KEL979
January 5, 2017
©2017 by the Kellogg School of Management at Northwestern University. This case was prepared by Greg Merkley
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RUSSELL WALKER AND GREG MERKLEY
Chipotle Mexican Grill: Food with
Integrity?
By any measure, Chipotle Mexican Grill was a success story in the restaurant business. It grew
from one location in 1993 to over 2,000 locations by 2016 and essentially created the fast-casual
dining category. One analyst called it “probably the best restaurant brand created in 10 or 15
years.”
1
Its stock appreciated more than 1,000% in the ten years following its 2006 IPO.
In January 2015 the company was lauded for delivering on its promise of “food with integrity”
when it took pork off its menu for six months until it could ensure a supply of humanely raised
meat. Then, in the second half of the year, after more than 20 years without a major reported food
safety incident, Chipotle was revealed as the source of multiple outbreaks of illness from norovirus,
salmonella, and E. coli that sickened nearly 600 people in 13 states. The company closed stores,
spent several months under investigation by the U.S. Centers for Disease Control and Prevention
(CDC) and other health organizations, and faced a criminal investigation in connection with the
incidents.
2
After a much-publicized closing of all of its stores on February 8, 2016, and numerous
changes to its food sourcing and preparation practices, Chipotle tried to win back customers with
dramatically increased advertising and free food promotions.
However, on April 26 the chain announced its rst-ever quarterly loss as a public company.
Same-store sales for the rst quarter were 29.7% lower than in the previous year. Operating margins
fell from 27.5% to 6.8% over the same period, and the company’s share price was down 41% from
its summer 2015 high.
What happened to Chipotle, and more importantly, could it be xed?
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Fast Casual Dining
Chipotle was considered a fast casual restaurant. The denition of fast casual dining was uid,
but one essential ingredient was price—fast casual restaurants averaged $9 to $13 per receipt,
versus $5 for fast food. In addition, a fast casual restaurant did not offer full table service and
generally prepared food in full view of customers. It offered higher-quality food than at a fast food
restaurant, with fewer frozen or processed ingredients. This prole meant fast casual restaurants
competed against both fast food and full-service restaurants.
The popularity of fast casual dining in the United States had soared over the past decade; its
sales had grown by 550% from 1999 to 2014, a growth rate ten times that of fast food restaurants
(see Figure 1).
Figure 1: Fast Casual and Fast Food Sales Growth
Source: Roberto A. Ferdman, “The Chipotle Eect: Why America Is Obsessed with Fast Casual Food,” Washington Post, February
2, 2015, https://www.washingtonpost.com/news/wonk/wp/2015/02/02/the-chipotle-eect-why-america-is-obsessed-with-fast-
casual-food.
The fast casual dining segment was fragmented and highly competitive. Panera Bread Co.
was the segment leader, and Chipotle was number two in 2014 with a 17% value share.
3
Price
competition was not a major factor for Chipotle: customers perceived value in its atmosphere,
quick service, and high-quality ingredients. During the post-2008 recession, Chipotle gained
business from consumers trading down from more costly dining options and retained many of
those customers even after the market began to rebound.
4
Chipotle Background
Steve Ells, a classically trained chef, opened the rst Chipotle restaurant in 1993 in Denver,
Colorado. Within one month, the store was selling more than 1,000 burritos per day. Ells added
ve more locations in the Denver area in the next three years. In 1998 McDonald’s Corporation
purchased a minority stake in what was then a 14-store chain, and the next year purchased majority
control of the company. By this time, Chipotle had 37 stores, and McDonald’s continued to invest
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in the concept to grow its store base. In 2006 McDonald’s spun off Chipotle in an IPO on the New
York Stock Exchange. As of March 31, 2016, there were 2,066 Chipotle stores worldwide, the vast
majority of which were in the United States.
Ells said: “When I created Chipotle in 1993, I had a very simple idea: Offer a simple menu
of great food prepared fresh each day, using many of the same cooking techniques as gourmet
restaurants. Then serve the food quickly, in a cool atmosphere. It was food that I wanted and
thought others would like too. We’ve never strayed from that original idea. The critics raved and
customers began lining up at my tiny burrito joint. Since then, we’ve opened a few more.”
