Chipotle vs. Illegal Pete’s Restaurants Research Paper

Responding to Dynamic Business Challenges-Strategically & Operationally

Chipotle responds to internal challenges by upgrading its systems

Chipotle is famous for its foods such as burritos, tacos, burrito bowls and salads. In the last few years, the restaurant chain has undergone rapid expansion, effectively necessitating the growth of their staff as well. Typical of any expanding business entity, Chipotle experienced internal challenges especially concerning management of the growing volumes of transactions. This growth of transactions was especially as a result of expansion to new markets such as Canada and Europe. Besides the transactions, the company experienced complexities and growing expenses associated with management of large numbers of restaurant stores¹.

Amidst all the challenges of growth and expansion, Chipotle managed to deploy an E-business suit greatly boosting the enterprise resource planning capabilities of the company. One of the main ways in which the deployment of this technology has helped is through boosting the scalability and flexibility in the company’s operations in the quest to expand to the rest of the US. For instance, Chipotle is now handling between 40,000- 50,000 invoices per month with the majority of that –approximately 80% utilizing electronic data interchange.

Through the system, it is now possible for the company’s management to accurately monitor over 3000 project related activities of the company at any given time. Through the management system, the company is better able to manage distributed assets around the globe which number more than 1000².

One of the most important aspects that the new system offers the company’s management is that there is little need for intervention of the IT team in the running of the business’ reporting process, a major time saving aspect. Besides, there was also a complete upgrade with AT&T and Pricewaterhouse Coopers on the completion of hosting applications.

The adoption of technology to deal with challenges described above was only one of the aspects of a multifaceted approach to ensure the company continued operations during a challenging economic period. It is particularly important because the changes implemented represented long term strategic positioning that put the company in a better position strategically and operationally.

Chipotle expands amid divestment from McDonald’s

In 1998, McDonald’s undertook an initial minority investment in Chipotle, offering much needed assistance in the form of cash. Three years later McDonald’s had become the biggest investors proving to be critical in the chain’s quest for expansion. In less than seven years, Chipotle’s restaurants had grown from 16 at time of McDonald’s entry to 500 restaurants in 2005. Though the company offered a successful Initial Public Offering in 2006, McDonald’s decided to end its investment in the Chipotle in order to concentrate on its core business.

McDonald’s divestment took out over 1.5 billion dollars, a sizable sum in terms of investment. In fact, the management of Chipotle acknowledged soon after McDonald’s exit that they were likely to face difficulties in transitioning from the services that McDonald’s provided as they sought to enter a new phase that needed modified arrangements especially with existing suppliers and service providers. The management further highlighted the important role McDonald’s played in securing services such as insurance, banking, vendor relationships and employee benefit plans.

There were fears also among management that the profits may take a hit after special pricing deals like that between McDonald’s and Coca-Cola faced the prospect of ending thanks to McDonald’s exit³.

Despite the divestment however, Chipotle has been able to do well in the New York Stock exchange. In 2009, chipotle was named one of the fastest growing restaurants in the US ranking eighth when past year sales in the country are taken into account. In 2010, Chipotle ranked even better coming third in the US. Additionally, Consumer Reports named the company the best Mexican Food chain in 2001 with approximately 750,000 customers served every day in all it branches.

The exit of McDonald’s no doubt did leave Chipotle in a somewhat shaky financial and management position, exposing it to dynamic and strategic challenges. For instance, the company admitted that the incremental costs of employees’ benefits, insurance, information technology, insurance and beverages owing to the McDonald’s exit amounted to $1-$2 million from the year 2007⁴. However, the company was able to cope with the withdrawal registering the developments described above and returning a profit in the subsequent years. In fact, the company’s success has been phenomenal with growth including opening of new outlets in Canada and Europe.

The expansion itself has been a challenge given the fact that Chipotle has little experience in the areas they have sought to open new outlets. According to the company’s management, McDonald’s exit has given the management much needed autonomy in chatting the company’s future especially now that they are responsible for securing their own management, financial and legal services. According to the company’s management, Chipotle has been able to review the existing agreements while drafting new ones according to their own terms, an important step in addressing the operational challenges described above⁵.

Operates and makes profits amid justice and immigration investigations

One of the challenges that the company has had to deal with in the recent past is an investigation and audit from the US Immigration and Customs Enforcement. The ICE carried out an audit on the company’s Minneapolis restaurants in 2010 where some employees were exposed as having been using fraudulent work documents. There were other audits in on the company’s restaurants in Virginia as well as Washington DC.

In response to the above discovery by authorities perhaps, Chipotle management reacted by laying off over 450 employees in the audited Minneapolis restaurants and over 40 from the latter, with considerable protest from groups from the local community. While layoffs due to illegalities in the hiring process are normal in business, their disruptive effects to the smooth running of business operations are well known. The attention and costs associated with legal measures is likely to be a major disruption in business especially concerning strategic business operations.

