Chasing Chipotle
The burrito chain has set a torrid pace that few others in the Mexican segment can match.
By Staff -- Restaurants & Institutions, 4/15/2006
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Share price in Chipotle’s initial public stock offering doubled to $44 on the first day of trading in January. Was that a vote of investor confidence in prospects for the Mexican restaurant segment—especially midprice fast-casual concepts—or only recognition of Chipotle’s meteoric growth since Oak Brook, Ill.-based McDonald’s Corp. invested in it in 1998? The segment’s numbers look promising, but they illustrate problems as well as success stories.
According to R&I’s Top 400 Chains research, sales for the total Mexican segment rose 7.4% in 2004. Chicago-based consultancy Technomic Inc. says the greatest growth is from limited-service concepts (up 9% in 2004) rather than full-service chains (up 2%).
Unquestionably, the limited-service numbers have been skewed by the stellar performance of a single concept: Denver-based Chipotle. Its sales of $470.7 million in 2004 were 49% ahead of the previous year. In 2005 it grew another 33% to $627.7 million, nearly doubling in two years.
But is the entire Mexican segment on the rise? Chipotle isn’t alone in posting strong numbers and several chains—such as Atlanta-based Raving Brands’ Moe’s Southwest Grill—are evolving from regional to national market positions, but the category’s overall performance has been uneven.
Taco Bell, by far the largest Mexican quick-service concept with 2005 systemwide sales of approximately $6.3 billion, is on the move after several years of taking a back seat to parent Yum! Brands’ focus on developing its KFC and Pizza Hut concepts. Taco Bell opened 83 new stores in fiscal year 2005 and posted same-store sales growth of 6.5%. The Irvine, Calif.-based chain plans to open 114 new stores in its current fiscal year and 560 by 2010.
Casual Concerns
The Mexican fast-casual segment shows promise with consumers who are drawn to the spicy, fresh fare but it also has encountered difficulties converting opportunity into profit.
“Given the quality we’re finding in [fast-casual] fresh-Mexican chains—with quick-service styles, no tipping, in and out in 30 minutes—that’s a very attractive lifestyle experience for consumers,” says Robert Derrington, managing director and a senior restaurant analyst for Morgan Keegan in Nashville, Tenn. “At Baja Fresh Mexican Grill if you see the quality you get at that price point, it makes you wonder if you need to spend an hour and $12 a person at El Chico or On The Border Mexican Grill & Cantina.”
But Thousand Oaks, Calif.-based Baja Fresh has struggled since Dublin, Ohio-based Wendy’s International acquired it in 2002. Same-store sales declined more than 6% in 2004 and were off 3.7% last year. Wendy’s executives have been under pressure from investors to divest the concept.
Similarly, Carpinteria, Calif.-based CKE Restaurants’ 100-unit La Salsa Fresh Mexican Grill posted a net operating loss of $4.4 million for the 40 weeks ended Nov. 7, 2005, down from a $5.9 million loss for the year-earlier period. Carlsbad, Calif.-based Rubio’s Fresh Mexican Grill reported net income for the 39 weeks ended Sept. 25, 2005, of $2.2 million, compared with nearly $2.8 million a year earlier.
Such performances don’t prevent new chains from emerging. Juan’s Mexicali, a Denver-based chain of quick-casual restaurants started by one of the founders of Einstein Bros. Bagels, serves small and regular-size burritos to accommodate a range of appetites.
Boloco Inspired Burritos, a Boston chain run by the former director of operations for Chipotle in Texas, serves burritos made with Indian and Thai fillings.
Inexpensive Ingredients
Most traditional burrito ingredients—such as beans and rice—are inexpensive, leading to potentially lucrative margins for operators.
Seeing those margins, Moe’s Southwest Grill waded into the growing fast-casual Mexican segment five years ago. Since then, Moe’s has opened 320 franchise stores, says Brian Curin, vice president of marketing for Raving Brands. Moe’s plans to continue that growth: The company has signed franchise agreements for 800 units.
Chipotle, too, has its sights set on large-scale expansion. The company plans to use most of the $124 million picked up at its initial public offering on expansion, including 80 to 90 stores in 2006.
“We would really like to be in Boston and Philadelphia,” says Chipotle spokesman Chris Arnold. He adds that the company recently has entered Detroit and Miami and plans to open two stores in the Raleigh-Durham area soon. But he says about 80% of new Chipotle units are in existing markets.
Restaurant-industry analysts say that one reason for the Mexican fast-casual segment’s success is consumers’ perceptions that the food—often made fresh to order—is healthier than typical QSR fare. And because they perceive items to be of higher quality, consumers are willing to pay more.
Irvine, Calif.-based El Pollo Loco touts its offerings as healthy alternatives to other limited-service products. The company’s signature menu item, citrus-marinated chicken, can be grilled skinless for health-conscious customers, and is served—with steamed vegetables—in a salad or burrito. Ninety-five percent of its locations serve fresh chicken.
