[Applause]
hello everyone welcome back to case
studies with the biz doc this week it’s
Chipotle and I’m going to cover three
things first the history of Chipotle
which is a case study in itself how they
got to where they are today
second controls whether you’re running a
small company in Memphis Tennessee and
you’re selling t-shirts or something to
something the size of Chipotle
management controls are critical
especially when it’s food and the third
area is management transition when is
the right time for a start-up CEO to say
you know this company this child this
thing that I dreamed about that I built
when is it the right time for a start-up
CEO to step aside or maybe step onto the
board and bring in more experienced
management to take it to yet another
level I’m gonna cover those three things
this week and it all starts here with
the dawn it all started in 1993 Steve
Ellis went to the Culinary Institute in
Hyde Park New York I believe it is and
became a trained chef he worked at a
very nice restaurant in San Francisco
was honing his craft and then goes to
Denver where he is the dream of starting
a restaurant he was thinking of starting
a high-end restaurant because he was at
culinary school working at a high-end
restaurant in San Francisco but he
settled on what would later be known is
simply the fast casual restaurant that
would become Chipotle Mexican Grill to
get going he turned to his dad and he
got help which you cannot call
bootstrapping he may have had
bootstrapped a couple dollars in his
pocket as a chef but he got some very
important help from his dad with seed or
I would almost call a very light Series
A if you want to talk about it like that
from his dad
$85,000 to start the first Chipotle in
Denver Colorado right near the
University of Denver and he and his dad
had calculated well son if this is going
to be a success you’re gonna have to
sell about a hundred burritos a day so
that you can break even and make a
profit from there do you think you can
do this
dad I believe in this I’m gonna make
tasty food because I’m a trained chef
but I’m gonna make it in this fast
casual environment and these students
are gonna love my burritos I’m big on
flavor it’s gonna do it this is okay
well here’s $85,000 let’s go they were
soon selling a thousand burritos a day
and Chipotle was off and running and
during this this phase here there’s
something very interesting happen in
1997 four years later McDonald’s
invested in Chipotle and as a matter of
fact by the year 2000 I believe it’s
correct to say that McDonald’s was the
largest investor in Chipotle in other
words a fast-casual selling burritos
which McDonald’s didn’t sell McDonald’s
notice that your dollar my dollar that
we spent on lunch they notice where that
dollar goes their research and
McDonald’s is probably better than most
of the fast-food organizations in
America big on research for locations
and big on what competitors are doing so
McDonald’s makes an investment you don’t
think that maybe they were thinking of
buying it some day well perhaps that
didn’t actually happen but by 2000 they
were the largest investor and as
Chipotle continued to open many many
locations there are several different
stories and I don’t have the exact
quotes from the exact executives but it
really came out that McDonald’s said hey
as you look into the future and you
think about same store sales and opening
stores as your source of growth you need
to think about breakfast
and you also need to think about
drive-through so you get a people at the
front counter and you can have people
and drive through what the time Chipotle
was like no we’re not opening for
breakfast and we’re not going to open
for drive-through well there’s a thing
that was really taking off at that time
in America which was the breakfast
burrito
Taco Bell had it look how many different
locations have a breakfast burrito or
something like a breakfast burrito even
though their core business may be as
hamburgers
well Chipotle said no and they moved
along but they were continuing to grow
but let me talk a little bit about same
store sales and expansion McDonald’s
knows how to expand they are experts and
what same store sales are
as you look at the sales of say a
location this year and then you look at
it next year and did same store sales go
up there’s only two ways to make
same-store sales go up open longer like
for breakfast you open for breakfast
instead of lunch now you can have those
sales in the morning and the second way
is you sell more or at a higher price to
each customer that you do have so that’s
how you drive same store sales up
bringing more customers in at more times
a day or more dollars per customers so I
guess it really mounts the three ways to
drive same store sales or now
organizational growth you open another
location and locations in the restaurant
business are simply called doors or
stores so here we have them growing very
very rapidly with McDonald’s thinking to
the future saying you know you’re gonna
be thinking about growth at some point
and you might as well think about it now
nonetheless they go off and they grow
and by 2006 they were doing 800 million
dollars a year almost a billion dollars
so let me turn around here and now go
from here
so in 2006 you have an IPO and they got
off to a pretty good start in the IPO
and they drive forward and then the
first of what would be the Achilles heel
for Chipotle happens in 2008 in San
Diego there is a hepatitis outbreak and
then in Ohio Kent Ohio 400 people were
allegedly made sick by no row virus and
what these things are is if you’re in
the foodservice industry and you’re
bringing food out of the fields and
things like that there’s bacteria could
be from animals could be a lot of places
that it comes from but the fact is this
stuff is growing outside in the mud near
streams and even if it’s really good and
healthy and clean on the inside the
outside is what matters it’s got to be
washed and cared for and prepared
properly it’s also in the presence of
raw meat so inside your restaurant
raw meat has a whole other set of
bacterias that can be with the raw meat
inside the meat so it has to get up and
be cooked a certain number of minutes
like a hundred and sixty degrees or
something to ensure
all of that gets cooked off the meat for
bacteria but wait a minute you don’t
bring lettuce beautiful crunchy cool
tasty lettuce up to a hundred and sixty
degrees Sid has to be clean properly so
meat needs heat and fruits vegetables
need you know light light soaps and a
lot of good water and cleanliness and
you need careful processes so you don’t
mix the two that is critical and there
are all sorts of standards and
regulations and inspections that a food
service company will have whether you’re
making a burrito over the counter or
you’re operating a factory where you’re
putting things into cans or bags
freezing them whatever it is you’re
doing there’s all kinds of things that
goes in the food service nonetheless
something happened here and the stock
took a dive now what’s interesting is
