It was hard when I had to tell my kids that I thought Chipotle was “just okay.” My daughter dropped her fork. My son did a spit take. She was genuinely shocked. He was playing it up for effect. I appreciated both responses. But my wife and I recently came to a decision that it was time our kids no longer dictated…Read more...
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2 years ago Chipotle was in a downward spiral following a massive E. coli scandal. Here's the inside story of how the ex-Taco Bell CEO saved the chain.
Brian Niccol has managed to lead a massive turnaround at Chipotle since leaving Taco Bell to...Brian Niccol has managed to lead a massive turnaround at Chipotle since leaving Taco Bell to become the chain's CEO in March 2018. Since Niccol started the job, Chipotle has rolled out delivery, a loyalty program, and drive-thru "Chipotlanes," and it's even testing a new queso. However, perhaps the biggest change has been behind the scenes, with the rollout of the digital make line, which executives say essentially doubles the number of Chipotle locations in the US. Niccol and other top Chipotle executives recently sat down with Business Insider in Chipotle's new Newport Beach headquarters to discuss how he turned around the chain — and what comes next. Sign up for Business Insider's retail newsletter, The Drive-Thru, to get more stories like this in your inbox. Visit Business Insider's homepage for more stories. NEWPORT BEACH, California — In late 2017, Taco Bell and Chipotle were on opposite sides of the restaurant industry. Chipotle was founded by fine-dining veteran Steve Ells in 1993. Taco Bell was started by former hot dog stand owner Glen Bell in 1962. Chipotle invented fast-casual dining, a classier cousin of fast-food giants like Taco Bell. Chipotle sold "food with integrity." Taco Bell sold the Crunchwrap Supreme. But, probably the biggest difference between the two chains was their financials. Taco Bell was thriving, hitting six years of same-stores sales growth in 2017. Chipotle, meanwhile, was still desperately trying to win back customers after an E. coli scandal in 2015. Chipotle's shares had dropped more than 60% from their peak in August 2015 to November 2017, when then-CEO Ells announced the company was seeking a new top executive. Shares of Taco Bell parent company Yum Brands grew by more than 60% in the same period. Jack Hartung, Chipotle's chief financial officer who joined the company in 2002, recently told Business Insider that the time when Ells announced he was looking for a replacement was a scary period inside the company. "But also, there was enthusiastic anticipation, because I knew we needed to change," Hartung said. "It was obvious what we were doing wasn't working." Ells' announcement quickly sent the rumor mill into overdrive, as many wondered who would be tasked with saving Chipotle. Behind the scenes, Chipotle executives were meeting with a man who seemed, on paper at least, to be the polar opposite of Culinary Institute of America graduate Ells: Taco Bell's CEO, Brian Niccol. A year and a half later, it is clear that Niccol was exactly what Chipotle needed. As of early December, Chipotle's shares are up more than 150% since Niccol's first day on the job in March 2018. Chipotle has rolled out delivery services and a loyalty program, updated its mobile app, and begun building dozens of locations with "Chipotlanes" across the US. Plus, it has steadily been improving its previously maligned "dumpster juice" queso and testing a new recipe altogether. "You're not going to turn around a business usually by doing something around the edges," Niccol said during a recent interview in Chipotle's new Orange County headquarters. "You have to really say: 'Is the core strong? … The way you get people to come back to your business in a meaningful way is if the core of your business is relevant and has a reason to exist again." Here is how Taco Bell's ex-CEO used a mix of back-to-basics common sense and a big bet on technology to turn around Chipotle. Chipotle's 'staggering' pick Niccol started his career at Procter & Gamble before joining Yum Brands in 2005. He made his name turning around Taco Bell's business after the chain shuttered hundreds of locations and faced a lawsuit that claimed its beef was not, in fact, fully beef. It was a comeback built on expert marketing and Doritos Locos Tacos. "I guess I've always been drawn to opportunities," Niccol told Business Insider. "Even in my time at Proctor & Gamble, I had the opportunity to work on businesses where you believed they had a reason to succeed. They might've been struggling at the time, but boy at the core, I just believed there was a reason why they should succeed." In February 2018, Chipotle announced it had chosen