To: Clark Hansen, CEO
From: Jihye Gigi Choi, Investment Analyst R&D
Date: July 24, 2015
Subject: Investment Recommendation
The purpose of this memorandum is to propose investing in Chipotle Mexican Grill, Chipotle. The investment analysis conducted by my team indicates that Chipotle will not only offer respectable rate of return on our investments but will also benefit both the society and environment through Chipotle’s business operations. Chipotle is a leading example of how firms can equally pursue values of sustainability, and profitability. Chipotle’s motto: “Food with Integrity,” shows its aspiration to promote and serve “responsibly produced” food. Chipotle and our company share similar values, performing business in a socially and environmentally responsible manner. I strongly believe that our involvement with Chipotle will go beyond its financial benefits.
- About Chipotle
- Financial aspects of Investment
- Social aspects of Investment
- Potential risks
Chipotle “Food with Integrity”
Chipotle is the most popular fast casual restaurant, restaurants that provide premium ingredients with fast speed services. As the leader of the fast casual restaurant industry, Chipotle was the first restaurant chain to disclose the GMO ingredients in the US, and now Chipotle only serves food cooked with non-GMO ingredients. Since its first year of operations in 1993 by Steve Ells, the founder and co-CEO, Chipotle has been regarded as the pioneer in the fast-casual category, the fastest growing segment within the restaurant industry. As of today, Chipotle has opened more than 1,878 restaurants worldwide.
Financial Aspects
Chipotle’s strong revenue growth indicates that investing in Chipotle is a good business opportunity.. In 2014, Chipotle recorded a total revenue of $4.11 billion, an increase of $893.7 million, 27.8%, compared to the 2013. Furthermore, net income increased $117.94 million from its previous year. As the result of their astonishing financial performances, Chipotle was ranked top 5 out of 10 America’s fastest growing restaurants by CNBC. According to the most recent 10Q, Chipotle has earned $2.29 billion in revenues, and $263 million in profits for the first half of 2015.. This is a 17% jump in both revenue and net income, compared to 2015. Moreover, Chipotle reduced 1% of its total cost due to the relief in dairy and avocado prices, which is a great news for Chipotle, who had to increase its menu price last year.
Apprehension arises from its slowdown in growth of same-store sales. Chipotle had 15.5% increase in same-store sales for the first half of 2014. But for 2015, it only grew 7.1% in comparable restaurant sales. This decreasing trend of same-store sales resulted mostly from the increase in menu price. Despite the slowing growth, investment in Chipotle still seems promising. In April 2015 Chipotle announced that they will only treat GMO free ingredients, which is believed to favorably affect the sales of the latter half of 2015 and its future operations.
Social Aspects
Chipotle’s massive success proved the restaurant industry that public awareness, and strive for sustainability are the fastest means to success. Chipotle established its reputation from engaging in environmentally sustainable business practices and in public awareness. Chipotle falls into every category of key terms that our company utilize in investment decision making: Triple Bottom Line, Corporate Social Responsibility, Social Enterprise, and Carbon Footprint.
Triple Bottom Line (TBL): Corporations tend to overlook environmental and social costs incurred during its profit-making activities due to its nonmonetary nature. Triple Bottom Line (TBL) concept captures environmental and social cost by adding people and planet factors as new bottom lines to the profit model. Although it is hard to measure these non-monetary costs, and significant variances exist within each industry, the concept of TBL is fastly growing and soon will be the determining factor for companies’ success due to the demand of the public for TBL. The article “Chipotle closing on Thanksgiving Demonstrates commitment to conscious capitalism” says Chipotle giving a day off on major holidays for its employees clearly shows its interest and commitment to TBL’s people portion.
Corporate Social Responsibility (CSR): Corporate Social Responsibility is similar to TBL. As corporations become big enough to make significant influence on both the society and environment, their responsibility has grown accordingly. Society expects big corporations to take responsibility for their actions and utilize the power to promote positive impacts on the environment and social welfare. CSR can improve or degrade the value of the company. Thus, CSR is not optional but necessary. Chipotle puts its CSR effort especially on the environment such as supporting sustainable agriculture. As an example, when commodity cost increased, Chipotle raised its menu price instead of cutting the profit margins of the farmers, which could harm sustainable agriculture practices. Also, Chipotle previously announced that they will not buy from farmers, who mistreat their animals. Steve Ells says, “Food with integrity is our commitment to finding the very best ingredients raised with respect for the animals, the environment and the farmers.”
Social Enterprise: Any organization, both non-and for-profit, is a social enterprise if it invests to its local community to solve social problems and improve the community. In 2011, Chipotle established The Chipotle Cultivate Foundation in order to expand its sustainable activities. Through the foundation, Chipotle contributed more than $2 million to support its philanthropic projects. A recent Times article, “What Starbucks can learn about race from Chipotle” mentions Chipotle’s Cultivating Thought project as a good example of tackling social issues. Cultivating Thought project encouraged customer’s literature experience by printing customer-written line on cups and bags, so that people can share their thoughts and values, and ultimately harmonize people of all races under food and culture.
Carbon Footprint: Carbon Footprint is the amount of greenhouse gases such as carbon dioxide emitted by an organization or individuals’ activity. Unlike other non-monetary costs such as social cost, Carbon Footprint is calculable with formulas for household energy, transportation, diet and eating habits, and services and goods. Also, there are many websites that provide free online calculators for carbon footprint. By measuring the Carbon Footprint, people are reminded how everyday activity can impact the global climate change. One of the activities that produces the most Carbon Footprint within the restaurant industry is the transportation of food supplies. However, Chipotle only uses ingredients that are locally produced, therefore, significantly reducing the overall Carbon Footprint for the size of its business.
Potential risks
Although it seems like nothing can stop Chipotle’s massive growth, there are potential risks that can adversely affect our investment. Fluctuation in commodity costs and hardship in finding right location to open new restaurants are the major risks associated with Chipotle’s operation. It is uncertain when and how much the commodity costs would increase since mostly it results from uncontrollable natural phenomenon, such as drought. We should keep in mind that the increase in commodity costs may take a big bite out of Chipotle’s sales as well as our investment. In addition, Chipotle’s strict requirements about new restaurant locations,accessibility to organic ingredients, may slow its new store growth, which may delay our targeted ROI withdrawal time period.
Final Recommendation
My research and analysis make me confident to recommend investing in Chipotle. It is evident that through this investment, our company will be profitable, and will be contributing to the efforts of making positive impact on our community and the environment.
Work Cited
Jack Linshi “What Startbuck Can Learn About Chipotle”
David Cretzmann “Chipotle closing on Thanksgiving Demonstrates commitment to conscious capitalism”
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