the founder Steve Ellis was very very
concerned about product quality and he
was also concerned about being a company
with a conscience so there’s a lot of
what Steve Ellis did that was quite good
for instance back in 2000 he made a
visit to a hog farm and he did not like
what he saw in terms of the condition
and the treatment of the animals yes
we’re gonna grow the animal and we’re
going to slaughter it and that’s where
we get the meat but there’s humane ways
to raise the animals and he didn’t like
what he saw so he went and said you know
what Chipotle is gonna get open range
meats from you know animals that are
treated sensibly and humanely while
they’re being grown and then yes they go
to slaughter and make meat but along the
way I’m gonna go that way he also then
right here you know in 2010 he said I
want to see if we can get gluten out of
all of our products and they did that on
everything but I believe it was flour
tortillas so the flour tortillas had
gluten but everything else on the menu
they could say we’re gluten free so you
can see they were really working hard to
promote healthy to promote humane to
promote you know fast casual quality
flavor these
all very noble things and it was leading
to a lot of growth that was happening at
Chipotle and it was pretty tasty stuff I
no longer eat there but when I did I
enjoyed you know what I thought was
pretty flavorful now along the way
they’ll spread into other bumps in a
road you know wallet promoting all this
humane this and no gluten and no GMO and
things like that you know there was an
Institute did a study that said did you
know that this Chipotle burrito is a
thousand calories a thousand calories in
this lunch burrito and most people would
say look that is just not sensible to
pack down a thousand calories especially
if you’re going back to an office
environment or a more sedentary
environment where you sit and you’re not
like moving around working in a factory
or something like that or you know an
active athlete going out to work out for
the afternoon no a thousand calories if
you’re going back into that that is just
way too much and actually it was
interesting because there was a
comparison done to the Big Mac and most
people would think that the Burger King
whopper or Big Mac oh my goodness those
are big calories well guess what this
had more calories than a Big Mac or a
whopper and so it was a little bit
embarrassing where they’re trying to
position themselves as healthy but have
this now that led to some changes and
they published the calories for each of
the items and it led to some changes and
to some sensibilities so this whole area
here you know I saw it as an opportunity
for Steve to get control of this and set
the tone for a growth future in which he
met all of these wonderful promises he’s
making about no GMO you know a gluten
only in the tortillas and you know
free-range meats sensible that’s very
good things and that’s what the brand
stood for and the brand had a lot of
promise well and from that moment from
10 to 2012 2014-2015 everything changed
but along the way let’s take a look at
the growth of the revenue and the prop
and the net income they were doing
pretty well when they went out for the
IPO I mentioned it was about eight
hundred million two years later in eight
they had one point three three
Ioan in revenue and 127 million in net
income that’s pretty good
2010 1.8 4 billion and 250 million of
net income 2012 2.7 1 billion in revenue
and 327 million in net income so you can
see why it’s going up the stock market
likes these numbers 2014 4 point 1 1
billion and 445 million in net income
then 2015 they celebrated their biggest
year ever 4.5 billion in revenue and 475
million in net income and then the fun
started and I don’t mean fun I’m being
very sarcastic 2015 would become what I
call the zone of death as the stock
which had run all the way to over 700
dollars a share would crash heavily down
losing 40% 50% of its value it was
horrible it all started in July in
Seattle where there is an announcement
that some people were sick they ate at
Chipotle and it was ecoli Oh
then in August 270 270 people became
sick and Simi Valley California and they
said that it was the no Roe virus
another food contamination bacterial
virus then in August in Minneapolis 45
people became ill and it was Salmonella
some Annelle it typically comes from
meat that is not fully cooked
if the Salmonella virus is present
that’s bad but you fully cooked the meat
you know I said 160 degrees for 5
minutes or some combination like that to
it’ll kill any other bacteria that’s in
the meat well so it either wasn’t cooked
or you know something was going on there
but these people as salmonella October
Washington Oregon there is another
foodborne bacteria outbreak 50 people
and at this point suddenly they start to
go with the war words with the CDC
that’s the Center for Disease
control based in Atlanta Georgia and
they here in the United States try to
protect you and me when there’s an
outbreak they have scientists and
research methods to go out and they want
to find out where did it start what’s
the origin so not only can we trace back
notify the public to see who could be
sick and help the hospitals in the area
know where’s the pattern of the
expansion and the proliferation of the
ill people but also get back to the
source so they could stop it do we have
a farm that’s not producing clean do we
have a supplier problem do we have a
procedure process problem they’re very
thorough to protect the public health
because that’s their job and suddenly
you know Chipotle’s saying oh the center
of Disease Control is going to declare
the outbreak over and Center Disease
Control aside wait dude don’t say what
I’m gonna say because I need to continue
my research and there could be outbreaks
that happen after outbreaks because it’s
not over
sometimes people then then contaminate
each other so the outbreak may not be
over once people are becoming sick well
then in December eighty people students
at Boston College got sick so from July
to December you know there were jokes
going around calling like Ipoh clay and
things like that for e.coli and the PR
and the perception took a mighty hit a
deserve it hit as people were like I’m
sure I’m gonna eat there well by the end
of sixty sixteen you know sales had
plummeted all the way down to three
point nine billion and only twenty two
million dollars of net income so let’s
look at that at the end of fifteen you
know four point five billion for 275
million by the end of sixteen all of
this has shaken through the system and
it’s a freaking disaster then in 2016 it
doesn’t get much better you know they
actually closed for one day in February
of 2016 to talk about food safety issues
and all their locations
now many people would say well that’s
nice that you did that remember
Starbucks closed for a day because their
CEO said hey I want to make the best
product for my customers that are
trusting me and that was a product
quality issue and everybody applauded
that because by and large 21
