Steve Ells, Founder, former Chairman & CEO of Chipotle Mexican Grill (NYSE: CMG)
While it’s interesting to study founders of tech companies, who became billionaires in their 30s or 40s, I’ve been always fascinated by people who built extraordinary businesses in highly competitive industries, like retail or restaurants, where it is much harder to differentiate from competitors. The common theme is that such founders are innovators, establishing new markets and pushing their industries forward, building a lot of value for consumers and shareholders along the way. As Roku CEO Anthony Wood puts it: “It’s hard to make money when you pick fights with the incumbents in the industry”.
Steve Ells is one of such founders, as he created a new restaurant category – fast casual, which combined the speed and convenience of a quick service restaurant with high quality food.
Ells’ recipe for building an outstanding restaurant business:
1. Strong corporate culture
2. Simple menu and high quality food
3. Focus on just few things, but doing them better than anyone
Ells on his early years and on starting Chipotle:
As a kid, I watched Julia Child and Graham Kerr, the Galloping Gourmet, on television while my friends were watching cartoons. In grade school I learned how to make hollandaise from my mom, and during high school in Boulder I started throwing dinner parties and collecting cookbooks. After college I went to the Culinary Institute of America [in Hyde Park, N.Y.] and then to San Francisco to work at Stars restaurant. I aspired to have my own restaurant, but quickly realized I didn't know the economics of full-scale restaurants.
One day, while sitting in a taqueria called Zona Rosa close to my house, I watched how the line crew took care of people in very short order. I took out a napkin and jotted down what I thought the average check was and how many people were going through the line, and I timed it. I thought, Wow, this thing makes a lot of money -- it could be a little cash cow that could fund my real restaurant. My dad gave me $85,000 -- part loan, part equity. I packed up within a couple of weeks and drove back to Colorado. It was the summer of 1992. The first Chipotle opened in Denver on July 13, 1993.
The tipping point came in October, when the restaurant reviewer from the Rocky Mountain News gave Chipotle (CMG) an A rating and described how we made the marinade to grill the chicken, how we used only the ripest of avocados -- all the little details.
After that people came from all over Denver, and down from Vail and Aspen. Suddenly the line was out the door and down the block. [4]
Quotes from Annual reports (AR) and interviews:
On Chipotle and his vision:
When I first opened Chipotle Mexican Grill some 13 years ago, my vision was simple—I wanted to show that food that was served fast did not have to be a typical fast-food experience. [AR 2005]
We plan on bringing the Chipotle experience to more and more people through a measured and disciplined growth plan that emphasizes quality over quantity, opting to build new restaurants only as quickly as we can find great sites and outstanding managers to run our restaurants. [AR 2005]
Chipotle was originally designed to be a very simple and efficient restaurant with very few moving parts. This allowed us to serve great food using fresh raw ingredients and classic cooking techniques, but also serve it to our customers fast. Chipotle is better today because we built upon this foundation by always challenging ourselves to do better. [AR 2006]
As we continue to grow, our vision remains the same: to change the way the world thinks about and eats fast food. We believe that the best way to accomplish this is to do just a few things, and do them better than anybody else… We are making this happen by building a unique corporate culture: one that appeals to the highest performers, and empowers them to take broader leadership roles in the company. [AR 2007]
Our success has been driven by our focus on doing just a few things, but doing them better than anyone else. This focus allows us to seek the best ingredients we can find, prepare great tasting food using classic cooking techniques, create a special people culture which leads to exceptional interactive service and an extraordinary dining experience, and serve our customers in an environment designed to complement our brand. [AR 2009]
Even within the booming fast casual sector, Chipotle’s leadership is undeniable: according to Factiva, more than 40 restaurants have been described as the Chipotle of their cuisine in news reports, demonstrating our influence within the category. [AR 2014]
On how Chipotle is different: “The kinds of food we purchase, that we’re cooking in front of customers, that we serve in this interactive format. We have two day-parts, lunch and dinner. We don’t have breakfast. We don’t have drive-thru. We don’t have late night. We don’t have 24-hours.”(Oct-14) [7]
“We’re not best in the world at burritos and tacos. What we’re best in the world at is building a people culture, sourcing really great ingredients, cooking according to classic cooking techniques, understanding the corresponding economic model and how to tweak that and drive that and provide this really great, new fast food experience. That’s what we’re best in the world at.”(Oct-14) [7]
On food:
Our menu is decidedly simple—focusing on just a few menu items, and preparing them exceptionally well using high-quality ingredients and classic cooking techniques. [AR 2005]
Our food is better today than ever before because our raw ingredients are the best they have ever been. By caring more about our ingredients, and respecting the animals, the land and the farmers who produce the food, our food will continue to taste even better and we will continue to strengthen the bond we have with our customers. [AR 2006]