Niccol to replicate his Taco Bell turnaround at the fast-casual chain, sparking a mini-meltdown in certain corners of the financial world. Jim Cramer ranted about the pick on CNBC's Squawk on the Street, comparing the minimal natural ingredients in Chipotle's burrito to the long list of items in Taco Bell's beef burrito. "This is a staggering pick," Cramer said. "It's everything [Chipotle doesn't] care for. It's like naming a guy from the Army to run the Air Force." While some outsiders were skeptical of how Niccol would fit in at Chipotle, analysts were enthusiastic about his arrival. And, according to Hartung and chief digital officer Curt Garner, many Chipotle employees were equally ready for new leadership. The E. coli scandal had helped unearth underlying issues the company needed to address, including Chipotle's subpar efforts to build a digital business. "Some of the hard times actually helped Chipotle make a lot of changes," Garner said. "It's hard when you're on the top of the world to critically look at opportunities and things that could be done differently." By late 2017, Chipotle's game plan had devolved from a unified strategy into a series of Hail Marys. In 2016, Chipotle gave away an estimated $70 million in free burritos between February and May, hoping free food would win back customers. In 2017, the chain hastily rolled out all-natural queso — long customers' most-demanded item — only for critics to call it "dumpster juice" and a "crime against cheese." Niccol said that, when he arrived at Chipotle, some people were trying to push bundled deals to bring back customers. "I was like, 'That's just not what Chipotle is. So we're not going to do it,'" he said. "I think it actually gave relief to everybody in the organization, because I think they all kind of knew in their bones like, yeah, this is not what we do." Looking back at his early days at the company, Niccol admits there were a few false starts, such as testing a chocolate milkshake and keeping locations open late to sell tacos. If he were to go back and offer advice to himself or someone else trying to turn around a company, he says it would be: "Make sure you take the time to understand who are the people in all the various roles." "The gravity will be, 'What's your first initiative?'" Niccol said. "And, that first initiative will not be nearly as effective if you haven't figured out ... what is the culture we need organizationally? What are the leaders we need?" Getting the right people for the job Niccol's mission to get the right people for a new era of Chipotle was accelerated by moving the company's headquarters from Denver, where Chipotle was founded, to Newport Beach, California, minutes from the ocean and less than half an hour from Taco Bell HQ. Chipotle announced the move just two months after Niccol joined the company. The 399 employees in the company's Denver office were either laid off or offered relocation packages. "Making the relocation, I think, sped up the process on people and culture," Niccol said. "But, it was hard. And, you know, I wouldn't want to do it again. But looking back, I'm so glad we did it and I'm so glad we did it at the speed at which we did it." New hires included chief marketing officer Chris Brandt from Bloomin' Brands, chief development officer Tabassum Zalotrawala from Panda Restaurant Group, and chief people officer Marissa Andrada from Kate Spade and, before that, Starbucks. Niccol said that Ells — as promised — has stayed out of Chipotle's day-to-day business. Instead, the founder is available "when needed," sharing his feedback if he stops into a Chipotle location. Much of Niccol's early work was not burrito rocket science. Instead, Niccol worked to get everyone at Chipotle on the same page. Hartung says the leadership team went back to the basics, reevaluating the company's values and purpose. "I've kind of joked with people because I'm like, look, I'll be the first one to tell you the strategies. They're not glamorous," Niccol said. "They're not putting a man on the moon. What they are is how you run a great restaurant." Take Chipotle's marketing strategy, for example. Niccol — who served as Taco Bell's CMO before becoming president — says that people frequently ask him how much more money the company is spending on marketing today. The answer is the same as before: 3% of sales, a figure that Niccol himself was shocked to hear when he started at the company. "I [was] like, well, that would be $150 million," Niccol said. "There's no way we're doing that. Where is it going?" What Niccol found was that Chipotle was spending millions of dollars on what he calls "low-efficacy efforts," like local freebies. Today, the company continues to spend 3% on marketing. Now, however, the money goes