the Starbucks in the coming weeks you
said wow they do have the quality this
is a little bit better coffee they’re
paying attention to this well that’s
wonderful for marketing and product and
quality this is freaking people getting
sick you know and you’ve got your stock
that goes from $700 all the way down to
you know into the 300s and that kind of
a drop in such a short period of time if
you’re an investor there’s only one word
for that is damn and if you’re leaning
over a toilet puking your guts out
because you ate a bad burrito that it’s
double damn so this is just horrible for
investors this is horrible for customers
and they wait all the way until February
the following year to close for one day
and talk about food safety now they did
close some restaurants here but they
were working with the Center for Disease
Control to clean all ingredients out of
the restaurant clean everything in the
restaurant sanitized the restaurant to
basically take it to zero now bring in
new supplies new food and let’s get this
open again so they did that a couple of
times voluntarily and a couple other
times they were under pressure from the
CDC so why wouldn’t you close like back
in November when all of this is going on
why wouldn’t you close there you wait
till the following well you know the
market you know reacted that a to and it
continued to go down now in late 2016
they’re trying to get everybody to come
back they’re trying to get him to come
back so they actually did something good
that was successful for the moment they
announced the chip topia rewards card so
if you went like four visits in a row on
your fourth visit you got something so
it was basically a repetitive visit
reward card trying to encourage people
to get a benefit to come in and start
being a repeat visitor repeat diner at
Chipotle again well that when they ended
it studies showed that the brand hadn’t
moved very much meaning that there was
so much damage was done he would I call
the zone of death that the perception of
them didn’t recover even when they did
this rewards program and according to
some research it was the single most
lucrative rewards benefit that
you or I could have had anywhere in in
the food service you know fast food fast
casual industry meaning that what we had
to spend to get something a benefit at
Chipotle and the number of things we
bought was far less to get the reward
than other places another word and say
we’re really trying hard to put a high
value program out there to bring us back
in but when it was over we didn’t think
any more positively about Chipotle than
we had in the months prior which meant
that the what was happening to the brand
was pretty deep-seated well they also
had an issue because other bad news bad
news travels in flocks and their CMO
mark crumb packer I believe was his name
you know he’s in New York and he gets
stung on like five counts of cocaine
possession because he was repetitively
buying I guess from an undercover
organization now they said it wasn’t
affecting his job and they put him on a
leave of absence and he came back no I
think that’s a humane thing to do
because if he shows that he’s recovering
and he’s recovering at it come back and
he hasn’t harassed employees to do
things I think it’s it’s good that they
bring him back so it showed that inside
the culture of the company there were
there was something going on there that
I think was sensible but nonetheless
they said it didn’t affect his job but
it was yet another piece of bad PR along
the way you know also you know suddenly
malware shows up and they said that 20
250 restaurants in 47 states have been
infected by malware that was potentially
exposing your and my credit cards from
at the point-of-sale
now you’re like oh no so now their IT
systems weren’t bulletproof with
firewalls to protect intrusion so they
have malware get in there then there was
as we call a rat video went viral
showing a Chipotle restaurant somewhere
with a rat that apparently had fallen
from the ceiling or something now
there’s probably a lot of fast foods as
does McDonald’s have one Mouse or one
rat in one location summer in the United
States right now probably but
nonetheless it’s just another shot to
Chipotle about the cleanliness there
then
they attempted to introduce a new food
product and they introduced what
everybody called the worst queso ever
invented it was horrible and you know
the CEO Steve Ellis was out there
tweeting and stuff saying well haters
are gonna hate
wait a minute haters are gonna hate it
tasted terrible
we’re not haters we’re customers and we
said that’s not delicious you are a
trained chef
go back to your Culinary Institute
history and make some queso that’s damn
tasty please so you know meanwhile he’s
trying to you know you you kind of put
it back on the customer a little bit
they’re haters gonna hate which I don’t
think was the right thing to do and then
bingo we get hit with another case of
norovirus again finally at the end of
2017 enough is enough and the startup
CEO Steve Ellis steps down to executive
chairman what executive chairman means
is he’s on the board of directors but
he’s no longer like a day-to-day
operator but executive chairman means
that he will influence and have some
discussions with or relationships on a
day-to-day basis with certain executives
he created the place he knew more about
the menu and everything that goes with
it so ok it made sense to keep him there
but clearly what the board is saying we
got to look for a new CEO and I’m gonna
take you to why they did that in just a
moment so he steps down and then now
it’s that they’re adding some new
ingredients they’re pretty interesting
and tasting and they’re closing tasty
made burgers
well they apparently had attempted to
get into the burger lane now I don’t
know why they would do that I would
think why don’t you focus on
rejuvenating your brand you know
focusing on the Mexican grill that you
do so well go fix your queso disaster by
putting out something that’s really
really tasty and why don’t you focus on
that there’s a lot of opportunities to
be focusing on getting your core
business right without getting
distracted they also had a um I think 15
or 20 Asian themed restaurants that were
out there so why are you trying to
experiment like that there are big
holding companies that have a lot of
fast food
Pizza Hut and Kentucky Fried Chicken you
know I think are in the same holding
company but there’s a lot of that but
that’s done by holding companies each of
those individual restaurants does what
it does well and focus focus focus on
getting it right along the way they did
open for breakfast and they did a test
drive through finally that they’ve now
got drive throughs opening breakfast
they added scrambled eggs and some
breakfast oriented foods into what they
were doing but a lot of people who just
came in and said well I’m just gonna
have the burrito because breakfast
burritos are big so they opened for
breakfast but the breakfast menu you
know didn’t work perfectly but I think
that’s good that they were opening for