However, Chipotle was able to overcome it without much effect to its operations in the cities involved and the rest of the outlets. The financial performance of the company the company is perhaps the best proof of the company’s operational tenacity concerning challenges such as the above. In 2010, the company’s operating revenue totaled $1.8 billion with a net income of $178 million. The above is clear proof of the sound management in place at Chipotle to guard against operational challenges⁶.

Illegal Pete expands amid the credit crunch

The financial crisis that culminated to the 2008 economic recession adversely affected both small and big businesses. The fact that credit was not flowing smoothly exposed many led to the collapse of many businesses especially small and medium enterprises. Illegal Pete’s was one of the small businesses that got caught up the financial crisis. Given its small size, expansion is not easy because of the inability of its investors to inject enough capital for the expansion. Already, the costs or running its operations were high and expansion was almost not in the plans.

However On October 2009, Illegal Pete succeeded in opening a new restaurant branch in a former Pizza parlor at the intersection of East Evans Avenue and Williams Street in Boulder. Boosted by the Obama administration policies to unlock flow of credit to small businesses, the restaurant’s management did not waste time in opening a new outlet⁷.

By the own admission of Pete Turner, it had been a challenge to achieve the above milestone considering everybody in the country is going through difficult phase. The opening of the restaurant was a clear show of the successful operational measures in place at the company to overcome such business challenges.

Entrepreneurship in Action

Chipotle’s exemplary entrepreneurial success

Chipotle has a long history in the restaurant business. However, the entrepreneurial spirit behind the founders of the company is one of the most striking points of its unique history. Founder Steve Ells who attended the Culinary Institute of America started off as a cook in San Francisco before opening the first outlet in Denver through a loan from his father. Ells showed entrepreneurial courage by his venture and his investment paid off with the restaurant exceeding sales targets by over 90% in its first month of operation⁸.

The opening of two more restaurants by Ells using the business’s cash flow and credit from financial institutions paid off when McDonald’s decided to invest in the chain in 1998. It took an entrepreneurial acumen for Ells to discover the popularity of taquerías and San Francisco burritos in the Mission District to come up with the Chipotle idea. His father’s entry into the business after 1995 extended the entrepreneurial spirit making Chipotle a McDonald’s target. The fact that Chipotle traces its roots to humble beginnings by a founder motivated by success highlights the very entrepreneur spirit that still drives the company today.

Illegal Pete’s slow but commendable entrepreneurship

Illegal Pete too has an entrepreneurial background typical of small businesses. Pete Turner created all the recipes used in all Burrito illegal Pete restaurants⁹. Furthermore, he had to travel to Mexico City to secure dining chairs, a fete clearly displaying the entrepreneurial spirit that still drives the business. Pete has chosen to keep control of his stores instead of venturing into franchising.

Conclusion

The two cases above are both unique in their own ways. Chipotle is a big restaurant chain boasting hundreds of outlets while Illegal Pete on the other hand is a small business with less than 50 employees and a handful of outlets¹⁰. Both business face different situation concerning economies of scale and business regulations. There is therefore bound to be some skewed comparison when analyzing both entities. There are few avenues through which to compare both of them. Their approaches to investment are different, though they deal in the same line of business.

Chipotle is the older of the two having been in the business for close to twenty years while Illegal Pete has been in the business for slightly over fifteen years. Despite the differences in the time of founding, Ells of Chipotle seems to take bigger risks compared to Turner of Illegal Pete. Both businesses were set up at the time when the US economy was recording significant growth. However, Chipotle seems to have taken advantage of the well performing economy to establish itself faster than Illegal Pete.

Illegal Pete seems to take a cautious approach which is any objective analyst’s opinion is not paying many dividends. Illegal Pete appears to completely be against the idea of opening up to franchise business approach. While Chipotle was lucky to attract McDonald’s investment, Illegal Pete is unlikely to get the same suitor given the prevailing economic climate that makes it hard to access credit. It is important to note that Chipotle, like Illegal Pete owns most of the outlets in its name safe for a few franchise arrangements. However one cannot credit McDonald’s investment alone as the sole factor in Chipotle’s runaway success. Corporate culture and the entrepreneurial approach of the proprietors determine to great extent success a business records.

Despite the difficulties businesses are facing in accessing credit, it is perhaps safe to conclude that Illegal Pete is its own victim when it comes to getting loans for business. It is easier for a business of Chipotle’s size to access credit based on its size operations and financial returns than a business Illegal Pete’s status. For instance, Illegal Pete‘s annual revenue totals to slightly over $2.5 million while that of Chipotle tops $190 million.

Creditors are therefore more likely to extend loans to the latter than the former based on the above financial performance. In other words, Chipotle easily gains a creditor’s confidence making it easy for it to access the financial resources for its expansion.

There is no way to correctly determine which approach as employed by two businesses is correct. On one hand, a cautious approach cushions investors especially in this economic climate. Additionally, it helps preserve the corporate culture. It is one of the factors holding Turner from venturing to franchise business. However, adoption of the cautious approach limits growth and the revenue one makes out of the business.