towards national campaigns, as well as a growing social media and digital presence. As sales increase, Niccol says, the budget will also grow. "National media essentially just gets more recognition for the dollars you're spending, so you get more impressions, more eyeballs per dollar that you've spent," BTIG analyst Peter Saleh said. "So they shifted that, and that was a big driver of the brand turnaround." Coming back from a tech deficit Chipotle's comeback hasn't been built purely on back-to-basics common sense. Saleh says that, alongside marketing, the company's progress on digital is the other major key to its turnaround. Compared to other fast-food chains, Chipotle was at a "tech deficit," Hartung says. Garner began hacking away at that deficit when he joined Chipotle from Starbucks, coming in as chief information officer in 2015. But, it wasn't until Niccol began that digital finally exploded at the company. Garner says that the pair immediately clicked, quickly finishing each other's sentences when discussing technology opportunities at the company. He recalls that, after his first meeting with Niccol, he went home and told his wife: "Well, here we go." The second make line is key to Niccol's digital strategy and Chipotle's comeback. The second make line is, in essence, exactly what it sounds like. It serves the same purpose as the counter where customers point out what they want and employees load up burritos with ingredients. However, it is purely focused on customers who ordered ahead or for delivery. It is a simple concept. But, when Niccol recalls his dawning understanding of the second make line, it is like listening to someone talk about discovering a box of priceless treasure while cleaning out their attic. "Once you actually get into the business, you realize, well jeez, not only is there opportunity to continue to take a different point of view on food, with the real cooking, the real ingredients, the idea of giving everybody access to that — but it's like, wow, we've got the second make line," Niccol said. When Niccol joined Chipotle, most locations already had two make lines, but the strategy around the second make line was unclear. Niccol decided to make the second make line and its digitalization one of his top priorities, the center of a universe of expanding dimensions where Chipotle could grow sales. The chain finished digitizing the second make line in September. "Brian came in and again, just helped make it very, very clear: We're going to focus on a few things," Hartung said. "We're going to build a digital system and it's going to involve finishing the digitizing of the second make line." Part of Chipotle's struggles with the second make line was that it felt like a secondary priority. Earlier this year, the company rebranded the "second make line" the "digital make line" — a small but purposeful tweak that reveals the company's massive digital aspirations. Garner says that change was "really important because second seemed to make it less than, or perhaps an afterthought." Managers would pull people off of the second make line when stores got busy, focusing on staffing the customer-facing make line. By renaming the make line, digital is no longer a nice-but-secondary sales channel. Instead, it is an equal, crucial part of the business. The digital make lines mean that people can order ahead on their mobile apps and burritos will be ready when they arrive to pick them up. It allows burritos to be swiftly delivered via a third-party delivery service like Postmates. It also allows Chipotle to add a drive-thru in the form of "Chipotlanes," with customers ordering ahead via app and pulling through to pick up their burritos. Chipotle executives say the digital make lines essentially doubled the chain's location count, allowing the chain to max out at twice as many burritos per hour. "No one else has a dedicated digital restaurant within every restaurant," Garner said. Because different aspects of Chipotle's digital business were built out together, linking back to the digital make line, they have begun feeding off of each other. "It was building, building, building," Niccol said. "We did a lifestyle bowl that was only available in the app, and it really built from there. And then we followed that up with the rewards program, where I think it took another crank. And then we finally had delivery where it was across all our restaurants, and then there was another crank." "We believe strongly that just putting a new app out or just signing up delivery partners would be a failure for us," Garner said. "We thought it's so important to pull the string through the entire experience. [If] we have an app, but we can't reserve production time and guarantee when your food will be ready, it's gonna be