breakfast and they were trying and they
were working on it that’s an example of
things that I think they should have
been trying in their Lane nonetheless
they closed tasty made which was just
announced a little bit ago here in 2018
they’ve got drive-through starting and
then they go and hire Brian Nicole
Nicole and Nicole I hope I got that
right and he worked at Pizza Hut and he
worked at Taco Bell had about six seven
years at Pizza Hut than six seven years
at Taco Bell and they recruited him over
well that resulted in a quick pop up of
the stock price to over three hundred
dollars a share to an enterprise value
right now of right around nine ten
billion dollars the value right now but
there’s a lot of investors that are a
little nervous because they’re like wait
a minute this is the guy at Taco Bell
that brought us the Doritos locos taco
that doesn’t sound like the kind of
things that follow in what Chipotle
stands for this isn’t what they stand
for the other side is saying wait a
minute
this guy was focused on disciplines and
controls in those restaurants and quick
service quick service translates to
same-store sales you can get more done
at lunch with quick service and more
people can get through the line between
11:30 and one o’clock that critical 90
minute lunch window so he’s probably
gonna be good for same store sales he’s
probably going to be good for efficiency
well it remains to be seen is he gonna
bring us a Doritos locos taco which
nobody can say is a particularly healthy
option but it’s pretty tasty and so the
jury’s out on worries gonna be but
people do agree that he is all about
controls which brings me to the last
part so where are they going I think
they’re gonna be okay with Nicole
they’re at four and a half billion
dollars in sales closing 17 back up to
about 176 million in net income so I
think that there’s a way out and I think
changing the CEO at this point basically
is the announcement that we’re doing
things in a different way but I want to
take you to what in my view a case study
of what I think has happened a lot of
you asked me say Tom we’d love you to
dive a little deeper into the lessons of
case studies not just go through history
as a case study well I think history is
a case study in this case because
clearly something that happened here
didn’t get fixed and how does malware
feed into that let me explain controlled
growth is so important when you’re
growing like this you have to control
your growth in other words you have to
systematize things and look for all of
the potential failsafe opportunities
such as firewalls and security to
protect customer information whether
you’re Nordstrom’s and you’re operating
online commerce or you’re Chipotle and
you’re just operating you know you know
you’re taking credit cards at the
point-of-sale
once you are touching that kind of
information there are criminal elements
out there they’re gonna be trying to
knock into that and steal it from you so
there’s a there’s a philosophy of
control that goes all the way from IT to
food and when you are growing there’s
three areas of control one is people how
do you train people do you train them
consistently do you review the training
methods do you see if they’re if they’re
doing what they should be and the
training is working and reinforcement
training there’s a lot that goes into
that then processes once somebody is
trained and what they should do is that
process working right whether you’re
protecting credit card information from
your customers or you’re bringing
meat and raw vegetables into the same
back kitchen and getting ready to
prepare it as any restaurant does are
your processes in place doing the right
thing and lastly vendors or is your
selection process and your upstream
review process to make sure those
vendors are high caliber how is that and
so controlled growth each one of these
things can get out of hand you can be
hiring people so fast that you’re not
getting each one trained you can be
growing so fast that the process that
worked yesterday needs to be adjusted
and optimized today and you didn’t do it
and now you have a problem you can have
vendors that you grow so fast
that they grow fast meaning I maybe I’m
supplying pork – you know Chipotle and I
have a free-range farm I gotta buy more
land grow more hogs and go faster maybe
I cut corners maybe I’m you know the
part of the issue here in e.coli
outbreaks so are my vendors staying in
control all of this comes together then
when something happens you have to find
permanent solutions organizations that
find permanent solutions when fast
growth leads to a failure of people
processes or vendors that’s a sign of a
mature organization if this happens here
and they keep growing and then seven
years later it happens here I don’t
think they ever permanently solved the
problem it doesn’t seem like it and I
don’t think that the solution is to
criticize the Center for Disease Control
because they’re making this announcement
or that announcement they’re trying to
protect the public and so I think what
happened here is a start-up CEO who is a
gifted chef drove it through high growth
adding some good people around him but
in the end I think what got exposed is
it was not a culture of high controls
because when you see a malware outbreak
and you see repetitive things happening
I think that’s a sign that the
management during the growth did not
have that organization under control and
it starts showing up in so many
places and yet they had a brand that was
beloved that now needs to make a
comeback and maybe the new CEO that’s
been brought in
Brian Nicole is going to be part of that
oh and maybe he brings with him his
experience with a very large Taco Bell
organization that has more locations
than the 20 250 some locations that
Chipotle has now so I think that’s a
case study in itself you we could also
go into PR and how they reacted and how
they did this but I think what we see is
a case study of how they successfully
grew coupled to what would happen behind
the scenes a lack of controls and
permanent solutions that led to
repetitive problems including one that
is horrifying I don’t think it’s safe to
eat there in the mind of the diner is a
disaster and that my friends was what I
called the zone of death that is the
Chipotle case study and there’s lessons
in there for you or me
whether we’re operating a small t-shirt
company in Memphis Tennessee or we’re
operating something as big as a five
chain restaurant in our city or a 2,000
locations restaurant chain a humongous
organization across the United States
wherever you are there’s lessons in the
Chipotle history and a case study of
control for you remember we’re on a
mission to a million subscribers here at
value tainment and when we are we will
have the first value tainment conference
where you will learn how to grow your
business grow yourself grow your
leadership as you drive forward and be a
success in your life and we can’t wait
until next time i’m thomas with the biz
doc and i hope i left you better than i found you
hello everyone welcome back to case
