Chipotle Mexican Grill And the Future of the Fast Food Industry

Chipotle Mexican Grill And the Future of the Fast Food Industry Matt Fagella Management 302 Professor Jordi Comas May 11, 2016

Executive Summary The fast food industry in America has seen tremendous growth in revenue and consumer popularity over the past few decades, but with this trend has come a wide range of adverse social impacts. In an effort to keep costs down and profits higher than ever, factory farming and the mistreatment of animals, employees, and the citizens of the United States have become common practice. There has been a rapid rise in diet-related disease, worker exploitation, systematic animal abuse, and environmental destruction in America, and the fast food industry is a major contributor to each of these issues. Chipotle Mexican Grill is hoping to end this threatening movement. Since its founding in 1993, the restaurant chain has quickly become one of the most popular fast food options in the United States, promoting the ethical treatment of animals and healthier ingredients than traditional fast food. With over 2,000 locations worldwide, Chipotle has the potential to create a significant impact on the future of the healthy fast food industry. While Chipotle is undoubtedly making powerful strides towards quick, healthier food options at an affordable price, their overarching Food With Integrity mission is often criticized by the media. Questions have been raised concerning their employee treatment as well as the firm s commitment to ensuring all ingredients are local and natural. Since the E.coli outbreaks in late 2015, the safety of their food has been under scrutiny, and other potentially unethical practices have also been revealed. Chipotle has the potential to be a true pioneer in the fast food industry in the United States, but in order to accomplish this, the company needs to better evaluate the ethical decisions made throughout each aspect of its chain.

Table of Contents Executive Summary.....2 Introduction.....4 Issues with the Modern Fast Food Industry... 5 How Does Chipotle Compare? Strengths............8 Weaknesses......... 9 Problems Chipotle Still Faces..........11 Recommended Course of Action... 12 Hold Suppliers to Higher Standards..............13 Improve Employee Treatment..........14 Conclusion......15 Works Cited.......17

Introduction The fast food industry in America has seen exponential growth over the past few decades, and with it has come a wide range of adverse social impacts. In an effort to keep costs down and profits higher than ever, factory farming and the mistreatment of animals, employees, and the citizens of the United States have become common practice. Chipotle Mexican Grill is hoping to end this dangerous movement. In 1993, Steve Ells was a young chef looking to start his own restaurant after graduating from the Culinary Institute of America. He was fascinated by the popularity of smaller burrito places near his home in San Francisco, CA, which gave him the inspiration to start the first Chipotle restaurant near the University of Denver campus. Using an $85,000 loan from his father, Ells set a goal to sell 110 burritos per day in order to keep his restaurant profitable. Within one month, they were selling over 1,000 burritos each day. Today, Chipotle has become one of the most popular restaurant chains in the United States. Consumer Reports ranked Chipotle as the best Mexican fast-food chain in 2011, and about 750,000 customers are currently being served each day. The company has thrived on its signature tacos and burritos, hooking customers on an enticing combination of taste and their mission Food with Integrity. With over 2,000 locations worldwide, Chipotle has the potential to create a significant impact on the future of the healthy fast food industry. While Chipotle is undoubtedly making powerful strides towards quick, healthier meal options at an affordable price, their overarching Food With Integrity mission is often criticized by the media. Questions have been raised about the employee hiring process as well as the company s commitment to ensuring all ingredients are local and natural. Ever since the frequent E.coli outbreaks in late 2015, the safety of their food has

been under scrutiny, and other potentially unethical practices have been revealed. Chipotle has the potential to be a true pioneer in the fast food industry in the United States, but in order to accomplish this, the company needs to better evaluate the ethical decisions made throughout each aspect of its food chain. Issues with the Modern Fast Food Industry Fast food in the U.S. has grown from a $6 billion-a-year business in 1970 into a tremendous corporate industry with more than $170 billion in annual revenues today. 1 The rise in popularity of fast food has changed the market to find more efficient ways of producing and shipping food in mass quantities at very low prices. However, the modifications that have occurred over the past few decades have come with a cost. In particular, since meat, dairy, and eggs are the main ingredients in fast food, the exponential increase in fast food consumption has led to a vast range of negative social impacts. The United States has seen a rapid rise in diet-related disease, worker exploitation, systematic animal abuse, and environmental degradation. Unfortunately, the fast food industry s economic influence has enabled it to create a fundamental shift in the country s eating patterns, in addition to altering the manner in which food is produced. The industry has enormous purchasing power, and huge demand quantities for cheap animal products have contributed to a rise in factory farming and government subsidiaries for staple animal feed crops 2. The fast food industry holds 1 The Dark Side of the All-American Meal 2 Why Quick, Cheap Food Is Actually More Expensive.

