Sample Chapter

Chipotle Effect

Beginnings

Chipotle may not have fired the first shot in the fast casual revolution, but the fresh Mexican chain is certainly the most famous of the founding fathers. Launched by Steve Ells in a space near the University of Denver in 1993, the restaurant grew quickly, open-ing its second location in 1995 and continuing its expansion first with a loan from Ells’s father and later with a $1.8 million Small Business Administration loan. Ells, who had no business back- ground, had clearly tapped into an unmet need among diners for healthful, fresh Mexican cuisine, and the Chipotle brand began to take shape: sustainably sourced ingredients, a simple menu, and impeccable quality.

In 1999, Ells opened his first restaurants outside of Colorado, but it was interest from McDonald’s Corporation that was the magic bullet for the company’s growth. The fast-food titan first approached Ells in 1997 and became a minority investor a year later. Contrary to popular belief, McDonald’s did not buy Chipotle but did become its largest investor, sinking more than $360 million into the chain over seven years and helping Chipotle make use of its proven distribution system. By 2005 the chain had more than 500 company-owned restaurants, and in January of 2006 it made its initial public stock offering (IPO), the stock doubling in value on the first day of trading.

In 2006, McDonald’s divested itself of its Chipotle holdings, earning about $1.5 billion on its investment. Today, the company has restaurants in 38 states and Canada, was the third-fastest-grow- ing restaurant chain in 2010 according to Nation’s Restaurant News, and was ranked as the best fast-food Mexican chain in 2011 by Consumer Reports. Most recently, the company hired award-winning chef Nate Appleman to create new menu items and spearhead the creation of a new fast casual Asian concept restaurant, ShopHouse Southeast Asian Kitchen, which opened in Washington, D.C., in the summer of 2011.

In my humble opinion, Chipotle was simply in the right place at the right time with the right product. But this does not mean that their success has been due to pure luck. You can have the right place, time, and product going for you, but you have to know how to leverage them. True, the company was not the first “Fresh Mex” concept, the first burrito player, or the first creative brand builder. But they knew how to grab the gold when the opportunity came. Having watched the mistakes of their predecessors, they were able to develop an in-store and external brand that tapped into what their customers cared about: freshness, quality, sustainability, a sense of humor, and above all, a sense that they were breaking out of the “slightly more upscale fast food” mold of chains like La Salsa and Baja Fresh.

Among other things, Chipotle’s success is another nail in the coffin of the “first mover advantage.” There have been many companies and people in history who have come late to the dance and yet prevailed as the leader in their industry. It’s not always the first mover who winds up “owning” the category; another player who enters the market later and takes advantage of the pioneer’s mistakes often rises to the top. Some examples of this are the following:

  • Nikola Tesla, who, despite his genius, lost out to Thomas Edison in developing the first mass-market electrical utility
  • Ohioan Elisha Gray, who was working on the telephone at the same time as Scotsman Alexander Graham Bell but got no credit for the invention
  • New Zealander Richard Pearse, who actually flew a powered aircraft nine months before Orville and Wilbur Wright gained global fame for their flight at Kitty Hawk, North Carolina
  • Flamboyant pianist Joseph “Jelly Roll” Morton, who may have been the single figure most responsible for creating the music known today as jazz but was completely eclipsed as a pioneer by Duke Ellington and Louis Armstrong.

Want more examples? Here are a few:

  • Facebook completely dominates social networking over its predecessor, MySpace.
  • Walgreens owns the drugstore market over the much older A&P.
  • Sonic has pushed venerable A&W to a niche player.
  • Apple’s iPhone nearly destroyed the previously dominant Motorola to the point where Motorola’s mobile business is now owned by Google.
  • Starbucks threatened the survival of the corner coffee shop.
  • Barack Obama was in the right place at the right time with his use of social media to win a presidency.

Don’t Pioneer, Perfect

Chipotle has not been the great innovator in the fast casual business. There are several concepts that look better, feel better, and feed consumers better. They did not invent the concept of the fresh food assembly line. They were not the first to introduce sustainably and transparency-sourced ingredients or to apply an industrial design ethos that made the primary colors and hard plastic of the fast-food design palette obsolete. Rarely do pioneers also produce high quality; they are too busy trying to troubleshoot their new ideas to pay attention to fit, finish, and customer experience in order to produce excellence. Apple might be the exception; they managed to both pioneer the definitive online music business model with iTunes while introducing a product that has still not been surpassed. They did the same with the iPhone, defining the smart phone segment.

Chipotle is not the Apple of the restaurant industry. However, their growth has been well nigh unstoppable. There are several reasons for this, the most important of which is that being the first mover in a market space does not automatically confer success. While there is some advantage to be in had being the first player in a market niche (or in creating that niche), doing so more often leaves the first mover quite vulnerable.

Opening your business is, in effect, laying all your cards on the table. (It is possible to be clandestine, but it is rare; few companies are as adept at secrecy as Apple, which has managed to change its industry numerous times while giving its competitors relatively little to work with.) This allows potential competitors to reverse-engineer your company and in doing so build a business model with all of the strengths and none of the weaknesses of the pioneering company. In a sense, early players in a space become de facto test beds for second-wave entrepreneurs who learn from the errors of their predecessors.