studies with the biz doc this week it’s
Chipotle and I’m going to cover three
things first the history of Chipotle
which is a case study in itself how they
got to where they are today
second controls whether you’re running a
small company in Memphis Tennessee and
you’re selling t-shirts or something to
something the size of Chipotle
management controls are critical
especially when it’s food and the third
area is management transition when is
the right time for a start-up CEO to say
you know this company this child this
thing that I dreamed about that I built
when is it the right time for a start-up
CEO to step aside or maybe step onto the
board and bring in more experienced
management to take it to yet another
level I’m gonna cover those three things
this week and it all starts here with
the dawn it all started in 1993 Steve
Ellis went to the Culinary Institute in
Hyde Park New York I believe it is and
became a trained chef he worked at a
very nice restaurant in San Francisco
was honing his craft and then goes to
Denver where he is the dream of starting
a restaurant he was thinking of starting
a high-end restaurant because he was at
culinary school working at a high-end
restaurant in San Francisco but he
settled on what would later be known is
simply the fast casual restaurant that
would become Chipotle Mexican Grill to
get going he turned to his dad and he
got help which you cannot call
bootstrapping he may have had
bootstrapped a couple dollars in his
pocket as a chef but he got some very
important help from his dad with seed or
I would almost call a very light Series
A if you want to talk about it like that
from his dad
$85,000 to start the first Chipotle in
Denver Colorado right near the
University of Denver and he and his dad
had calculated well son if this is going
to be a success you’re gonna have to
sell about a hundred burritos a day so
that you can break even and make a
profit from there do you think you can
do this
dad I believe in this I’m gonna make
tasty food because I’m a trained chef
but I’m gonna make it in this fast
casual environment and these students
are gonna love my burritos I’m big on
flavor it’s gonna do it this is okay
well here’s $85,000 let’s go they were
soon selling a thousand burritos a day
and Chipotle was off and running and
during this this phase here there’s
something very interesting happen in
1997 four years later McDonald’s
invested in Chipotle and as a matter of
fact by the year 2000 I believe it’s
correct to say that McDonald’s was the
largest investor in Chipotle in other
words a fast-casual selling burritos
which McDonald’s didn’t sell McDonald’s
notice that your dollar my dollar that
we spent on lunch they notice where that
dollar goes their research and
McDonald’s is probably better than most
of the fast-food organizations in
America big on research for locations
and big on what competitors are doing so
McDonald’s makes an investment you don’t
think that maybe they were thinking of
buying it some day well perhaps that
didn’t actually happen but by 2000 they
were the largest investor and as
Chipotle continued to open many many
locations there are several different
stories and I don’t have the exact
quotes from the exact executives but it
really came out that McDonald’s said hey
as you look into the future and you
think about same store sales and opening
stores as your source of growth you need
to think about breakfast
and you also need to think about
drive-through so you get a people at the
front counter and you can have people
and drive through what the time Chipotle
was like no we’re not opening for
breakfast and we’re not going to open
for drive-through well there’s a thing
that was really taking off at that time
in America which was the breakfast
burrito
Taco Bell had it look how many different
locations have a breakfast burrito or
something like a breakfast burrito even
though their core business may be as
hamburgers
well Chipotle said no and they moved
along but they were continuing to grow
but let me talk a little bit about same
store sales and expansion McDonald’s
knows how to expand they are experts and
what same store sales are
as you look at the sales of say a
location this year and then you look at
it next year and did same store sales go
up there’s only two ways to make
same-store sales go up open longer like
for breakfast you open for breakfast
instead of lunch now you can have those
sales in the morning and the second way
is you sell more or at a higher price to
each customer that you do have so that’s
how you drive same store sales up
bringing more customers in at more times
a day or more dollars per customers so I
guess it really mounts the three ways to
drive same store sales or now
organizational growth you open another
location and locations in the restaurant
business are simply called doors or
stores so here we have them growing very
very rapidly with McDonald’s thinking to
the future saying you know you’re gonna
be thinking about growth at some point
and you might as well think about it now
nonetheless they go off and they grow
and by 2006 they were doing 800 million
dollars a year almost a billion dollars
so let me turn around here and now go
from here
so in 2006 you have an IPO and they got
off to a pretty good start in the IPO
and they drive forward and then the
first of what would be the Achilles heel
for Chipotle happens in 2008 in San
Diego there is a hepatitis outbreak and
then in Ohio Kent Ohio 400 people were
allegedly made sick by no row virus and
what these things are is if you’re in
the foodservice industry and you’re
bringing food out of the fields and
things like that there’s bacteria could
be from animals could be a lot of places
that it comes from but the fact is this
stuff is growing outside in the mud near
streams and even if it’s really good and
healthy and clean on the inside the
outside is what matters it’s got to be
washed and cared for and prepared
properly it’s also in the presence of
raw meat so inside your restaurant
raw meat has a whole other set of
bacterias that can be with the raw meat
inside the meat so it has to get up and
be cooked a certain number of minutes
like a hundred and sixty degrees or
something to ensure
all of that gets cooked off the meat for
bacteria but wait a minute you don’t
bring lettuce beautiful crunchy cool
tasty lettuce up to a hundred and sixty
degrees Sid has to be clean properly so
meat needs heat and fruits vegetables
need you know light light soaps and a
lot of good water and cleanliness and
you need careful processes so you don’t
mix the two that is critical and there
are all sorts of standards and
regulations and inspections that a food
service company will have whether you’re
making a burrito over the counter or
you’re operating a factory where you’re
putting things into cans or bags
freezing them whatever it is you’re
doing there’s all kinds of things that
goes in the food service nonetheless
something happened here and the stock
took a dive now what’s interesting is
the founder Steve Ellis was very very