excessive economic clout in today s society, and massive multinational corporations such as McDonalds and Burger King are now making enormous profits selling fast food at artificially-reduced prices. As consumers continue to devour increasing quantities of fast food, the negative impacts have become increasingly more apparent. Several scientific studies have been conducted correlating the consumption of meat and other animal products with some of the deadliest medical disorders in today s society. Cardiovascular disease, multiple types of cancer, diabetes, and obesity are all strongly related to the increase in fast food consumption, yet the industry does little to amend this downward spiraling pattern. Obesity in the United States has more than doubled since 1980, with more than 60% of today s adults and about 20% of children now being classified as overweight or obese. 3 Fast food is one of the leading contributors to this trend due to its high sugar, fat, and Figure 1: Obesity in the U.S. has been on the rise for decades, and a main contributor has been the increase in fast food consumed by children 3 Childhood Obesity

calorie content, in addition to low overall nutritional value. Unfortunately, the negative impacts of the industry extend beyond harming human health. Industry workers, animals, and the environment also experience detrimental impacts as a result of the poor ethical behaviors exhibited by large fast food corporations. There are currently about 3.5 million fast food workers in the United States. Typically, these employees work for minimum wage with no medical benefits or a right to unionize. The agricultural industry is presently ranked as one of the most hazardous industries to work for in the U.S., and fast food workers suffer one of the highest injury rates of any employment sector. 4 Large corporations often exploit their workers just to lower their cost of business and ultimately raise profits, ignoring the ethical implications behind their actions. Animals are equally mistreated in the fast food process. The majority of the big companies purchase large proportions of meat, dairy, and eggs produced by farmers, and therefore are able to exert huge influence over the way animals are raised for food. Factory farms are forced to supply for the industry s large demand volumes of animal products at the lowest costs possible 5. To accomplish this, animals are regularly crowded together to conserve space, often confined to cages or crates, and fed non-therapeutic antibiotics and growth hormones. Body parts are amputated and the animals are ultimately slaughtered on assembly lines, often times remaining fully conscious throughout the process. Cows, chickens, and pigs are raised enduring lifelong pain and suffering on factory farms where they are treated as nothing more than production units. 4 The Fast Food Jungle 5 Health Food Restaurant Franchise Industry

Lastly, the environment continues to suffer as a result of multinational fast food corporations and their ethical practices. The livestock sector is one of the top two or three most significant contributors to the most serious environmental problems, at every scale from local to global, that the world faces today. 6 Millions of acres of forest are cut down annually to manufacture fast food packaging, which accounts for almost 20% of all litter in the United States 7. Fast food companies have shown no interest in slowing this devastation, especially since they profit more from factory farming than any other commercial or industrial sector. Evidently, there are multiple serious issues with the modern fast-food industry in America, yet none of which are being addressed or seriously considered. As we look to improve our nation and its culture for our future, it is imperative to take the necessary steps to repair the food industry and its rising concerns. How Does Chipotle Compare? Strengths Chipotle has worked tirelessly to separate itself from traditional fast food chains by emphasizing its sustainable food and appealing to Americans against unhealthy, antibioticridden food. In 2001, Chipotle released their mission statement Food With Integrity, which highlighted the company s efforts to increase their use of naturally raised meat, organic produce, and dairy - without any added hormones. Relative to other fast food 6 Livestock s Long Shadow: Environmental Issues and Options 7 2008 Fast Food Industry Packing Report

