanian, Ram). Firm Infrastructure at Chipotle is superior as they are not using the franchise model like competitors. This means they can raise wages of the team worker freely. In addition to that the bulk of their profits will not be from franchise fees, but from actual sales (How Industry)

Core Competencies
Core competences make a disproportionate contribution to ultimate customer value, or to the efficiency with which value is derived, and provide a basis for entering new markets.

One of Chipotles major core competences is their ability to serve high quality food at a reasonable price. The company has a mission of “Food with Integrity.” Most of their vegetables and dairy products are organically and locally grown, which provides a lot of value to the customers nowadays (Subramanian, Ram). As for the meat products, “100% of CMG’s pork, 80% of its chicken and, 50% of its beef were classified as naturally raised beef” (Subramanian, Ram). Customers value these fresh and organic ingredients so much that they are willing to pay a little bit more over competitors like Taco Bell or Qdoba. The idea of going organic and natural has been the new trend with retail chains like Whole Foods and Trader Joe’s (Subramanian, Ram). These organic and natural products tend to be more expensive and customers realize this and are willing to pay for it. Chipotle recognized this trend of going organic and natural and took advantage immediately. With their emphasis on organic and natural products, I think there is the potential for new market entry into retail chains like Whole Foods or Trader Joe’s with products that are

premade.
The second core competence of Chipotle is having superior human resource management. As mentioned earlier, 98% of Chipotle’s managers started as crew members. Chipotle promotes its employees in a short period of time (Cultivates Quality Restaurant Managers). This has created incentive for employees to perform well, which promotes Chipotle’s high quality standard. Employees will work harder knowing that they can be promoted if their work is adequate. It is rare to have a system like Chipotle’s in the restaurant industry, and is very difficult to imitate. Most employees in the industry are paid minimum wage or less, and may never see a promotion. Having such high skilled, motivated employees in the restaurant industry is very rare and valuable. Service is extremely important to customer satisfaction; if it’s not up to par, the restaurant will suffer.
The third core competence of Chipotle is their marketing. They’ve marketed themselves prioritizing being healthy and high quality. Chipotle’s marketing has helped establish their high quality image and reputation. People associate Chipotle with high quality and freshness. It is very rare to have that reputation and is extremely valuable. Without that reputation, Chipotle wouldn’t nearly be as successful as they are. Chipotle relies heavily on their reputation and believe that a “word of mouth” marketing strategy is the best strategy to employ (Subramanian, Ram). Chipotle is appealing to virtually everyone, with that being said, they seem to hone in on the Millenial generation when it comes to advertising. The Millenial generation has taken a particular liking to the idea of freshness and healthier options. They also seem to like that chipotle doesn’t advertise on T.V. because it makes it more down to earth and authentic.

Business Level Strategy
Firms can choose from five business-level strategies: Cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership and differentiation. The business-level strategy that a firm chooses is a function of the basis for competitive advantage that it seeks to achieve or maintain and the breadth of the target market it wishes to serve. Chipotle has adopted a focused differentiation strategy as its major business-level strategy. A focused differentiation strategy is an action plan the firm develops to produce goods or services that a narrow group of customers perceive as being unique in ways that are important to them.
Using a focused differentiation strategy, Chipotle targets a niche market of consumers who are looking for healthier, customizable product differentiation among high quality ingredients. This strategy is successfully implemented and supported by its primary and supportive actives. Chipotle products are premium priced, and compete with other fast casual Mexican food chains, such as Qdoba and Taco Bell. Chipotle believes that even though organic ingredients raises the cost of their food, customers are still willing to pay extra for a healthier option. There are three differentiating factors that Chipotle focuses on: high quality ingredients, outstanding service, and strict corporate control over the Chipotle brand name.
Chipotle has changed the way people think about and eat fast food. “Food with integrity is our commitment to finding the very best ingredients raised with respect for the animals, the environment and the farmers. It means serving the very best sustainably raised food possible with an eye to great taste, great nutrition and great value” (Subramanian, Ram). Chipotle positions itself as a provider of higher quality food by using fresh, gourmet and increasing organic ingredients successfully differentiates their products from competitors and meets the consumer demand for healthier food option. “Restaurants served a limited menu of burritos, tacos, burrito bowls and salads, all prepared with fresh ingredient” (Subramanian, Ram). Chipotle’s focused menu allows the firm to carefully examine where each of its ingredients come from and select the best suppliers for its customers. “Chipotle plans to purchase more than 20 million pounds of locally grown produce in its restaurants this year” (Business Wire) and Chipotle is currently the only national restaurant with a significant commitment to using local produce on a large scale.
Chipotle also provides great customer experience. Chipotle has revolutionized the fast food experience by offering quick meal options and complying with the healthy food trend. “Given its higher than average food costs, Chipotle focused on operational efficiency. The restaurant economized on labor by keeping their menu options limited and by using an assembly line system for food preparation” (Subramanian, Ram). Chipotle further seeks to enhance its customers’ experience by attracting and retaining quality staff by offering attractive long-term career opportunities.
Chipotle has been carefully building its brand image by using a non-traditional marketing strategy. Chipotle has target millennial for its primary customer segment. “Chipotle has found a ‘Sweet spot’ with millennials by solidifying its reputation for freshness and offering a healthier fare than its competitors. The brand also gains reputation by shying away from traditional media… Millennials view the lack of TV as more authentic” (Subramanian, Ram).