How should Chipotle Invest $.26 per Burrito?

I was intrigued by an article in this week’s BusinessWeek regarding Chipotle’s incredible growth (27% YOY last quarter), despite a relatively small advertising budget.

McDonald’s spends $820M+/yr in marketing on $21.5B revenue…4% of revenue.

Chipotle spends $4.5M on $882M revenue…less than 1% of revenue.

I did the math... if you assume the average meal is $8 (with drink, maybe chips), then Chipotle is serving over 110 million burritos (or burrito bowls, as I prefer) per year.

If they decided to spend as much as their McDonald’s parent and competitors (4% of revenue), they could spend an additional $29M in marketing. That’s an extra $.26/burrito they could spend on advertising. Or perhaps they should spend it on something else?

I’m not suggesting they spend this money. They are growing 26% YOY and pulling in $41M in net income. They are not ‘growth challenged’.

More importantly is the positive business results growing on such a small marketing budget? How does Chipotle do it?  They create a great atmosphere, built an eco-friendly company, and invest in great food that is served fast. I eat there once a week -- they give me more food than should fit in my stomach for a decent price, and it comes nowhere near the poor quality of first-frozen fast food.

As growth slows Chipotle will face the pressures of a public company, typically to reduce costs. Bad idea…see my post on “Marginalizing Quality”. Or, ironically, analysts may ask for them to spend more on advertising. This is the recipe (no pun intended) for disaster because it could change the DNA of what makes Chipotle successful. Sustained success is to continue innovation and improvement using the same strategy that drove word of mouth in the first place. Perhaps there are new strategies to amplify their customers' passion?!

Hopefully management and the street will remember what got Chipotle here and when it is time to prime the pump for growth they’ll look at investing that $.26 per burrito (or less) in the same strategy – creating a great experience and product. In my opinion, this is the foundation for a winning strategy in today’s “citizen marketing” world (See "The Word of Mouth Company").

Comments

[Adelino de Almeida]

Cost reduction is not a good, sustainable growth strategy; advertisement may temporarily increase same store sales. There may be other "innovative" growth strategies in QSR but the path is always the same: geo expansion, dayparts expansion. Unlike assembly lines there is only so much cost that can be squeezed out of the QSR supply chain before growth is severely affected

[Chipotle Fanatic]

I've had the opportunity to hear chipotle marketing managers speak on several occasions to relativly small audiences. Each time someone in the audience has asked why chipotle doesn't offer queso burritos and how delicious they are and how all of the other burrito shops offer the queso burrito. The speakers response was also always the same, "Do you know what queso is? It's processed crap!.....we don't do that at chipotle, if you want a queso burrito go to Qdoba". Chipotle has been dedicated from the begining to quality...which needless to say costs the big $ but also get's people talking. As long as Chipotle keeps it's end of the deal by providing top quality at a decent price I'll keep mine and contiune to spend the noonish hour at the fine establishment.

[chipotle-eater]

I think they're spending that extra money making the burritos taste delicious and/or spending it on the "food with integrity" which certainly costs a bit of a premium.

I do hope with Google and Chipotle marching to their own drummer that more and more companies will focus/remember what got them their great status rather than "just listening to the street" and falling away from their values.