These superior quality ingredients cost more, but we believe that they taste better, and help us to build a stronger bond with our customers. We believe that everyone should have access to better food from sustainable sources, and we have built an economic model that allows us to invest more money in food, while still producing outstanding financial results. [AR 2007]
The cornerstone of our vision is the philosophy we call “Food With Integrity” (FWI). FWI is our ongoing commitment to serve food made with the very best ingredients – ingredients that are raised with respect for the animals, the environment, and the farmers… In 2010, we used more than 75 million pounds of naturally raised meat – meat from animals that are raised in a humane way, never given antibiotics, or added hormones, and fed a pure vegetarian diet with no animal byproducts, and plan on increasing that number in 2011. [AR 2010]
Our food culture sets us apart from other restaurants. We have always used great quality ingredients and prepared the food we serve using classic cooking techniques in open kitchens. [AR 2012]
On the future of fast food: “I hope that it is a model based on respect. Respect for people's taste buds and for their health, for the environment and animal welfare, and for traditional farming methods. We have shown that you can serve fresh, high quality, sustainably raised ingredients that are delicious, and that you can do it without charging more. But we have a superior economic model based on a focused menu served quickly and efficiently. That's the key. Our high volumes allow us to spend more money on our raw ingredients. And people can tell the difference. So in the future I think we will see more concepts like Chipotle and fewer and fewer of the old concepts that are serving cheap, highly processed food.” (Sep-10) [3]
On how can Americans eat better: “If we really want to change the way Americans eat, we need to make delicious, sustainably raised food accessible to everyone. Most people are not willing to sacrifice taste or pay a lot more when it comes to eating better. That's why the Chipotle model is so important. It proves that fast food can be delicious, sustainable, and accessible to everyone. And I believe that Chipotle, and other restaurants' concepts that follow our format, will eventually displace traditional fast food in this country. It's already happening. Since Americans eat out so much, this shift away from traditional fast food will ultimately make a huge difference in the way people eat.” (Sep-10) [3]
“It’s the food that is the problem with fast food, not its speed.” (May-16) [8]
On people and culture at Chipotle:
We invested in communication and training programs which make the position of manager clearly accessible to those with a strong work ethic and a passion for great customer service. These programs will reduce the costs of recruiting, interviewing and training outside candidates while improving our bench of great managers and lowering crew and manager turnover. [AR 2006]
Beyond our efforts to serve the best-tasting food, made with more sustainable ingredients, we believe the most important thing we can do to ensure the success of our company is to build a culture which attracts and empowers the highest performers. We hire people who possess those certain characteristics one cannot train, and we teach them the skills they need to be successful at Chipotle. [AR 2008]
Another key aspect of our mission is the creation of an exceptional people culture: one where we select only the best and brightest people to join our organization and where each of these people empowers the people they work with to be at their very best. The foundation of this culture is the restaurant manager position, since it is the most important position in our company. [AR 2009]
The Restaurateur program is the cornerstone of our people culture and demonstrates how we are developing the future leaders we will need to sustain our growth. Restaurateurs, and the cultures they are creating in their restaurants, are allowing us to serve better tasting food, provide a better dining experience for our customers, and deliver better financial results. Our unique and compelling people culture is having a tremendous and growing impact on our business, and is one of the key drivers behind our success. [AR 2013]
The best Chipotle restaurant managers get the title "restaurateur" and a $10,000 bonus for each person they hire who starts as crew and goes on to become a manager. We have 170 restaurateurs out of 1,000 managers, and the turnover rate among them is very low.(Oct-10) [4]
I think the innovation that is the most important part of Chipotle which is our people culture. It’s our ability to attract top performers and create an environment where they are truly empowered to reach their potential. (Feb-13) [12]
On marketing:
“I thought we were going to get customers excited by telling them there were no antibiotics in our meat or no growth hormones used to raise the animals or no RGBH in our cheese or sour cream. Well, that's not a very appetizing message. So now we have a marketing program that's going to start a dialogue about why better ingredients make for better-tasting and more healthful food.” (Oct-10) [4]
In 2012, our marketing focused on building the Chipotle brand and engaging with our customers in ways that create stronger, deeper bonds than is possible with “limited time offers,” and on connecting with people emotionally in a way that is both true and meaningful. With programs like our award-winning “Back to the Start” animated short film and our Cultivate food and music festivals, we are creating a lasting connection with our customers and continuing a tradition of building our brand in unconventional ways. [AR 2012] link to the video:
Other:
