tv Titans at the Table Bloomberg September 12, 2015 7:30am-8:01am EDT
♪ carol: with the right ingredients -- speed, quality, leadership -- steve: good morning. carol: chipotle has reinvented the fast food business. >> we really broke all of the fast food rules. monte moran: i believe that we could change fast food culture. carol: serving food with integrity has produced big profit. nick setyan: they have completely smoked their competitors. carol: and those competitors are following suit. monte: competition helps us, it doesn't hurt us. carol: changing the way america eats. steve: we are really, really passionate about feeding our customers really great food. ♪
carol: food evangelists? maybe. company on a mission? definitely. 20 years ago, after graduating from the culinary institute of america, steve ells had a dream. steve: the reason i opened chipotle was to generate cash so i could afford to open my full-scale restaurant. so with a very modest investment -- i think i had $80,000 or so. carol: from your dad? steve: my dad lent it to me. carol: with money from dad and inspiration from california taquerias, ells opened his first chipotle in denver in 1993, serving up tacos and burritos. steve: we didn't have very much money. the idea was to use materials that were inexpensive. so plywood and barn metal and pipes for the table bases and the stools, things like that. so at the end of the day, you know, i had this built environment that i think, unintentionally, really said a lot about the brand and the food that we were serving.
carol: things went so well that his dream of opening a fine dining establishment with white table cloths was pushed aside. steve: it did much, much better than i had expected. and i thought, wow, i should probably have one more of these. and then i will get on to my full-scale restaurant. carol: what you really were meant to do. steve: but the second restaurant did much better than the first. carol: within five years, ells had opened 16 chipotles and attracted the attention of mcdonald's. in 1998, the world's biggest fast food chain began investing in chipotle. over the next seven years, mcdonald's put $350 million into the company, becoming the majority stakeholder. steve: it was a great way to really jumpstart chipotle. malcolm knapp: without mcdonald's, they never would've become a big company in my view. i mean, they immediately got the benefit of a huge company's systems, processes, real estate expertise, a whole bunch of stuff. steve: but what we found is that we have very, very different cultures. carol: those different cultures
and mcdonald's decision to focus on its core business led to a parting of the ways. mcdonald's spun off chipotle in 2006, making more than $670 million on the deal, nearly doubling its original investment. the day chipotle went public, it had more than 500 locations. the stock went wild, doubling in one day, the second-best restaurant ipo of all time. today, the company is worth about $12 billion as the stock has more than tripled in the past five years. ells is the driving force. steve: we really broke all the fast food rules. we ordered fresh, whole ingredients, we prepared everything in the restaurant according to classic cooking technique, and then we served all the food in this interactive format, so the customers get to pick and choose exactly what they want. carol: it's a format where customers are lining up, eager for food that hasn't been
sitting under heat lamps, but instead is quickly made in front of them. nick setyan: if anything, they actually created that fast casual category. and so, you know, i look at them as more of a trailblazer, as a first mover. carol: fast casual eateries, including panera bread and the mexican food chain qdoba, don't offer full table service but promise a higher quality of food and atmosphere than fast food restaurants. fast casual is the fastest growing category in the restaurant business, boosting sales 13% in the u.s. in 2012. that is compared to sales growth of less than half that at fast food chains, including yum! brands, taco bell, and mcdonald's. all well-known brands, but chipotle takes it further. nick setyan: they have been able to actually brand themselves as a company that you can identify with based on your values. >> this is steve. steve is a classically trained chef. he is also the ceo of chipotle. carol: those values highlight locally sourced, natural, organic food whenever possible, and an awareness about how
animals are raised. you didn't start out that way. steve: no. i mean, i was starting out by buying, you know, fresh food. but you learn that maybe fresh is not enough anymore. that you really need to understand the provenance and the methods by which farmers and ranchers raise food. >> steve had an idea. he visited the industrial hog farms where most pigs are raised. the pigs were kept indoors all the time. steve: my introduction to the way most of the pigs are raised, i'd say 99% of them, and i learned about this maybe 12 years ago or so. when i saw that, it was really shocking to me. i mean, it was -- it is a model that i think is based on a lot of exploitation. pigs are crammed into confinement factories, if you will. carol: you were upset by it? steve: it was very upsetting. and i think most people who see that would be upset. carol: so upsetting that chipotle decided it would no longer use pigs or cows raised on industrial farms.
