Chipotle: A Quest for Dominance

By: Larry Zhang, Senior Editor

 

“Let’s go to Chipotle!” is a phrase often heard by many Americans looking to grab a tasty burrito or burrito bowl. But what exactly has contributed to the widespread success of Chipotle, particularly with its dominant market share? And what factors allow Chipotle to continue to maintain its food ascendancy? When looking at Chipotle Mexican Grill, a fast-casual eatery in the restaurant industry of the tertiary (service) sector, it is critical to note how the characteristics, personality, disposable income, demographics, and geographical location of its target consumers are influenced by two main factors: its nature of market competitiveness and production details within this industry and sector.

The competitive nature of fast-food and fast-casual businesses in the restaurant industry is crucial to understanding why the concept of Chipotle is so successful. Restaurants like Chipotle can maintain a competitive edge over competitors by offering a wide variety of products, such that consumers aren’t lost to substitute restaurants. For example, Chipotle’s decision to offer salads and burrito bowls, in addition to burritos and tacos, makes them much more appealing to health-conscious consumers (who are largely a part of its target buyers). With this, Chipotle doesn’t have to lose out to other fast-casual restaurants, such as Panera Bread or Moe’s Southwest Grill.

In addition, product differentiation and special rewards have increased, and will continue to increase, Chipotle’s market presence. Rewards and specials such as “dress up in a Halloween costume for a free burrito” inspire brand loyalty, appealing to those who value guest interaction as part of the dining experience. And because the restaurant industry is so competitive with respect to price, location, and food quality/accessibility, marketing is another factor determining competitiveness. Chipotle’s marketing campaigns have hit the nail on the head by stressing its natural, organic, and authentic ingredients, with pieces of Mexican-American and other literature printed on its bags as part of its “Cultivating Thought” campaign. This appeals to consumers who also value other parts of the “Chipotle experience,” especially those interested in the environment, sustainability, and literature.

Furthermore, Chipotle’s production details set it apart from competitors. If it wants to continue to increase market share, it should also continue to raise the quality bar by highlighting and offering these higher quality ingredients, which include meats from “humanely raised” animals (such as pigs allowed to roam freely), 100% natural flavors, non-GMO crops, and local produce, which it serves more of than any other U.S. restaurant business. Because these ingredients are often more expensive due to higher quality, the difficulty of material acquisition is high, but such is reflected by a greater price. Also, Chipotle should expand beyond the U.S., Canada, France, Germany, and the U.K to countries with buyers of similar average disposable incomes in major urban areas, such as Australia or China.

Currency risk exposure also plays a large role, as global currency fluctuations can have a tremendous impact on profit gains and losses. For example, if U.S.-based Chipotle makes 20 million in Euros with their France and Germany locations, their profits may waver drastically depending on current exchange rates. Because share value and profits are on the line, international companies like Chipotle should monitor the changes and could also enter into an exchange rate agreement with a forward contract if they want to increase profit and market share.

Delivery issues are not highly problematic, though, as Chipotle’s locally sourced ingredients should correspond to greater expedience in transportation times and shipping costs, both of which contribute to output efficiency. However, elasticity of pricing is also an important concept worth recognizing. It is estimated that if the average fast-food/fast-casual restaurant raised prices by 40%, quantity demanded would drop 33%, leading to an elasticity of demand at .833. Since Chipotle is relatively inelastic, it should raise prices by as much as possible to maximize market share.

And last but not least, the relatively lackluster performance of Chipotle’s competitors allows for Chipotle to maintain its image of dominance within the market. Moe’s, similar to Chipotle, only offers about 500 locations (compared to Chipotle’s almost 2,000); Baja Fresh Mexican Grills offers only about 200. Because Chipotle fits its niche so well, that of high quality, fast-casual Mexican cuisine, it offers more to the health-conscious consumer than Taco Bell (fast-food), and more to the price-conscious consumer than say, Olive Garden (casual dining). For these reasons, Chipotle will continue its domination of the fast-casual market.