5
Chipotle’s business model was dened by ve elements: a simple menu; high-quality fresh
ingredients; fast, personalized food; no franchises; and committed employees.
Simple Menu
Chipotle offered only burritos, bowls (essentially a burrito served in a bowl rather than
wrapped in a tortilla), tacos, and salads. The price of each item was based on the choice of meat (or
vegetarian option). There was no extra charge for additional elements, which included rice, beans,
four types of salsa, sour cream, cheese, and lettuce. In total, each store used 64 main ingredients.
6
High-Quality Fresh Ingredients
In 2001 the company adopted the slogan “food with integrity” to describe its approach to
sourcing and preparing ingredients. Chipotle prepared all food on-site from raw ingredients, which
were responsibly sourced from producers that used sustainable, humane practices. It screened
potential suppliers for compliance with the company’s standards for animal care and sustainable
farming.
Chipotle had about 100 suppliers, most of them small- to mid-sized regional companies, not
large national rms. It also sourced ingredients from local farms (within 350 miles of a given
restaurant), but these supplied no more than 12% of its fresh produce in 2015.
7
In most cases the company did not purchase products directly from suppliers. Once suppliers
were approved, they sold to third-party distributors purchasing on behalf of Chipotle. Purchased
goods were taken to 24 independently owned and operated regional distribution centers and then
delivered to Chipotle stores for preparation.
In 2013 Chipotle became the rst major American chain to identify genetically modied
ingredients on its menu. In 2015 it went one step further and announced it would use only non-
GMO foods.
Sourcing meat became a problem as the company grew. In 2013 Chipotle began serving
“conventionally raised” beef because there was not enough antibiotic- and hormone-free beef
available. Then, in January 2015, it removed pork carnitas from the menu in 600 stores when one
of its suppliers violated Chipotle’s standards. Replacing the supplier proved challenging—it took
more than six months to nd a supplier that raised pigs to Chipotle’s standards—but the company
was lauded for its commitment to humanely raised pork.
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Despite its high-quality ingredients, Chipotle was criticized for offering food high in calories
and fat. For example, its chicken burrito (with black beans, rice, cheese, and salsa) contained nearly
1,000 calories and 12 grams of saturated fat,
8
equivalent to two Big Macs from McDonald’s.
9
Fast, Personalized Food
Chipotle offered a personalized service model. Customers chose a base for their meal (burrito,
burrito bowl, tacos, or salad) and then selected their choice of meat, rice, beans, salsa, and other
toppings as their meal was prepared in an assembly-line style in front of them.
No Franchises
All Chipotle restaurants were company-owned. During the period of McDonald’s ownership,
the company experimented with franchising in eight locations, but all were later repurchased.
Ownership gave Chipotle total control over how the business was executed in each store.
Committed Employees
In 2016 nearly 60,000 people worked in Chipotle restaurants, most of them relatively
inexperienced and low-paid hourly workers. Employees were paid above-market rates and offered
incentives for performance. They also received two days of paid sick leave each year, a generous
benet by industry standards. As a result, Chipotle employee turnover was lower than the industry
average.
10
Food Safety in the United States
In the United States, numerous safety protocols had been designed to prevent food-borne
illnesses. For example, the U.S. Department of Agriculture developed Hazard Analysis and Critical
Control Point (HACCP), “a management system in which food safety is addressed through the
analysis and control of biological, chemical, and physical hazards from raw material production,
procurement, and handling, to manufacturing, distribution, and consumption of the nished
product.”
11
The system was voluntary, but McDonald’s and other large-scale food producers
incorporated the principles and practices into their operations (and their suppliers’ operations) in
order to reduce the risk of food poisoning by E. coli, salmonella, norovirus, and other pathogens.
Escherichia coli, also known as E. coli, commonly was found in the lower intestine of animals. It
could be transmitted by water used to irrigate crops, or by manure that was not properly treated.
Produce that was hard to clean and eaten raw, such as lettuce, tomatoes, and cilantro, was at
high risk for E. coli contamination. Cooking and properly sanitizing killed E. coli, but restaurants
and food producers combined multiple approaches, including washing hands, preventing cross-
contamination between food items, storing food at proper temperatures, and maintaining adequate
cooking temperatures.
