The Big Apple — January 2015

The Chipotle Effect
by Joe Radice, Vice President, Wray Executive Search

Observations on a Storm

News flash!   March 4, 2015, Wall Street Journal front page headlines.   McDonald's to Curb Antibiotics in Chicken:  Suppliers asked to halt certain drugs.  Ripple effect expected.  McDonald's US president Mike Andres wrote in an email to franchisees that "people want to know what's in their food", leading us to believe that the company is concerned about the health of consumers.  After all, people DO want to know what is in their food.   But the article further states that "The announcement comes three days after Steve Easterbrook took over as McDonald's chief executive, vowing significant change at the fast-food giant to reverse two years of worsening sales declines."  

The restaurant company, Chick-fil-A, Inc., with over 1200 units nationwide (only one unit is located in NYC at New York University), made the determination to eliminate antibiotics from their chicken supply just a year ago.  Another sizable brand, Panera Bread, introduced antibiotic-free chicken on their menus in 2004 and was an early advocate of calorie-posting, establishing their program, voluntarily, in 2012.  

In 2001 Chipotle released a Mission Statement calling for "Food with Integrity"and vowed to use naturally-raised meats, organic produce and dairy without added hormones.    Even though McDonald's was an early investor in Chipotle (they fully divested their interest in 2006, the same year Chipotle went public), McDonald's is arguably late to a party hosted fourteen years ago by Chipotle.

Restaurant companies make these environmentally-responsible decisions not for altruistic reasons but for economic ones.  It makes good business sense.  We must applaud Mr. Easterbrook at McDonald's for his ban-on-antibiotics decision, which will certainly be disruptive to McDonald's – at least initially.  The ban will also have a ripple effect throughout the food supply and restaurant industries.  What sets Chipotle founder and CEO, Steven Ells, apart is his singular vision in creating his brand and how truly successful Chipotle has become due to its focus on freshness, health, and environmental sustainability without sacrificing taste.

The Chipotle model of healthy food that tastes good has changed restaurant dining, particularly fast food, in such a dramatic way that a whole new industry segment of quick service restaurants was spawned called fast casual.  Ells challenges every traditional method of operating a quick service restaurant.  For example, Chipotle restaurants famously have no freezers. They use a batch cooking approach, hand slicing and chopping food for daily consumption to preserve freshness and taste.  Most importantly, Ells recognized that consumers would pay more for this new restaurant model of healthy, tasty food, served in an attractive environment – and they have.   

After shares of Danny Meyer's Shake Shack doubled on its first day of trading, the company was immediately valued at $1.6 Billion. The investment class took notice.  Having grown from a hot dog stand in Manhattan's Madison Park, Shake Shack is now considered by many to be the hamburger response to Mexican food's Chipotle.  As we know, the Shake Shack concept was born in New York.   But, for years, the fear of pricy real estate has discouraged the major chains from locating outposts in the Big Apple.   What Chipotle, Shake Shack, Starbucks, and even Panera have proven is that the Ells model of healthy, tasty food served in an attractive environment, at higher price points, can be very profitable.  

Every bit as interesting is that Manhattan, Brooklyn, and more recently Queens, are becoming incubators for new fast casual concepts.   A quick look at what Yelp terms fast casual in New York City will turn up dozens of restaurants focusing on fresh, healthy food, moderately priced, in modest yet attractive surroundings.  Due to social media, many are fast-becoming popular. 

For example, New York original Luke's Lobster, serving fresh Maine lobster rolls for $15 and lobster grilled cheese for $12, already has 14 units, with one in Philadelphia and three in the DC area.    Dig Inn is a "farm-to-counter" concept with the mission statement "Real good food for everybody".  Their food is locally sourced and freshly made, all of it on-site, with an emphasis on delicious, hot and cold, vegetable sides.   Dig Inn recently opened their tenth location, each of them in Manhattan, and now has private equity investment to fuel additional growth.  An exciting Japanese-American concept is Kobeaki.   With burgers made with Kobe beef squeezed between a glazed Asian bun, condiments like teriyaki ketchup and wasabi mayo, shrimp tempura and spicy tuna rolls for under $10, sweet potato fries, and green tea ice cream sandwiches, this Japanese cuisine is "westernized' and very popular.        

Whether these concepts will continue to grow and prosper, just maintain, or disappear entirely, certainly remains to be seen.   Restaurants demand investment, consumer tastes are fickle, and competition is fierce.  But the spark created by Chipotle continues to inspire and encourage aspiring restaurateurs to create newer and worthy concepts.   And most certainly, with Millennials leading the charge, you can bet that fresh, healthy offerings will be here to stay for many years to come.


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