corporations, Chipotle is miles ahead of the competition in terms of overall health quality and the methods by which their ingredients arrive at the restaurant. None of Chipotle s locations have freezers, microwave ovens, or can openers as part of an effort to be transparent about the freshness of the ingredients being used. 8 Since the company s founding, the restaurants have also transitioned to using only the leg and thigh meat from its chickens, further improving the quality of meat used in production. Chipotle brands its meats as Responsibly Raised, which entails raising animals humanely without the use of antibiotics or added hormones 9. Since 2010, 100% of Chipotle s pork was naturally raised, and today it sources all of of its beef from farms that either meet or exceed the naturally raised standards. The sour cream and cheese ingredients are made with milk that comes from rbghfree cows and is sourced from pasture-based dairies. These dairies provide an even higher standard of animal welfare by providing outdoor access for cows 10. Much of its remaining produce is organically grown using USDA organic certification. Chipotle has consistently stated its intention to reinvent the way people think about fast food, and has done an exceptional job of breaking barriers set by the modern fast food industry. The firm s efforts to distinguish itself from traditional fast food has paid off, both in terms of sales and public image. Health.com has included the restaurant chain in its list of the Healthiest Fast Food Restaurants, and in 2013 Chipotle was ranked third in consumer perception, trailing only Chik Fil A and Panera Bread 11. 8 Chipotle Mexican Grill Inc.: Strategy with a Higher Mission or Farmed and Dangerous?" 9 Chipotle 10-K 10 FOOD 11 Lutz, 2013

Weaknesses Chipotle proudly boasts its support for local economies. The company claims to make the livelihood of small family farms possible through the purchase of locally sourced produce, in a time where many local farms are struggling due to the national demand. This seems like a highly ethical decision by Chipotle, however, the company defines local as within 350 miles of the restaurant 12. It is clear the term local is loosely defined, as many would consider this a significant distance and not necessarily of aid to nearby farmers. Furthermore, the company states only some of its produce is sourced locally. The exact percentage of local produce is not specified, giving reason to believe the figure may not be as impressive as the restaurant chain would like the public to believe. While their original statement might sound like an ethical decision at first glance to naïve customers, Chipotle s commitment to buying local and aiding small family farms seems to be overpowered occasionally by the need to compete economically with the other giant fast food corporations. Additionally, Chipotle has recently been criticized for the way they hire and treat new employees. In 2010, Chipotle became subject to a probe by the US Attorney s office in Washington as well as the Department of Homeland Security s Immigration and Customs Enforcement (ICE). The investigation conducted by ICE determined that Chipotle had been illegally hiring numerous workers around the country, and ultimately resulted in the firing of over 500 workers. Some of these employees had risen significantly through the 12 Chipotle 10-K

company ranks and held important salaried positions overlooking workers controlling the health and safety of food being served. There have also been multiple lawsuits filed in the past few years where employees complain they are not properly compensated for overtime hours. Numerous workers have come recently noted they are not being paid properly due to policies set in place by corporate policy which are specifically designed to exploit the employees. If Chipotle wants to be regarded as an ethical company, it needs to ensure each aspect of its chain is acting with good morals. A corporation with the motto Food With Integrity is certainly not living up to its mission with this type of employee abuse. Problems Chipotle Still Faces Despite good intentions, at times the supply of Responsibly Raised meats is not enough to meet Chipotle s demand. For periods in both 2013 and 2014, Chipotle was forced to contradict their mission statement and serve conventionally raised meat containing Figure 2: From 2013 to 2014, Chipotle s food costs increased 1.2% as it increased the Responsibly Raised meat it served to customers by 20% (Jones, 2014).

antibiotics due to a shortage of beef across the country 13. In 2013, only about 80-85% (compared to 100% a year before) of Chipotle s beef was naturally raised 14. In defense of the company, Chipotle does a good job maintaining transparency with their customers whenever their meats are conventionally raised. Announcements are made on their website and informative signs are put up at the affected restaurant locations. This gives consumers the opportunity to avoid these meats in favor of healthier alternatives if they desire. However, this does highlight some of the issues Chipotle faces as its chain continues to expand nationally. It is becoming increasingly more difficult for the business to keep up with demand, especially in today s world where the majority of beef is still raised with antibiotics. Keeping to their high nutritional and ethical standards will continue to be a challenge for the corporation going forward. Recommended Course of Action Chipotle has the capability to influence a transformation across the entire fast food industry through raising awareness about the modern day threats of today s agriculture and food industry. Chipotle has a strong marketing team and budget that has been extremely successful in the past, and can continue to make strides in displaying the dangers and threats of today s food industry to consumers if they choose to allocate their spending appropriately. Chipotle already raises awareness through its Cultivate Foundation, where several advertisement campaigns have been run promoting sustainable foods and raising 13 What is Chipotle Mexican Grill? 14 Bloomberg, 2013