There were many different kinds of salmonella bacteria, which caused food poisoning in
over one million Americans each year. Food—most commonly poultry, beef, eggs, and milk—
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could be contaminated with the bacteria during food processing or handling. A common cause
of contamination was food handlers who did not wash their hands with soap after using the
toilet. Preventive measures included refrigeration; cleaning food preparation surfaces; avoiding
cross-contamination of cooked and raw food; fully cooking ground beef, eggs, and poultry; and
pasteurizing milk.
The highly contagious—and common—norovirus sickened millions of people in the United
States every year and was the leading cause of illness from contaminated foods.
12
It was transmitted
by an infected person or contaminated food, water, or surfaces, so the best way to prevent it was
by washing hands properly and frequently and keeping sick workers away from food-processing
areas. Chipotle established protocols to prevent norovirus incidents in its stores after an outbreak
sickened 500 of its customers in Ohio in 2008.
Chipotle’s Food Safety Problems in 2015–16
Chipotle’s public food safety problems began in August 2015 when salmonella from tomatoes
sickened more than 60 people at 28 Chipotle restaurants in Minnesota and Wisconsin. That same
month, 82 customers and 17 employees fell ill with norovirus infections at a Chipotle restaurant in
Simi Valley, California.
The big blow came in October when 22 customers became sick from E. coli at eight of its locations
in Oregon and Washington. All 43 of the region’s stores were closed voluntarily on October 30 due
to what co-CEO Ells called “an abundance of caution.”
13
Shares of Chipotle fell 2.5% on the rst
trading day after the store closings.
Chipotle cooperated with state and federal health ofcials as they tried to identify the origins of
the E. coli strain that caused the outbreak. The Oregon Public Health Division suspected vegetables
rather than meat. “We’ve looked at every food item there, including meat, and it seems like the
common denominator is produce.”
14
Some experts said companies, such as Chipotle, that source fresh produce from small farmers
may be more vulnerable to foodborne illnesses. “A company like McDonald’s tends to work with
large-scale suppliers that have resources of their own to do the types of assessments [that can detect
dangerous pathogens]. . . . But if you’re working with small, independent farmers, it requires a lot
of effort to validate them.”
15
However, other experts pointed out that because some of Chipotle’s
produce was sourced within 350 miles of its stores, outbreaks would tend to be regional, rather
than national, in scope, and thus be smaller and more contained.
16
Chipotle’s CFO said: “We like the local program, we think it’s important, but with what’s just
happened we have to make sure food safety is absolutely our highest priority. If it’s testing and
safety versus taking a step backward on local, we would do that and hope it would be temporary.”
17
An independent expert said, “They were paying attention to [selling food that is unprocessed,
antibiotic- and GMO-free, and local], but they weren’t paying attention to microbial safety.”
18
In response to the outbreak, the company worked with health ofcials to improve its food
handling procedures. It deep-cleaned and sanitized not only the closed stores but all of its
restaurants nationwide. It tested food, preparation surfaces, and equipment in all of its stores and
found no evidence of E. coli. It replaced all ingredients in the closed stores and tested all fresh
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produce, raw meat, cheese, and sour cream prior to restocking the stores. It hired two food safety
consulting rms to “assess and improve upon” its “already high standards for food safety.”
19
On
November 10 the company reopened all of its stores in Oregon and Washington.
Early in December, the CDC updated its original count of Chipotle-linked E. coli victims to 52.
It also began investigating ve new cases of E. coli potentially linked to Chipotle. On December 4,
Chipotle warned investors that the E. coli outbreak could cause fourth quarter same-store sales to
decrease 11% and prots 26%.
20
Separately, illnesses linked to Chipotle were reported in seven more states across the United
States.
21
That same month at least 80 students (later increased to 140) were sickened by norovirus
linked to a Chipotle restaurant in Boston. The Boston Public Health Commission said the norovirus
incidents did not appear to be related to E. coli incidents in Oregon and Washington. One food
expert said, “I can’t think of a situation with ve separate incidents involving one restaurant chain
in a six-month period.”
22
Chipotle hired IEH Laboratories and Consulting Group, a food safety research rm, to
improve food safety procedures at Chipotle’s suppliers and restaurants. The company said the
new procedures would put it 10 to 15 years ahead of industry standards. “They’re trying to be local
and serve food with integrity, but as you grow it becomes incredibly complex and difcult and
challenging. When you look at what’s going on, how they’re expanding, the outbreak was almost
bound to happen,” said one observer.