An open approach on the other hand presents opportunities to gain considerably from the investment. It also opens the business to big risks especially if expansion is facilitated by credit. However, considering free market principles, it is better when businesses take risks like in Chipotle’s case. Remaining cagey in business like in Illegal Pete’s case is likely to derail growth, effectively delaying realization of return on investment.

The analysis of the two themes above exposes quite a bit of both businesses’ weaknesses. Both entities are vulnerable to the cyclical economic changes like the 2008 financial crisis and recession. However, the negative effects affected Illegal Pete more than Chipotle owing to their size of operations and financial wellbeing. Illegal Pete had difficulty accessing credit for expansion while Chipotle was able to open new outlets internationally without much struggle. Besides expansion, Chipotle was able to deploy new systems for their business to enhance service delivery. In terms of operations and the challenges that come along, it is fair to conclude that a considerably big business is likely to overcome them easily compared to a small business.

Recommendations

On the backdrop of the above analysis, the two companies should consider the following recommendations

• Given the failure many expansion plans in the past, Chipotle must take carefully consider their expansion program to ensure sound return on investiments.
• Illegal Pete owners must shed the cautious attitude and adopt an aggressive strategy that will in the long run help the company to grow and compete on the same level with Chipotle.
• Illegal Pete should consider overhauling their marketing approaches especially concerning online advertisement. There is a scarce presence of the brand on the internet compared to its competitors.
• Both companies should consider opening to large scale franchise business arrangements as they will provide new venues of cash besides exposing them to a wider market, especially on the case of illegal Pete.
• Chipotle should fasten the pace of drafting their own agreements are probably consider ending third party engagements with McDonalds in order to cement their position in the market.
• Both companies should consider diversifying into other food businesses to expand beyond their traditional reach as a way of diversifying revenue streams for long-term success.
• It is important for Illegal Pete to expand their business beyond Colorado to areas with potential to increase sales.

Presentation

• In terms of Responding to Dynamic Business Challenges-Strategically & Operationally, Chipotle seems to be well versed than Illegal Pete. For instance they showed few signs of struggle during McDonald’s exit and also during the investigation by the ICE.
• Illegal Pete on the other hand has struggled to expand beyond Colorado. Despite showing no operational challenges, the company has faced other challenges in securing credit which has greatly affected its development unlike Chipotle.
• Chipotle provides the typical entrepreneurial example that every entrepreneur must copy especially in taking advantage of the market opportunities as well as taking risks.
• Illegal Pete on the other hand is the perfect of example of the business entities keen on retaining their basic values while taking minimal risks. They seem to be in a comfort zone.
• In general, both approaches by the companied analyzed ca appeal to different investors. Furthermore, they are both acceptable. The only difference is that Chipotle’s approach is risky but likely to pay dividends while Illegal Pete’s approach is cautious but with minimal benefits.

Bibliography

Alsever, Jennifer. “Illegal Pete’s: Cash vs. control eats at eateries eyeing franchises.” Denver Post. 2004. Web.

Anderson, Mark. “Chipotle to serve up Asian eatery.” Sacramento Business Journal, 2011. Web.

Chapman, Richard. “Illegal Pete’s breaks out the burritos.”Univerity of Denver, 2009. Web.

Debaise, Colleen. “Starting Chipotle From Scratch.”The Wall Street Journal, 2009. Web.

Hot Stocked. “Chipotle Mexican Grill: Company Description.” Hot Stocked, 2010. Web.

Jones, Robin. “Chipotle Mexican Grill in Cerritos.” Daily News, 2006. Web.

Mallia, Joseph. “‘Green’ cleaning at Chipotle.” Newsday.com, , 2010. Web.

Manta. “About Illegal Pete’s.” Manta, 2011. Web.

“McDonald’s plans to reduce ownership of Chipotle Mexican Grill.” Allbusiness.com, 2006. Web.

Oracle. “Chipotle Mexican Grill, Inc. Upgrades Financials to Support Rapid Growth.” Oracle Customer Snapshot, 2010. Web.

Footnotes

1. Mark, Anderson, “Chipotle to serve up Asian eatery,” Sacramento Business Journal. Web.
2. Oracle, “Chipotle Mexican Grill, Inc. Upgrades Financials to Support Rapid Growth,” Oracle Customer Snapshot. Web.
3. Robin, Jones, “Chipotle Mexican Grill in Cerritos,” Daily News. Web.
4. Hot Stocked, “Chipotle Mexican Grill: Company Description,” Hot Stocked. Web.
5. Colleen, Debaise, “Starting Chipotle From Scratch,”The Wall Street Journal. Web.
6. Joseph, Mallia, “‘Green’ cleaning at Chipotle,” Newsday.com. Web.
7. Jennifer, Alsever, “Illegal Pete’s: Cash vs. control eats at eateries eyeing franchises,” Denver Post. Web.
8. “McDonald’s plans to reduce ownership of Chipotle Mexican Grill,” Allbusiness.com. Web.
9. Richard, Chapman, “Illegal Pete’s breaks out the burritos,”Univerity of Denver. Web.
10. Manta, “About Illegal Pete’s,” Manta. Web.