awareness about food sourcing. The company has started to address the reality of today s agriculture business through the release of two animated advertisements, The Scarecrow and Back to the Start, which have combined for over 25 million views worldwide 15. These simple yet informative videos highlight the dangers of factory farming in a way that the general public can easily comprehend. This is the type of advertising Chipotle needs to continue to build upon if they truly want to establish themselves as a corporation with integrity. These ads will both increase demand for their product, since consumers will feel more inclined to purchase food from sustainable restaurants, as well encourage consumers to think more carefully about purchasing food from companies that participate in poor ethical practices and factory farming. If customer demand falls for the major players in the fast food industry, these huge multinational corporations will be forced to rethink their business models and will ultimately improve their own ethical standards to compete in the changed market. Hold Suppliers to Higher Standards In addition, Chipotle should work with suppliers to set higher standards for the industry. Chipotle s demand for sustainable food has led to the creation and support of sustainable farms around the country, and the demand is still not fully being met. There is further room for growth, therefore Chipotle can work with new suppliers and offer them better prices for higher quality food than the other non-sustainable buyers who are solely interested in keeping costs down. Suppliers will agree to this if Chipotle can provide reliable and consistent demand for their sustainable products, which should not be a 15 How Chipotle's 'Food with Integrity' Strategy Can Really Succeed

problem considering the company s needs and mission statement. As Chipotle grows and becomes an even stronger presence in the industry, competitors will be challenged to also work with their suppliers to raise standards in an effort to keep pace with Chipotle. Through this process, suppliers as a whole will begin to shift towards sustainability to keep up with the demands of their buyers, many of whom would be the large companies of today s fast food industry. As more industry competitors begin to seek sustainable suppliers, the market dynamic of the fast food industry will adjust accordingly. This increased demand for sustainable food will benefit pre-existing suppliers and provide incentive for more to join the market. Suppliers that previously used anti-biotic and other unethical practices to satisfy their buyers (huge corporations solely interested in profits) will now produce more sustainable products to satisfy the altered needs of the large corporations. Instead of being a minority in the industry, sustainable growers will become increasingly more prominent. As the number of sustainable suppliers grows, competition amongst firms will drive prices lower and standards even higher. Business will then have the power to leverage suppliers against each other and reap further benefits. Through this cycle sustainable food will become less expensive over time, benefitting everyone. It only takes a few big-name competitors to switch over to Chipotle s sustainability practices before a domino effect takes place throughout the food industry. Improve Employee Treatment Finally, for Chipotle to establish itself as a model company, it needs to solve its internal issues with employees. Workers are an integral part of the supply chain, and

problems with them will effect the entire company image. Chipotle has worked hard to distinguish itself as a leader in the way it sources food, but has plenty of room to improve internally. Workers deserve to be fully compensated for their efforts and should be hired through an entirely legal process. Chipotle claims its culture of high quality foods starts with the hiring process, stating the company makes an effort to hire employees who share a passion for food and who will operate in our restaurants in a way that is consistent with our high standards. 16 To date, Chipotle has not held the same standards for employee treatment as it has for food sourcing, and until this is fixed the integrity of the Chipotle brand name will be compromised. Conclusion Clearly, there are serious problems with the fast food industry in America. Chipotle Mexican Grill has taken a powerful first step towards correcting some of these issues, but needs to continue to act as a role model for future companies to follow. Chipotle has captured a huge audience of Americans, many of whom are teenagers and young adults with potential to be lifelong customers for companies who treat their employees, animals, and environment ethically. Chipotle has undoubtedly taken huge strides in raising standards for the food they serve and the methods by which the ingredients are produced, but there is still room for improvement. Further marketing and increasing public awareness about the benefits of sustainable food sourcing will educate consumers and hopefully lead them to purchase food from ethical companies as opposed to the large 16 Chipotle 10-k

corporations who solely consider profits. Chipotle has the capability to permanently change the fast food industry in the U.S. for the better, and hopefully a new trend of ethical fast food companies will result in healthier Americans, morally treated animals, and the environmental benefits that are greatly needed.

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