So many people told me it was not a good idea to a start a restaurant, especially a fast-food restaurant. There was so much wrong with it; it was too spicy; everything was done by hand, from scratch. Everything was wrong. But that’s why customers liked it; it’s different, in the right way. If you have an idea, just go for it. If everybody is telling you that it’s wrong, maybe that’s an indication that it’s an original idea. (Sep-09) [1]
"When he opened the first Chipotle, it was never about developing a chain restaurant," Chris Arnold, Chipotle's director of public relations, says of Ells's first venture, the Chipotle he opened at 1644 East Evans Avenue [Denver] in 1993. "It was creating a cash cow to pay for a 'real' restaurant. His goal was to own his own fine-dining restaurant. Chipotle was a means to that end." (Jun-10) [2]
On what makes a great restaurateur: “A great restaurateur is someone who's truly passionate about what they do. They are usually perfectionists who are never satisfied with their restaurant. They are not in it for the money but for the love of the food. The very best are leaders who empower their teams to carry on their mission or start their own restaurants.” (Sep-10) [3]
When I started Chipotle, I didn't know the fast-food rules. People told us the food was too expensive and the menu was too limited. Neither turned out to be true. (Oct-10) [4]
On competition from fast food chains: “It’s a joke. You know those guys, right? They can’t change. The culture is just too ingrained. Which bodes very well for Chipotle.” (Oct-14) [7]
“You know, I hate to borrow Apple’s tag, but think different. Really. From the very beginning. I didn’t know what the fast-food rules were. I got my training at the Culinary Institute Of America, and then I opened up a fast food place according to fine dining rules.”(Oct-14) [7]
On 2015 food safety incidents:
2015 was the most challenging year in Chipotle’s history. The events of the year impacted our results and our reputation. We are committed to learning all we can from a difficult time to become a better company, and we strongly believe that our best days are ahead of us. We are also deeply committed to regaining the trust of our customers, and know that by doing so we will be in the best position to provide strong returns to our shareholders. [AR 2015]
In 1998 Chipotle got first investment from McDonalds; eventually MCD acquired them in 2001 for $1.5B.
McDonald’s comes knocking
Chipotle was immediately a hit, enabling Ells to open a handful of stores in the Denver area. Along with Z-Teca, it inspired other upstarts to embrace higher-end, oversized burritos, an option still little-known in many parts of the country. Soon, the market would be dotted with the likes of Green Burrito, Red Burrito and Baja Fresh.
One day in 1998… a serious suit showed up and said he was from McDonald’s. The burger chain was worried about franchisees building out their territories and exploring other growth vehicles. It was also concerned about the Golden Arches’ relevance to a market that was increasingly looking for fresher, more wholesome, higher art fare. Chipotle, which had not franchised, looked like a perfect concept to bring aboard as a second franchise vehicle. How did Ells feel about selling a stake in his baby for $360 million and letting the deepest-pocketed enterprise in the business fund his expansion? Thus began a rocky partnership.
The McDonald’s years
Opposites attract, but in the instance of Chipotle and McDonald’s, not so much. The big burger chain wanted to plane and sandpaper its young acquisition into something that could be offered as a new franchise option to existing McDonald’s franchisees. That meant rigidifying systems, taking skill and art out of the kitchen and reducing costs wherever possible, including in product specs. The direction clashed head-on with what Chipotle was trying to do.
A franchise test didn’t go well, marking what may be Chipotle’s lone experience with that mode of expansion. McDonald’s decided to let Chipotle grow as an all-company-operated endeavor, not an unusual approach before “asset light” became the mantra of investors and franchisors. Chipotle quickly outperformed its much larger parent. Younger consumers couldn’t get enough of its fresh, customized burritos and tacos, and the concept grew from 16 stores to 500. Meanwhile, McDonald’s ran into considerable trouble, without the diagnosis that would come years later: that it was losing its relevance. Activist investors urged McDonald’s to recapture its mojo by focusing more intensely on the core burger business and spinning off the distractions of the other concepts it had amassed. By that time, the roster included not only Chipotle, but also stakes in Fazoli’s, Donatos Pizza, Boston Market, Pret-A-Manger and Red Box, a DVD-vending business.
In 2006, McDonald’s spun off Chipotle in an initial public offering priced at $22 a share. The price would immediately double, and would eventually rise to nearly $500 a share. Ells found himself with the Wall Street investment community as his new partner. That relationship would prove far more harmonious. [10]
In 2015 Chipotle was hit by a serious of food safety incidents and by Oct-2017 stock was down by 60%. Ells left CEO position in early 2018, while in March 2020 he left the Board of directors.
We don’t know the reasons why Ells lost his touch with the business but between 2005 and 2015 his stake in CMG declined from 1.0M to 0.3M shares, while his compensation increased from $0.9M to $28.9M.
2 Chipotle's Steve Ells judging America's Next Great Restaurant
3 Behind the Scenes with Chipotle Chairman and Co-CEO Steve Ells
4 Chipotle: Rise of a fast-food empire
5 Chipotle's Ells to receive Cornell Hospitality Innovator Award
6 How Chipotle Changed American Fast Food Forever
7 I Didn’t Know What The Fast-Food Rules Were”: Steve Ells
8 Chipotle Founder Steve Ells Shares How He Reinvented the Fast Food Experience
10 REMEMBERING THE HIGHS AND LOWS OF STEVE ELLS’ REIGN
11 The untold truth of Chipotle
12 Icon & Innovator Awards 2013
13 Chipotle Annual reports 2005 - 2017