today, the pork is raised on open fields at the niman ranch pork company. a farmer's cooperative, the family owns polyface farms and other suppliers. chipotle buys more naturally raised meat than any other restaurant company in the world. the cilantro is organically grown and the chain uses lettuce, peppers, and oregano from local farms around the country. this food with integrity comes from ells, who has taken a hands-on approach in every part of the business, from design of the tables and chairs to food preparation. steve: so how long does this cook? >> this cooked for almost five and a half hours. carol: and hands-on when it comes to picking managers, marketing, and customer service. it is a philosophy preached by chipotle's management team. monte: anytime we get customer feedback that they have had an experience that was less than wonderful -- carol: you call them? don't tell me you call them back. monte: well, you know, we do. steve and i, if we get an e-mail from a customer, we call them or write them back.
carol: a handful of chipotle senior managers are longtime friends of steve ells. we were calling it back at the office the chipotle mafia. steve: there are a lot of people who make up the senior management team. two i happen to have gone to school with. carol: those two are co-ceo monty moran and chief marketing officer mark crumpacker. then there's another high school pal, joe stupp, who runs chipotle's social media. bruce gueswel designed and built the chairs you see in every chipotle and the wall art. his wife went to school with steve ells and the others. did you have any idea when you were in high school that this is what you would all be doing together? mark crumpacker: steve wasn't even going to be a chef at that point. he was studying art history or something. so, no, this is all very strange. steve: i'm going to have chili corn salsa with sweet white corn, garlic, onions, delicious. carol: not strange to ells, who was fascinated by food at an early age. ♪
julia child: welcome to "the french chef." i'm julia child. carol: is it true that you did watch julia child and "the galloping gourmet" when you were younger? steve: it's true. i loved those shows. julia child: this goes into a 350-degree oven. steve: as a kid -- i was in grade school -- i would watch those shows and then go in the kitchen and try to make stuff. carol: and chipotle has been making stuff for the last 20 years. industry watchers say the company continues to gain traction thanks to a key advantage. so what's unique about chipotle? knapp: well, fundamentally, it's the founder. really good entrepreneurs all have great passion and it's real. this is a guy who lives it. carol: when we come back -- steve: hello, denise. carol: the guy who lives it goes face to face with employees. monte: is denise an empowering leader? ♪
♪ >> hello. carol: companies talk about the importance of having a people culture. steve: how are you? >> emmanuel, nice to meet you. carol: this company means it. steve: hello, denise. nice to see you. carol: it's 9:00 a.m. on a monday morning, and the co-ceo's of an approximately $12 billion company are making a surprise visit to this chipotle. steve: nice to meet you. carol: their mission, to interview every employee who works here. steve: pretty good. i'm steve. >> i'm david. steve: david. good to meet you. carol: last year, ells and moran made 220 visits to personally check in on chipotles across the country in search for what they call the next restaurateur. said: i'm said. monte: said. nice to meet you. i'm monte. carol: it's a title that goes to an elite manager who has shown an ability to work with people and to promote from within the ranks. monte: do you know what a restauranteur is? >> yeah, i do. steve: what is it? >> it's someone with high
standards. people who, like -- now you make me so nervous because you asked that question. carol: for the next seven hours, ells and moran talk to the team. monte: is this your first chipotle? >> yes, it is. carol: their goal -- to put employees at ease while checking in on what's going on at the restaurant. steve: so how was your team when you arrived? >> can i be honest? i -- steve: please do. >> i had to get rid of most of them and then this is my brand-new team. monte: hi, reba. who hired you? >> denise. monte: is it fun to work here? it doesn't sound very convincing. >> it is. everybody -- everybody is really friendly. monte: is denise an empowering leader? >> definitely. she is -- monte: what makes you say that? >> she is constantly on top of everybody. she is constantly teaching. steve: so what attracted you to chipotle? why did you decide to be here? >> cooking. that's my passion. steve: over the years, i knew that -- that chipotle had all