concerned about product quality and he
was also concerned about being a company
with a conscience so there’s a lot of
what Steve Ellis did that was quite good
for instance back in 2000 he made a
visit to a hog farm and he did not like
what he saw in terms of the condition
and the treatment of the animals yes
we’re gonna grow the animal and we’re
going to slaughter it and that’s where
we get the meat but there’s humane ways
to raise the animals and he didn’t like
what he saw so he went and said you know
what Chipotle is gonna get open range
meats from you know animals that are
treated sensibly and humanely while
they’re being grown and then yes they go
to slaughter and make meat but along the
way I’m gonna go that way he also then
right here you know in 2010 he said I
want to see if we can get gluten out of
all of our products and they did that on
everything but I believe it was flour
tortillas so the flour tortillas had
gluten but everything else on the menu
they could say we’re gluten free so you
can see they were really working hard to
promote healthy to promote humane to
promote you know fast casual quality
flavor these
all very noble things and it was leading
to a lot of growth that was happening at
Chipotle and it was pretty tasty stuff I
no longer eat there but when I did I
enjoyed you know what I thought was
pretty flavorful now along the way
they’ll spread into other bumps in a
road you know wallet promoting all this
humane this and no gluten and no GMO and
things like that you know there was an
Institute did a study that said did you
know that this Chipotle burrito is a
thousand calories a thousand calories in
this lunch burrito and most people would
say look that is just not sensible to
pack down a thousand calories especially
if you’re going back to an office
environment or a more sedentary
environment where you sit and you’re not
like moving around working in a factory
or something like that or you know an
active athlete going out to work out for
the afternoon no a thousand calories if
you’re going back into that that is just
way too much and actually it was
interesting because there was a
comparison done to the Big Mac and most
people would think that the Burger King
whopper or Big Mac oh my goodness those
are big calories well guess what this
had more calories than a Big Mac or a
whopper and so it was a little bit
embarrassing where they’re trying to
position themselves as healthy but have
this now that led to some changes and
they published the calories for each of
the items and it led to some changes and
to some sensibilities so this whole area
here you know I saw it as an opportunity
for Steve to get control of this and set
the tone for a growth future in which he
met all of these wonderful promises he’s
making about no GMO you know a gluten
only in the tortillas and you know
free-range meats sensible that’s very
good things and that’s what the brand
stood for and the brand had a lot of
promise well and from that moment from
10 to 2012 2014-2015 everything changed
but along the way let’s take a look at
the growth of the revenue and the prop
and the net income they were doing
pretty well when they went out for the
IPO I mentioned it was about eight
hundred million two years later in eight
they had one point three three
Ioan in revenue and 127 million in net
income that’s pretty good
2010 1.8 4 billion and 250 million of
net income 2012 2.7 1 billion in revenue
and 327 million in net income so you can
see why it’s going up the stock market
likes these numbers 2014 4 point 1 1
billion and 445 million in net income
then 2015 they celebrated their biggest
year ever 4.5 billion in revenue and 475
million in net income and then the fun
started and I don’t mean fun I’m being
very sarcastic 2015 would become what I
call the zone of death as the stock
which had run all the way to over 700
dollars a share would crash heavily down
losing 40% 50% of its value it was
horrible it all started in July in
Seattle where there is an announcement
that some people were sick they ate at
Chipotle and it was ecoli Oh
then in August 270 270 people became
sick and Simi Valley California and they
said that it was the no Roe virus
another food contamination bacterial
virus then in August in Minneapolis 45
people became ill and it was Salmonella
some Annelle it typically comes from
meat that is not fully cooked
if the Salmonella virus is present
that’s bad but you fully cooked the meat
you know I said 160 degrees for 5
minutes or some combination like that to
it’ll kill any other bacteria that’s in
the meat well so it either wasn’t cooked
or you know something was going on there
but these people as salmonella October
Washington Oregon there is another
foodborne bacteria outbreak 50 people
and at this point suddenly they start to
go with the war words with the CDC
that’s the Center for Disease
control based in Atlanta Georgia and
they here in the United States try to
protect you and me when there’s an
outbreak they have scientists and
research methods to go out and they want
to find out where did it start what’s
the origin so not only can we trace back
notify the public to see who could be
sick and help the hospitals in the area
know where’s the pattern of the
expansion and the proliferation of the
ill people but also get back to the
source so they could stop it do we have
a farm that’s not producing clean do we
have a supplier problem do we have a
procedure process problem they’re very
thorough to protect the public health
because that’s their job and suddenly
you know Chipotle’s saying oh the center
of Disease Control is going to declare
the outbreak over and Center Disease
Control aside wait dude don’t say what
I’m gonna say because I need to continue
my research and there could be outbreaks
that happen after outbreaks because it’s
not over
sometimes people then then contaminate
each other so the outbreak may not be
over once people are becoming sick well
then in December eighty people students
at Boston College got sick so from July
to December you know there were jokes
going around calling like Ipoh clay and
things like that for e.coli and the PR
and the perception took a mighty hit a
deserve it hit as people were like I’m
sure I’m gonna eat there well by the end
of sixty sixteen you know sales had
plummeted all the way down to three
point nine billion and only twenty two
million dollars of net income so let’s
look at that at the end of fifteen you
know four point five billion for 275
million by the end of sixteen all of
this has shaken through the system and
it’s a freaking disaster then in 2016 it
doesn’t get much better you know they
actually closed for one day in February
of 2016 to talk about food safety issues
and all their locations
now many people would say well that’s
nice that you did that remember
Starbucks closed for a day because their
CEO said hey I want to make the best
product for my customers that are
trusting me and that was a product
quality issue and everybody applauded
that because by and large 21
the Starbucks in the coming weeks you
