Analysis of Operating Costs at Chipotle

Cost of Production

There are various operating costs to a company, the top three key operating costs for Chipotle are Food Costs, Labor costs and Other operating expenses.  The main operating expense for Chipotle is Food, Beverage and packaging costs.  Looking at trends over the past five years, this cost for the company has been on the rise, there has been an almost $200,000 increase since 2014. Since Chipotle is a food only business, the impact of this cost will essentially determine the success of the company. Food, beverage and packaging costs decreased as a percentage of revenue in 2018 primarily due to the benefit of menu price increases taken in select restaurants in 2017 and again at the end of 2018 (Chipotle).  Chipotle features a simple menu of burritos, bowls, tacos and salads. In preparing food, they utilize simple cooking methods that need minimal appliances and utensils.  With using fresh ingredients they can also prepare food as needed and to keep costs minimized, items on the menu are always prepared in house. They can keep overhead lower by not having excess of dry storage and they order fresh ingredients as needed.  You can see in the chart below that the cost of goods sold is steadily increasing, showing continued anticipated growth through 2020.

CMG (n.d)

Chipotle has a number of fixed costs associated with running their corporation on a day to day basis. Insurance policies for the restaurants and employees, taxes (state and federal) and since a majority of the locations are in a leased building, lease agreements would also fall under a fixed cost.  The renewal of lease agreements can have some fluctuation involved with the fixed price, but this would be at renewal time only and then would stay fixed for the terms agreed upon. Although these fixed costs are among the top three for the corporation, they can have an impact on the cost of goods sold.  If a location were to close or there was a substantial increase in rent, the COGS for that specific location would decrease.

Chipotle Mexican Grill Inc (n.d)

A variable cost that has been affecting the overall numbers of Chipotle is General and administrative expenses.  There was an extensive increase from 2017 to 2018, with a 26.7% increase.  This was mainly due to due to a $32.1 million related to the corporate restructuring and other unusual charges (Chipotle).

Chipotle Mexican Grill Inc (n.d)

Overall Market

Restaurant chain businesses compete on a number of different levels, including menu, ambiance, innovation, and price as well as size, geographic reach, established reputation, and attractiveness to investors (Investopedia). Chipotle has its own niche; they proudly claim that they are the 1^st nationwide establishment in casual fast food dining to go with all GMO-free ingredients (Chipotle).  With this achievement and our society leaning towards a more health conscious lifestyle, it is making Chipotle a leader in the market. Some of its competitors include Shake Shack, Qdoba, Burgerfi, Moe’s Southwest Grill, McDonald’s and Taco Bell. But in reality, the restaurants listed aren’t truly its only competition. Panera Bread is the lead competitor, with taking a fresh approach to food they are similar in the same approach of “healthier eating”. Panera Bread is the lead competitor, with about 87 percent of Chipotles competing with Panera within a 10-minute drive. Among Mexican formats there was maximum overlap was with Qdoba, at 34 percent (Bezinga).

The potential for new competition in this specific market is very low. Chipotle prides itself on creating food with integrity and cultivating a better world. Chipotle does thing differently. In having a limited menu with a variety of meal customizations and their commitment of utilizing sustainable products. The market structure that is used by Chipotle has two key competitive advantages in its industry, customer captivity and no debt. In the restaurant industry most companies need debt to fund expansion of their franchise (Gremont). Ells has used only cash flow to expand his empire, the structure and strategy behind the firm will continue to influence the industry. The ease of entry is considered high, but the competition is also high. There are a plethora of restaurants that people can choose from to enjoy, so your establishment must stand out, and in a good way, and this is just what Chipotle is continuing to prove.  They have set a brand recognition and established a loyal consumer base.

Chipotle can remain to be a leader in the industry by doing just that, be a leader.  By emphasizing quality and responsibility.  If the company can rebound from the administrative re-structuring and focus on lowering food costs, the growth for Chipotle will be unsurmountable.  By evaluating costs and optimizing profit, the firm will need continue on the track of a small menu that has high possibility of options. Consumers want healthy food and are looking for organically-produced food.   Another way that Chipotle can maintain growth will to ensure that there is no franchise available, they are able to maintain a tight control over all aspects of its operations.

References:

• Analysis Shows Chipotle’s Biggest Threat Is Now Panera retrieved from https://www.benzinga.com/analyst-ratings/analyst-color/17/03/9230642/analysis-shows-chipotles-biggest-threat-is-now-panera
• Chipotle Annual Reports retrieved from https://ir.chipotle.com/annual-reports
• Who Are Chipotle’s Main Competitors?https://www.investopedia.com/ask/answers/052015/who-are-chipotles-cmg-main-competitors.asp
• Franchise Value and Competitive Advantage Like None Other, Aurelius Gremont retrieved from
• https://seekingalpha.com/uploads/2016/3/23/4867478/CMG_competitive_advantage.pdf