kinds of potential, but the concept was never really reaching its full potential, and so i knew i needed to have something, some sort of a program, something that would enable us to attract better, better people. monte: when steve approached me to join chipotle, the reason he approached me was because he was intrigued by the kind of culture we had at my law firm. there were a lot of people who were really, really into what they were doing and steve saw that and challenged me over the years as to whether i could bring that kind of culture to chipotle. knapp: the hero in their system is the store manager that manages to promote the most people who are qualified. it is essential to their growth model. carol: today, the chain has more than 1400 restaurants in the u.s., adding new stores at a
more than 13% clip in each of the last four years. as the number of locations almost doubles. chipotle may open as many as 180 new u.s. restaurants by the end of this year. internationally, chipotle began expanding five years ago and now has five restaurants in canada, seven in europe, with more under construction. but growth of locations and talk that they may raise prices by the end of the year alone isn't enough to appease investors, especially with the company's slowing revenue and same stores sales growth. some say chipotle's shares have gotten ahead of themselves. brad lamensdorf: this is a mature company trading at 40 times earnings, four times sales, and it's trading at 40% to 50% over any of its peers. when you're looking at the s&p 500 and you're looking at the multiple and you are looking at its competitors, this is trading like an internet stock. and there is no reason it should be. carol: other critics have incarol: other critics have
included hedge fund manager david einhorn of greenlight capital, who cited growing competition, saying taco bell was about to eat chipotle's lunch. bond fund manager jeff gundlach of doubleline has also advised shorting chiptle's stock, telling investors in may, "a gourmet burrito is an oxymoron. all you need to compete with its core business is a taco truck." carol: there are some of the folks that are shorting chipotle stocks. one of the things they're worried about is labor costs for the company. you smile. do you worry about increasing labor costs? monte: not in particular. i think anything that happens in the labor cost front is something where we have no disadvantage and some advantages over any competitor out there. do i worry about labor cost? you know, no. i think that the best way to make sure that our labor costs are healthy is to make sure that our teams are the very best teams that they can be. lamensdorf: he can say what he would like. you can get on and google minimum wage hikes. it is coming. yes, it is coming for everyone. but when it hits mcdonald's, they are trading at 15 times earnings.
when it hits chipotle, their margins are going to get hit and they are trading at 40 times earnings. it's a totally different conversation. carol: so you are short the stock, but you are not necessarily short the company. lamensdorf: correct. steve: i would go back 20 years ago to when i was starting chipotle in the first place. if i had thought about making money instead of creating a great restaurant experience, i would have thought about, oh, i need to buy cheaper ingredients. i need to buy things that are highly processed and easy for an inexperienced, low-performing team to consistently produce. carol: chipotle has run into some problems in its effort to build top teams. in 2010, an audit by federal investigators found undocumented workers at chipotle, leading to hundreds of firings. the company says it now has programs in place to ensure all workers are legally in the u.s. monte: our turnover has -- has sort of normalized now. i think for a while it was
increased as a result of some of the concerns that arose from the investigation with regard to immigration. but no, it has -- it has leveled off now. >> i love, love, love this company. i worked retail for about five or six different companies, i have never had a company push so many people the way you guys push us. steve: the team is really coming together. monte: they know that you really care about them. you set yourself up for great success. carol: coming up, chipotle's success may lie in its untraditional methods. crumpacker: we don't do the same kind of advertising everybody else does. ♪
♪ carol: just another rock festival? not exactly. it's the annual cultivate festival, part of chipotle's unconventional approach to marketing that includes cooking demos. >> what is happening is that the nitrogen doesn't have any calories or flavor, it's just a coolant. carol: eating -- >> tacos for everyone. carol: drinking and education. in between the free burritos, there are booths that promote sustainable agriculture -- >> that's a cucumber. a baby cucumber. carol: and highlight the dangers of industrial farming. >> cotton uses more pesticides than any other agricultural crop in the world. carol: chipotle's philosophy, food with integrity, in the form of an all-day party. >> thank you. we love ya'll. [applause] carol: so, filming "farmed and dangerous" -- mark crumpacker created cultivate and is in charge of chipotle's advertising and media. crumpacker: we don't do the same kind of advertising everybody else does.