said wow they do have the quality this
is a little bit better coffee they’re
paying attention to this well that’s
wonderful for marketing and product and
quality this is freaking people getting
sick you know and you’ve got your stock
that goes from $700 all the way down to
you know into the 300s and that kind of
a drop in such a short period of time if
you’re an investor there’s only one word
for that is damn and if you’re leaning
over a toilet puking your guts out
because you ate a bad burrito that it’s
double damn so this is just horrible for
investors this is horrible for customers
and they wait all the way until February
the following year to close for one day
and talk about food safety now they did
close some restaurants here but they
were working with the Center for Disease
Control to clean all ingredients out of
the restaurant clean everything in the
restaurant sanitized the restaurant to
basically take it to zero now bring in
new supplies new food and let’s get this
open again so they did that a couple of
times voluntarily and a couple other
times they were under pressure from the
CDC so why wouldn’t you close like back
in November when all of this is going on
why wouldn’t you close there you wait
till the following well you know the
market you know reacted that a to and it
continued to go down now in late 2016
they’re trying to get everybody to come
back they’re trying to get him to come
back so they actually did something good
that was successful for the moment they
announced the chip topia rewards card so
if you went like four visits in a row on
your fourth visit you got something so
it was basically a repetitive visit
reward card trying to encourage people
to get a benefit to come in and start
being a repeat visitor repeat diner at
Chipotle again well that when they ended
it studies showed that the brand hadn’t
moved very much meaning that there was
so much damage was done he would I call
the zone of death that the perception of
them didn’t recover even when they did
this rewards program and according to
some research it was the single most
lucrative rewards benefit that
you or I could have had anywhere in in
the food service you know fast food fast
casual industry meaning that what we had
to spend to get something a benefit at
Chipotle and the number of things we
bought was far less to get the reward
than other places another word and say
we’re really trying hard to put a high
value program out there to bring us back
in but when it was over we didn’t think
any more positively about Chipotle than
we had in the months prior which meant
that the what was happening to the brand
was pretty deep-seated well they also
had an issue because other bad news bad
news travels in flocks and their CMO
mark crumb packer I believe was his name
you know he’s in New York and he gets
stung on like five counts of cocaine
possession because he was repetitively
buying I guess from an undercover
organization now they said it wasn’t
affecting his job and they put him on a
leave of absence and he came back no I
think that’s a humane thing to do
because if he shows that he’s recovering
and he’s recovering at it come back and
he hasn’t harassed employees to do
things I think it’s it’s good that they
bring him back so it showed that inside
the culture of the company there were
there was something going on there that
I think was sensible but nonetheless
they said it didn’t affect his job but
it was yet another piece of bad PR along
the way you know also you know suddenly
malware shows up and they said that 20
250 restaurants in 47 states have been
infected by malware that was potentially
exposing your and my credit cards from
at the point-of-sale
now you’re like oh no so now their IT
systems weren’t bulletproof with
firewalls to protect intrusion so they
have malware get in there then there was
as we call a rat video went viral
showing a Chipotle restaurant somewhere
with a rat that apparently had fallen
from the ceiling or something now
there’s probably a lot of fast foods as
does McDonald’s have one Mouse or one
rat in one location summer in the United
States right now probably but
nonetheless it’s just another shot to
Chipotle about the cleanliness there
then
they attempted to introduce a new food
product and they introduced what
everybody called the worst queso ever
invented it was horrible and you know
the CEO Steve Ellis was out there
tweeting and stuff saying well haters
are gonna hate
wait a minute haters are gonna hate it
tasted terrible
we’re not haters we’re customers and we
said that’s not delicious you are a
trained chef
go back to your Culinary Institute
history and make some queso that’s damn
tasty please so you know meanwhile he’s
trying to you know you you kind of put
it back on the customer a little bit
they’re haters gonna hate which I don’t
think was the right thing to do and then
bingo we get hit with another case of
norovirus again finally at the end of
2017 enough is enough and the startup
CEO Steve Ellis steps down to executive
chairman what executive chairman means
is he’s on the board of directors but
he’s no longer like a day-to-day
operator but executive chairman means
that he will influence and have some
discussions with or relationships on a
day-to-day basis with certain executives
he created the place he knew more about
the menu and everything that goes with
it so ok it made sense to keep him there
but clearly what the board is saying we
got to look for a new CEO and I’m gonna
take you to why they did that in just a
moment so he steps down and then now
it’s that they’re adding some new
ingredients they’re pretty interesting
and tasting and they’re closing tasty
made burgers
well they apparently had attempted to
get into the burger lane now I don’t
know why they would do that I would
think why don’t you focus on
rejuvenating your brand you know
focusing on the Mexican grill that you
do so well go fix your queso disaster by
putting out something that’s really
really tasty and why don’t you focus on
that there’s a lot of opportunities to
be focusing on getting your core
business right without getting
distracted they also had a um I think 15
or 20 Asian themed restaurants that were
out there so why are you trying to
experiment like that there are big
holding companies that have a lot of
fast food
Pizza Hut and Kentucky Fried Chicken you
know I think are in the same holding
company but there’s a lot of that but
that’s done by holding companies each of
those individual restaurants does what
it does well and focus focus focus on
getting it right along the way they did
open for breakfast and they did a test
drive through finally that they’ve now
got drive throughs opening breakfast
they added scrambled eggs and some
breakfast oriented foods into what they
were doing but a lot of people who just
came in and said well I’m just gonna
have the burrito because breakfast
burritos are big so they opened for
breakfast but the breakfast menu you
know didn’t work perfectly but I think
that’s good that they were opening for
breakfast and they were trying and they