a terrible app experience." Chipotle plans to hit $1 billion in digital sales this year. In late September, Chipotle reported that digital sales grew 87.9% and made up 18.3% of sales in the most recent quarter. Hartung says that he anticipates that figure to more than double across the company. "We have restaurants that are as high as 40%," Hartung said, noting that even these are not fully maxing out what is possible. "I don't see why our whole company can't get up into that 30%, 40%, 50%." Unleashing the Chipotlane When looking at the future of Chipotle, digital continues to lead the way. And, chief among digital drivers is the dawn of the era of the Chipotlane. Chipotle's first "Chipotlanes" appeared around the time that Niccol was tapped to take over as CEO. Customers order on their phones, then drive up to the Chipotlane to pick up their pre-ordered burritos without ever leaving the car. In October, Chipotle announced that it plans to open 60 more locations with drive-thru "Chipotlanes" by the end of the year, in addition to the 20 that are already open. In 2020, more than half of the 150 to 165 locations Chipotle aims to open will include a Chipotlane. In some ways, the Chipotlane is the oldest trick in the book for chains. Most major fast-food chains, such as McDonald's or Chick-fil-A, do 70% of their business through the drive-thru lane. Further, BTIG's Saleh says, sales at locations with drive-thru lanes tend to be 30% to 40% higher than locations without drive-thrus. "Even if the Chipotlane isn't that much higher ... even if it's like 30%, not 40% higher, you take an average restaurant, which is doing $2.1, $2.2 million in volume today, you add 30% — that gets you to $2.7, $2.8 million sales volume," Saleh said. "The sales volumes are materially higher," Saleh added. "The digital mix is materially higher. The margins are higher and the returns are better." It should not take a fast-food industry executive to realize that this is something that could also boost sales in the stereotypically snootier fast-casual industry. Yet, adding a drive-thru seemed impossible for Chipotle just a few years ago. Prior to the E. coli scandal, Chipotle didn't want its then-sterling reputation linked to the McDonald's of the world. Practically, its single make line made the traditional drive-thru ordering process impossible. It took Garner building out tech capabilities and Niccol pushing a big bet on the digital make line to make a common-sense solution a high-tech reality. The future of Chipotle This ability to bridge tried-and-true fast-food strategies with genuine innovation is at the core of why Niccol and the rest of Chipotle's current leadership team are succeeding. Is adding carne asada to the menu for a few months really that different from Taco Bell's constant churn of wacky new menu items? The message of high-quality steak is different from a grilled cheese cheese burrito. But the goal is the same: to grab customers' attention and make the chain relevant. Niccol has positioned Chipotle in the sweet spot between common sense and high tech. From marketing, to menu innovation, to the drive-thru, Niccol has guided the company in taking what is best about fast food and filtering it through the lens of what might work at Chipotle. And, what works at Chipotle is a constantly shifting target. "The iPhones are 12 years old. Think about the fact that Nokia was the biggest company in the world prior to that," Garner said. "The cycles between the changes are speeding up and the duration between the changes is smaller. So the margin for error continues to be smaller and smaller." Even with digital sales up nearly 90%, executives say Chipotle's digital transformation is still in its "early innings." Still, Niccol emphasizes that he does not plan to lose his focus on restaurant industry basics as Chipotle explores what the chain of the future might look like. As tech shines in the spotlight, Niccol says that the company is making changes behind the scenes to help workers, whether that is rolling out mental health benefits in 2020 or adding AI ordering. "One of the things people are missing is the reason why transactions are accelerating," Niccol said. "Hey, do I think the marketing is better? Yes," he continued. "Do I think our operations are running better? Yes. Do I think digital is better? Yes. But at the end of the day, traffic is accelerating because people are enjoying the experience at Chipotle. They're believing in what Chipotle stands for."SEE ALSO: Chipotle's new steak might become a permanent addition to the menu. Here's why that would be a great idea for the chain. Join the conversation about this story » NOW WATCH: Rare Italian white truffles cost over $4,000 per kilo — here's why real truffles are so expensive