Also, consider the nature of first-wave and second-wave business creators. First movers tend to be pure entrepreneurs—visionaries long on grand ideas and passion and often short on business savvy. Second movers, however, tend to be the opposite. Having watched the first movers and seen the market potential of an idea, they typically approach their emergence into the niche with greater planning, ruthless strategy, and deeper pockets than the first wave. This dynamic often allows second-wave start-ups to benefit from their opponents’ mistakes, meet needs that are not being met, and use a given product or service as a launching pad for their own improved or cheaper iteration. In short, being first in a niche is like sticking a target on your back.

Some entrepreneurs have beaten more talented adversaries by simply filing patents first. Others have benefited from the complacency of first movers who thought they could not be toppled or who failed to keep up with the times. Other first-mover companies have done themselves in by failing to exhibit the disciplined thought and action described by Jim Collins in his bestseller Good to Great. By creating confusing new menus, launching doomed brand extensions or simply by getting away from what their customers want in an ill-advised pursuit of the new, they left market share on the table for the taking.

By building a credible eco-brand, focusing on a small menu of fresh, top-quality food, and leveraging social media (to name a few of its smart moves), Chipotle has set itself apart from some- what generic rivals such as Baja Fresh and Wahoo’s while taking the best ideas from their older competitors and polishing them into a truly distinctive brand with a hip, high-tech, personal feel that none of the other companies share.

Endangered Species?

Let’s set preconceptions about Chipotle’s originality or luck aside. For better or worse, the company plays a critical role in the evolution of fast casual. To date, this niche has helped to redefine what dining out is from the ground up. Perhaps the signal change is the decoupling of quality and speed. Prior to the creation of the fast casual segment, the relationship between food quality and speed of service was inverse: the faster you got your food, the lower the quality had to be.

No more. Thanks to Chipotle and other chains that consciously broadcast the quality and freshness of their ingredients, quality and speed are no longer related. On the lowest end of the quality scale remain the traditional fast-food restaurants like Burger King and Taco Bell, where quality remains secondary to speed. But no longer do customers presume that going to a QSR chain like Qdoba or Pei Wei means getting food that’s worse than they might get at a traditional casual-dining restaurant. Speed and quality can go together. That perception, which has solidified into fact, has transformed the restaurant industry.

Still, in 25 years we may look back on this as the Golden Age of the restaurant industry. Will this appear to be a period when innovation was abundant and entrepreneurs were bursting at the seams with creativity? Will we view the first dozen years of the twenty-first century as a time when consumer understanding, technology, and lifestyles were calibrated perfectly for the evolution of a new food and service lifestyle for America?

Due to the mammoth successes of chains like Chipotle, Panera, Five Guys, Red Mango,, Firehouse Subs, and Jimmy John’s, fast casual is expanding at an amazing rate—one we have to watch closely. Things are changing so quickly that concepts for the next hot Fro-Yo, Better Burger, or Fresh Mex restaurant are becoming irrelevant nearly as quickly as they can be built out. Choice may be at the top of the list for the discerning consumer, but value, quality, experience, and the “Fast Casual X-Factor” are what keep a brand relevant.

“Fast Casual X-Factor is the combination of the perfect product, the perfect experience and the perfect match to the consumer.”

This presents a big challenge to today’s QSR brands and the new ones breaking in. This includes fast-casual extensions from some of the biggest brands in the restaurant business. Red Robin rolled out Burger Works, its entry into the crowded gourmet burger space, in November 2011. Leveraging its well-known brand, Red Robin will sell a simpler and lower-priced menu of 1/3-pound burgers while also offering beer and wine. Diners will also have a build- your-own-burger option with the choice of beef or chicken patty and a variety of toppings. Burger Works burger will range from $4.49 to $5.99, considerably less than the same burger at the Red Robin par- ent stores.

IHOP, the granddaddy of Sunday morning sit-down pancake feed restaurants, popped the cork on IHOP Express in San Diego’s Gaslamp District after extensive market testing. IHOP Express offers counter service and a limited menu designed for to-go customers. Innovative menu options include the Cup O’ Pancakes—served in a cup and topped with strawberry-banana, double blueberry, or caramel apple toppings. Dishes unique to IHOP Express include corn-cake tacos with meat, shredded cheese and fresh salsa (obviously designed for the Southern California audience), and lower-calorie options from the chain’s Simple & Fit menu.

Even fast-food player Wendy’s is making a foray into QSR as it tries to remake its brand identity to occupy a space near the higher end of the fast-food firmament. Its first salvo into QSR is the “W” burger, a high-quality burger at a lower price point than most of the major fast-casual burger players. This is a direct play to grab market share from Five Guys and other quality burger builders. Clearly, the established restaurant brands, watching their revenues fall during the recession, are waking up to the potential of fast casual.

Technomic recently stated that the independent restaurant operator could in fact be endangered, and I agree. The fact that celebrity chefs and celebrity restaurateurs are jumping into the multi-unit business, bringing their TV-tested or Michelin-starred brands with them, represents a critical sea change for fast casual. Brands are becoming routine, easily shared, and easily replicated. Consumers get it, too, and for better or worse they are demanding better food and better experiences.