were working on it that’s an example of
things that I think they should have
been trying in their Lane nonetheless
they closed tasty made which was just
announced a little bit ago here in 2018
they’ve got drive-through starting and
then they go and hire Brian Nicole
Nicole and Nicole I hope I got that
right and he worked at Pizza Hut and he
worked at Taco Bell had about six seven
years at Pizza Hut than six seven years
at Taco Bell and they recruited him over
well that resulted in a quick pop up of
the stock price to over three hundred
dollars a share to an enterprise value
right now of right around nine ten
billion dollars the value right now but
there’s a lot of investors that are a
little nervous because they’re like wait
a minute this is the guy at Taco Bell
that brought us the Doritos locos taco
that doesn’t sound like the kind of
things that follow in what Chipotle
stands for this isn’t what they stand
for the other side is saying wait a
minute
this guy was focused on disciplines and
controls in those restaurants and quick
service quick service translates to
same-store sales you can get more done
at lunch with quick service and more
people can get through the line between
11:30 and one o’clock that critical 90
minute lunch window so he’s probably
gonna be good for same store sales he’s
probably going to be good for efficiency
well it remains to be seen is he gonna
bring us a Doritos locos taco which
nobody can say is a particularly healthy
option but it’s pretty tasty and so the
jury’s out on worries gonna be but
people do agree that he is all about
controls which brings me to the last
part so where are they going I think
they’re gonna be okay with Nicole
they’re at four and a half billion
dollars in sales closing 17 back up to
about 176 million in net income so I
think that there’s a way out and I think
changing the CEO at this point basically
is the announcement that we’re doing
things in a different way but I want to
take you to what in my view a case study
of what I think has happened a lot of
you asked me say Tom we’d love you to
dive a little deeper into the lessons of
case studies not just go through history
as a case study well I think history is
a case study in this case because
clearly something that happened here
didn’t get fixed and how does malware
feed into that let me explain controlled
growth is so important when you’re
growing like this you have to control
your growth in other words you have to
systematize things and look for all of
the potential failsafe opportunities
such as firewalls and security to
protect customer information whether
you’re Nordstrom’s and you’re operating
online commerce or you’re Chipotle and
you’re just operating you know you know
you’re taking credit cards at the
point-of-sale
once you are touching that kind of
information there are criminal elements
out there they’re gonna be trying to
knock into that and steal it from you so
there’s a there’s a philosophy of
control that goes all the way from IT to
food and when you are growing there’s
three areas of control one is people how
do you train people do you train them
consistently do you review the training
methods do you see if they’re if they’re
doing what they should be and the
training is working and reinforcement
training there’s a lot that goes into
that then processes once somebody is
trained and what they should do is that
process working right whether you’re
protecting credit card information from
your customers or you’re bringing
meat and raw vegetables into the same
back kitchen and getting ready to
prepare it as any restaurant does are
your processes in place doing the right
thing and lastly vendors or is your
selection process and your upstream
review process to make sure those
vendors are high caliber how is that and
so controlled growth each one of these
things can get out of hand you can be
hiring people so fast that you’re not
getting each one trained you can be
growing so fast that the process that
worked yesterday needs to be adjusted
and optimized today and you didn’t do it
and now you have a problem you can have
vendors that you grow so fast
that they grow fast meaning I maybe I’m
supplying pork – you know Chipotle and I
have a free-range farm I gotta buy more
land grow more hogs and go faster maybe
I cut corners maybe I’m you know the
part of the issue here in e.coli
outbreaks so are my vendors staying in
control all of this comes together then
when something happens you have to find
permanent solutions organizations that
find permanent solutions when fast
growth leads to a failure of people
processes or vendors that’s a sign of a
mature organization if this happens here
and they keep growing and then seven
years later it happens here I don’t
think they ever permanently solved the
problem it doesn’t seem like it and I
don’t think that the solution is to
criticize the Center for Disease Control
because they’re making this announcement
or that announcement they’re trying to
protect the public and so I think what
happened here is a start-up CEO who is a
gifted chef drove it through high growth
adding some good people around him but
in the end I think what got exposed is
it was not a culture of high controls
because when you see a malware outbreak
and you see repetitive things happening
I think that’s a sign that the
management during the growth did not
have that organization under control and
it starts showing up in so many
places and yet they had a brand that was
beloved that now needs to make a
comeback and maybe the new CEO that’s
been brought in
Brian Nicole is going to be part of that
oh and maybe he brings with him his
experience with a very large Taco Bell
organization that has more locations
than the 20 250 some locations that
Chipotle has now so I think that’s a
case study in itself you we could also
go into PR and how they reacted and how
they did this but I think what we see is
a case study of how they successfully
grew coupled to what would happen behind
the scenes a lack of controls and
permanent solutions that led to
repetitive problems including one that
is horrifying I don’t think it’s safe to
eat there in the mind of the diner is a
disaster and that my friends was what I
called the zone of death that is the
Chipotle case study and there’s lessons
in there for you or me
whether we’re operating a small t-shirt
company in Memphis Tennessee or we’re
operating something as big as a five
chain restaurant in our city or a 2,000
locations restaurant chain a humongous
organization across the United States
wherever you are there’s lessons in the
Chipotle history and a case study of
control for you remember we’re on a
mission to a million subscribers here at
value tainment and when we are we will
have the first value tainment conference
where you will learn how to grow your
business grow yourself grow your
leadership as you drive forward and be a
success in your life and we can’t wait
until next time i’m thomas with the biz
doc and i hope i left you better than i found you
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