Chipotle Mexican Grill

I. Key Problem Chipotle Mexican Grill (CMG) “Food with Integrity” founded in 1993 with the aim of reinventing Mexican food with a policy of Food with integrity and the commitment to finding the very best ingredients raised with respect for the animals, the environment, and the farmers. The company witnessed a tremendous growth over the years until October 18, 2012 when its stock price suffered a significant decline from a 52-week high of $442.

40 to $285.93.CMG who is a differentiator in the restaurant industry now faces an increase in food cost and shortened supply of organic items and also an intense competition from the launch of a Cantina Bell menu by Taco bell which Jeff Einhorn, a Hedge Fund Manager presented to have put CMG at risk of losing its potential customers. To stay steadfast in its policy means to increase the prices of its menus which lead to the question: “Could CMG continue to use quality and sustainably-sourced inputs as differentiators to justify a higher priced menu?”II. Relevant TheoryThis case involves low cost versus differentiation theory.

Chipotle is known for being a differentiator in the restaurant industry by using fresh ingredients, organic items, naturally raised meat free of antibiotics and fed with a vegetarian diet and its milk sourced from dairies that provided pasture access for their cows. Its policy which is “Food with Integrity” comes with a high price which was not inevitably passed onto customers but adjusted by its operational efficiency and thereby maintaining a high profit margin and giving it an edge in the industry. CMG needs to decide at this point how to sustain competitive advantage in the industry. Whether to allow the increase in food cost supplies, ingredients and organics to be passed on to the consumers by increasing the price in 2013? Or whether to use incremental revolution to avoid an extraordinary price hike.III. Assessment of AlternativesAn option that CMG has is to increase the prices of its menus going in 2013 to respond to the expected increase in food cost.

If CMG wants to continue with its differentiation theory, remain profitable and persists with its “Food with Integrity” mission, despite the shortage of the supply chain and pricey organic ingredients, this would be the option to choose. After all, this is the foundation on which the company was founded. Even though the expected increase in food costs was bound to affect CMG both in its margins and in its quest to increase its usage of sustainable inputs, it would ensure consistency in the company’s policy. CMG would continue to incur the cost of luxurious campaign that it could ill afford in these difficult economic times.

A major flaw of this option is that CMG stands a high risk of losing its potential customers who have already been reported to be visiting Taco Bell’s Cantina Bell menu which is cheaper and relatively with the same ingredients as Chipotle’s staples such as black beans, cilantro rice, and corn salsa. Another negative effect this option has demonstrated was by a fall in the stock of CMG after announcing that food costs are expected to increase, and in the Einhorn effect after analyzing that 75 percent of self-identified Chipotle customers also frequented Taco Bell and that Taco Bell came out on top on both price and convenience.He further stated that: “23% of Chipotle customers had already tried Taco Bell’s Cantina Bell menu – which features burritos and burrito bowls made with fresh ingredients – and two-thirds of those customers indicated they would return…”. CMG risks losing most of its customers by increasing the price of food to respond to an increase in cost. Customers would be scared away with by a seventy-eighty percent increase in price.

Another alternative CMG has is to use incremental revolution strategy which means making a big change in smaller steps. The company can remain organic and natural with this strategy but increase prices in a small magnitude.Though this strategy would not be profitable in the short run, but through marketing and advertising, it would gain the audience of more customers by preaching healthy food habits and regain competitive advantage in the long run. An average American is health conscious and would rather pay more (little bit) to get a healthy food. The last option CMG has is to go the same route as its competitor after all, it has built for itself a repute over the years in the industry.

Rather than paying a high price for its ingredients and staying natural, it can mix its meats and ingredients, go unnatural which I term detrimental. This means that its policy of food with integrity would be swept away and it would be stuck in the middle. This would eventually scare away the remaining loyal customers of the company and thereby increasing its risk of going down the drain.IV. Suggested Course of Action After carefully analyzing the three alternatives, I would recommend that CMG uses the incremental strategy – increasing the prices of its menu in smaller magnitude while keeping its core values as a differentiator in the industry.

It should change its policy on advertising that marketing has always been based on the belief that the best and most recognizable brands aren’t built through advertising or promotional campaigns but rather through the word-of-mouth publicity.I believe that if it increases its publicity by advertising, spend more money promoting its brand, and continue to carry out programs such as the “Farm Team” and “Cultivate” that it carried out between 2009 and 2011 as well as releasing both online and TV ads, this would not only keep the current customer base but would also attract more customers. I see the stock picking back up in a couple of years with this suggested course of action.V. Key TakeawayA company whose growth arises from being a differentiator should try by all means to keep its core competency even though it might face some challenges in the short term, it will eventually successfully regain and sustain its competitive advantage. It is difficult to be both a low cost and a differentiator.

Since CMG and has unique resources and capabilities which enable it to satisfy the needs of its consumers in ways that are difficult to copy because of the relationship it has built with its suppliers/farmer, it would not fall from the ladder as a differentiator. A low cost strategy is rarely able to sustain competitive advantage as it often results in price wars.