23
Finally, on February 1, 2016, the CDC announced that the E. coli outbreak ofcially was
over. According to the CDC, evidence suggested the outbreak arose from a “common meal item
or ingredient” served at Chipotle, but it was unable to identify the specic ingredient. Chipotle
suspected the cause likely was cross-contamination from beef imported from Australia, a conclusion
the CDC said was unlikely.
24
Impact on Chipotle
On April 26, Chipotle announced its rst-ever quarterly loss as a public company. For the rst
three months of 2016, same-store sales were down 29.7% from the previous year and operating
margins fell from 27.5% to 6.8%. Chipotle’s share price was 41% lower than its high in summer
2015. The company’s CFO admitted that 5% to 7% of its customers had said they would never
return.
25
Chipotle did not provide a public estimate of the cost of its new safety programs. Ells called
them “very, very expensive.” The CFO added, “Right now we’re not trying to make this cost-
effective.”
26
He acknowledged, however, that Chipotle might need to raise prices in order to repair
its margins, noting that “instead of investing [those prots] in food integrity, we might have to
invest that in food safety.”
27
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Rebuilding Confidence and Traffic
About the challenge of getting customers to return, the company’s chief creative and
development ofcer said, “There’s nothing worse from a trust perspective. This is not the kind of
problem that you market your way out of.”
28
Chipotle’s other co-CEO, Monty Moran, told investors in early February that the company
had improved its traceability program to identify the specic farm at which each ingredient was
produced in real time through its distribution system and in its individual restaurants via bar
codes on each package.
29
The company also hired food safety expert James Marsden, a meat science
professor at Kansas State University, to oversee food safety for the entire company.
On February 8, Chipotle closed all of its stores for several hours to train employees on new
food safety measures. Among the changes it implemented were the following:
• Cheese will arrive at restaurants already shredded. Tomatoes and cilantro, which are
particularly vulnerable to bacteria, will be washed, chopped, and tested in a central
kitchen. Similar processes will be used for beef, romaine lettuce, and bell peppers.
• In the restaurant, lemons, limes, jalapeños, onions, and avocados will be blanched (plunged
into boiling water before being submerged in ice water to stop cooking) for ve to ten
seconds before serving to reduce germs on their skins. Chipotle claimed this would not
affect avor.
• Employees who are sick or have vomited will be asked to stay home for ve days after
their symptoms have disappeared. Employees will be paid for those days.
• Suppliers will run “DNA-based tests” on small batches of ingredients before shipping
them to restaurants.
• A $10 million Local Grower initiative will be initiated to help small suppliers meet the new
standards.
While the stores were closed on February 8, patrons who showed up were able to request a
“rain check” free burrito. There were 5.3 million requests, twice as many as expected, and two-
thirds of the coupons were redeemed. The company increased its promotional efforts, sending 21
million offers for free food via direct mailings and launching its largest-ever ad campaign in 31 of
its top markets.
30
To improve the in-store experience for customers, Chipotle increased staff hours
to reduce waiting times.
31
Future Outlook
By April 2016, there were positive signs for the brand. Analysts reported that Google searches
for Chipotle and food safety had decreased sharply since the beginning of the year.
32
Troublingly,
however, an analysis of trafc data from Chipotle restaurants by Foursquare Inc. showed that its
most loyal customers had been 50% more likely than infrequent customers to stay away from the
restaurant during the outbreaks, and some had stopped eating at Chipotle altogether.
33
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Endnotes
1 Roben Farzad, “Chipotle: The One That Got Away from McDonald’s,” Bloomberg, October 3, 2013,
http://www.bloomberg.com/news/articles/2013-10-03/chipotle-the-one-that-got-away-from-mcdonalds.
2 Jim Zarroli, “Chipotle Faces a Criminal Investigation Into Its Handling of a Norovirus Outbreak,” NPR Morning
Edition, January 6, 2016, http://www.npr.org/sections/thetwo-way/2016/01/06/462147245/chipotle-faces-a-
criminal-investigation-into-its-handling-of-a-norovirus-outbrea.