Most El Pollo Loco locations operate a drive-thru as well as a dine-in area, in an effort to straddle the boundary between quick service and fast casual.
Other quick-casual Mexican chains are finding the best meat quality in pre-cooked product, prepared with the sous-vide method of cooking.
Chipotle has cooked all its pork and shredded barbacoa beef in a central commissary in Chicago for the past five years. The sealed bags are distributed to Chipotle locations and heated for service. Chipotle used to cook pork and shredded beef overnight at each store—it was the manager’s final task before leaving for the evening, Arnold says. But as the chain expands, commissary preparation makes more sense. Chipotle still cooks its conventional beef and chicken daily at individual restaurants.
Juan’s Mexicali prepares all meats using the sous-vide method, a system that allows the restaurant chain more control over the quality of its meats, says Tom Wilscam, co-owner of the Denver-based chain. (For more on sous vide, see “Seal of Approval,” on p. 38.)
“The labor market is very difficult. Kids who used to work for us can work for $15 to $20 per hour at home on a computer,” he says. “We wanted to develop something where the restaurants wouldn’t have to hire a chef. If employees can open a bag, they’re the chefs.”
Full-Service’s Forte
Despite faster growth in the limited-service Mexican segment, full-service Mexican chains also are growing. Their operators say that they still have a niche among consumers who want fajitas and margaritas in a relaxed environment. And they say that as many consumers are driven to find a good dining experience as they are to save cash.
Executives at Dallas-based Cozymel’s Mexican Grill don’t see the rise of Chipotle and other fast-casual chains as threats to full-service operations such as theirs.
“What guests want is a vacation from the rest of their day. If you’re going to Chipotle, you’re getting your food, eating for a while and getting back to work. There’s nothing like a vacation about it,” says Jack Baum, CEO of Food, Friends and Co., which acquired Cozymel’s from Brinker International in 2003.
“When people come to Cozymel’s maybe they don’t get a one-week vacation, but hopefully they get a one-hour vacation.”
Online, Not in Line
One of the best indicators of Chipotle’s success is also one of the chain’s problems—long lines to get a burrito.
“Management says that they have videotaped as many as 50 people walking away from a single Chipotle restaurant within an hour’s time, frustrated by the long line,” restaurant industry analyst Mark Kalinowski, New York City-based analyst for The Buckingham Research Group, wrote about the burrito chain.
To counter that problem, Chipotle has implemented a new online ordering system, allowing customers to skip the line and order via computer or fax machine.
Its DSL (“Don’t Stand in Line”) system allows a customer to move a computer cursor over an image of the Chipotle ingredient line and click “yes” or “no” buttons over each item.
Guests must call the restaurant 10 minutes before pickup to confirm their order, and then they can pick up without waiting. Many locations also offer parking spots reserved for DSL customers.
Because preordered burritos are made in the restaurant’s kitchen instead of on Chipotle’s front ingredient line, the DSL system relieves pressure on Chipotle’s customer lines, says company spokesman Chris Arnold.
Blossoming Burritos
New regional limited-service brands continue to expand the Mexican segment. Here are three of many with distinctive styles and aggressive plans.
BOLOCO INSPIRED BURRITOS
This Boston-based chain has 13 outlets, after recently opening franchise locations in Indianapolis, Charlotte, N.C., and San Diego. By the end of the year, the company hopes to have 24 stores in operation, and more on the way, says Michael Harder, Boloco president and chief operating officer. “Our goal is to become a national player” in the burrito segment, Harder says.
The chain’s take on the burrito is different than most. Only its Classic Burrito is filled with the typical rice, beans, meat, cheese and salsa. Boloco offers unusual flavor profiles for its menu items: The Teriyaki burrito combines teriyaki sauce, caramelized onions, broccoli, carrots and rice in a whole-wheat tortilla. The Bangkok includes peanut sauce, Asian slaw, cucumbers and rice wrapped in a flour tortilla.
BURRITOVILLE
This New York City-based chain has 17 locations in Connecticut, New Jersey and New York.
Fresh tortillas are pressed daily and burritos are served with short-grain brown rice.
Specialties include the Mystical Frisco Chicken Burrito, which puts standard burrito toppings on shredded chicken simmered in tomatillo salsa. Other offerings include the Mega Soy Burrito, which combines tempeh, soy sour cream, soy cheese, brown rice, red beans and guacamole.
TIJUANA FLATS
This Orlando, Fla.-based chain currently has 39 locations in Florida, Alabama, Georgia, Indiana, Kentucky and Virginia.
The restaurants serve burritos, quesadillas, salads, enchiladas, flautas and a children’s menu called Little Lizards. Each restaurant also boasts a “hot bar” of specialty hot sauces.
Burritos are made with regular or blackened chicken, beef and beans, and come in three sizes: Huge Megajuana, Large Tijuana or regular.
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