if we were a typical fast food company, all of our advertising or marketing would be about the new menu item that is available for a limited time only. so since we don't that, we have all these other ways to tell our story. >> action. carol: another way chipotle is telling its story is with a mini drama series. crumpacker: we are in l.a. shooting a web series that we've created called "farmed and dangerous." >> let's just order and get this over with. crumpacker: it's about a likeable but misguided group of people whose job it is to spin the most egregious aspects of industrialized agriculture in a positive way so that it looks good for consumers. >> sophia, i don't want to know more about i-fib. i want to know more about you. carol: chipotle plans to air "farmed and dangerous" online and hopes the series will be shown on cable or broadcast tv. no deals yet. crumpacker: what i hope is that incrumpacker: what i hope is that it develops an audience who likes it for its entertainment value. carol: consumers already found entertaining chipotle's one and only national tv ad. >> ♪ i'm going back to the start ♪
carol: a two-minute animated film about a farmer who decides to let his pigs out of little in to let his pigs out of little pens to roam free. it was meant to contrast the drawbacks of industrial farming with the concept of going back to the land. the mini flick first went viral, getting more than 4 million hits, then went to movie theaters before ever hitting the airwaves. steve: mark was really brilliant in the way he wanted to communicate the importance of food with integrity in a way that is not preachy, that people really could understand, and not understand just, you know, sort of the facts about ingredients but the emotional component to why it is so important to buy sustainably raised foods. carol: these days, chipotle is selling more than food. scroll the company website and you'll see organic hoodies, canvas totes, and baby tees for sale. is part of the strategy to also become somewhat of a lifestyle brand? would you like to see that? crumpacker: well, you know, our customers made us a lifestyle brand. people would make their own t-shirts, their own chipotle
t-shirts. carol: really? crumpacker: sure, yeah. they are very loyal people, so for us it was really just a matter of helping that out. carol: you spend a third of your sales on ingredients and very little on marketing compared to everybody else. can you keep that equation going? monte: you know, i think -- i think the most important marketing we do today, in the past, and in the future, will always be what you experience when you come into these restaurants. do you love what you eat? knapp: when the lines aren't 20 minutes long, they will up their marketing. carol: chipotle is now spending less on marketing as a percentage of sales and it has no plans to roll out a big tv campaign. >> face deep in a baconator from wendy's. >> yeah. sold! carol: in stark contrast to its competitors, chipotle's main menu has hardly changed since the first store opened 20 years ago. crumpacker: one of the things that makes chipotle financially successful is our focus. you know. our simple menu, and the fact that we don't constantly add new
menu items and therefore we don't have to spend lots of advertising dollars around each one of those menu items. and we don't have to try to teach our crews how to prepare new menu items, which would actually mean dumbing everything down. steve: chipotle has basically a couple of things -- burritos and tacos and bowls and salads, i guess, too. but it is the combinations that people can make. there are so many different combinations of flavors that -- that i don't think it is about a new menu item. carol: do you feel pressure to do a breakfast or anything? steve: we signed a lease and opened a restaurant in the dulles airport, and part of the lease stipulation is that we be open during breakfast. we have since opened another airport location at baltimore airport. and we have a new frittata that we dice up, sort of like the same size as our chicken or steak, and that is part of the breakfast burrito or bowl or tacos. and it's delicious. carol: do you plan to expand
that? steve: we will see how it goes. right now, we are just going to continue to serve it there, but it is always a possibility. >> what can i serve for you, sir? carol: one new item that is on the menu, sofritas. chipotle added its first new menu item in june. in an effort to expand its customer base, chipotle began serving the vegan filling made with tofu in its california stores, a test run for a national rollout. in steve: certainly there are a an lot of vegans or vegetarians in general who are asking for this sort of thing. but what we notice is that people who are buying sofritas now, about half of them are vegetarians or vegans and the other half are people who normally eat meat. carol: how far can you take this model? steve: i think many, many different kinds of cuisines can fit into the chipotle format. carol: first up, shophouse. steve: it is based on the flavors and ingredients of southeast asia. so you have really exciting thai curry, vietnamese meatballs,
beef laab -- that is a traditional thai preparation. carol: there is one shophouse in d.c., another in hollywood. six more are on the way by 2014. could you see it for italian food, for indian food? steve: any kind of cuisine would fit into the model. that's why i think it is the new fast food model. carol: five years from now, 10 years from now, i mean, do you want to be steve ells, the person leveraging this model, this new fast food model that you have created? will steve: what is exciting is that it is not going to be about steve ells creating anything. it is going to be about an extraordinary team. carol: we have read that, you know, you wanted to open up a chipotle, get a bunch of cash -- steve: yeah. carol: and open up a fine dining establishment. do you still dream about doing that? steve: i do, and every week we open up three new fine dining chipotle restaurants in a neighborhood near you.
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