3 Euromonitor International, “Chipotle Mexican Grill Inc. in Consumer Foodservice (USA),” October 2015, p. 3.
4 Ibid., p. 1.
5 Kal Gullapalli, “How Chipotle Became the Gold Standard of Mexican Fast-Food,” Business Insider, January 21, 2011,
http://www.businessinsider.com/chipotle-the-new-gold-standard-2011-1.
6 Susan Bereld, “Inside Chipotle’s Contamination Crisis,” Bloomberg, December 22, 2015,
http://www.bloomberg.com/features/2015-chipotle-food-safety-crisis.
7 Elliot Maras, “Chipotle Strikes Back,” Food Logistics, April 18, 2016, http://www.foodlogistics.com/article/12185699/
chipotle-strikes-back.
8 “Fresh Mex: Not Always Healthy Mex,” Center for Science in the Public Interest, September 30, 2003,
http://www.cspinet.org/new/200309301.html.
9 Adam Chandler, “Is Fast Food Healthier Than Chipotle?” The Atlantic, February 18, 2015,
http://www.theatlantic.com/health/archive/2015/02/is-fast-food-better-than-chipotle/385589.
10 Gullapalli, “How Chipotle Became the Gold Standard of Mexican Fast-Food.”
11 U.S. Food and Drug Administration, “Hazard Analysis Critical Control Point (HACCP),” accessed May 27, 2016,
http://www.fda.gov/Food/GuidanceRegulation/HACCP.
12 Bereld, “Inside Chipotle’s Contamination Crisis.”
13 Karlene Lukovitz, “Chipotle’s Brand Strength To Be Tested by E. coli Outbreak,” MarketingDaily, November 5, 2015,
http://www.mediapost.com/publications/article/261876/chipotles-brand-strength-to-be-tested-by-e-coli.html.
14 Julie Jargon, “Chipotle Grapples with E. coli Outbreak,” Wall Street Journal, November 3, 2015, http://www.wsj.com/
articles/chipotle-grapples-with-e-coli-outbreak-1446506975.
15 Ibid.
16 Ibid.
17 Bereld, “Inside Chipotle’s Contamination Crisis.”
18 Ibid.
19 Lukovitz, “Chipotle’s Brand Strength To Be Tested by E. coli Outbreak.”
20 Paul R. La Monica, “Can Chipotle Recover from E. coli Outbreak?” CNNMoney, December 7, 2015,
http://money.cnn.com/2015/12/07/investing/chipotle-stock-e-coli/index.html.
21 Roberto A. Ferdman, “What in the World Is Happening to Chipotle,” Washington Post, December 9, 2015,
https://www.washingtonpost.com/news/wonk/wp/2015/12/09/what-in-the-world-is-happening-to-chipotle.
22 Julie Jargon, “Norovirus Conrmed in Boston Chipotle Outbreak,” Wall Street Journal, December 10, 2015,
http://www.wsj.com/articles/norovirus-conrmed-in-boston-chipotle-outbreak-1449684009.
23 Ferdman, “What in the World Is Happening to Chipotle.”
24 Maras, “Chipotle Strikes Back.”
25 Julie Jargon, “Chipotle to Offer More Free Burritos,” Wall Street Journal, March 16, 2016, http://www.wsj.com/articles/
chipotle-to-offer-more-free-burritos-1458155867.
26 Bereld, “Inside Chipotle’s Contamination Crisis.”
27 Ibid.
28 Ibid.
29 Maras, “Chipotle Strikes Back.”
30 Maxwell Murphy, “Chipotle Food-Safety Problems May Cost It Up to 7% of Customers,” Wall Street Journal, CFO
Journal (blog), March 17, 2016, http://blogs.wsj.com/cfo/2016/03/17/chipotle-food-safety-problems-may-cost-it-up-
to-7-of-customers-cfo.
31 Samantha Bomkamp, “Is Chipotle Doing Enough to Get Customers to Come Back?” Chicago Tribune, April 27, 2016,
http://www.chicagotribune.com/business/ct-chipotle-future-0428-biz-20160427-story.html.
32 Julie Jargon, “Chipotle Counters Frightful Results,” MarketWatch, April 23, 2016, http://www.marketwatch.com/
story/chipotle-counters-frightful-results-2016-04-23-10485737.
33 Ibid.
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