PRINT THIS STORY:

CHANGE TEXT SIZE:

McDonald’s link helps Mexican chain forge ahead

By Joseph DiStefano

Chipotle Mexican Grill seeks to place its restaurants in high-visibility areas, such as urban storefronts, shopping center endcaps and strip centers.

Thanks to the help of well-heeled backer McDonald’s, a small Mexican restaurant chain with an upscale approach to fast food is expanding into strip centers across the United States.

Chipotle Mexican Grill has grown from a single 800-square-foot restaurant near the University of Colorado’s Denver campus to 81 units in just seven years.

Along the way Chipotle (pronounced chi-POAT-lay) has garnered a string of accolades from food reviewers and caught the attention of McDonald’s, which acquired a minority stake in the Denver-based chain in February 1998. Since then the Oak Brook, Ill.-based fast-food giant has increased its stake to a majority interest.

Chipotle units range from 1,800 square feet to 2,800 square feet, but the company says it prefers the restaurants to be around 2,400 square feet. The company seeks sites in high-visibility areas, including urban storefronts, shopping center endcaps and pads as well as freestanding buildings.

But it mainly seeks strip centers — and finds them. Today, some 70% of Chipotle’s restaurants are in neighborhood and community centers, said Dan Fogarty, director of marketing for the Denver-based chain.

Strip centers have been part of Chipotle’s real estate strategy since 1996, when it opened its third restaurant in Littleton, Colo.

They are also a major component of Chipotle’s corporate marketing message: “We bring life to the average strip center.”

One thing Chipotle does bring to strip centers is heavy foot traffic, according to Bob Seawright, regional leasing manager for the West for Cleveland-based Developers Diversified Realty Corp. (DDR). DDR currently has one Chipotle and is looking to add more, Seawright said.

“They bring excitement because of the way they draw in a lot of traffic in peak hours,” he said. “There’s a tremendous amount of energy and activity that one experiences in the whole process of buying lunch or dinner at Chipotle.”

Chipotle opened at DDR’s Perimeter Center, a neighborhood center in Dublin, Ohio, in August 1999. While he couldn’t provide hard numbers, Seawright said that based on foot traffic, the restaurant’s sales performance there has been excellent.

“As soon I got them, I said, ‘I know where I’m eating lunch every day,’” said Janet Beaudry, SCMD, senior marketing director, for Westcor’s recently opened Flatiron Crossing. The restaurant opened a 2,800-square-foot unit in the village portion of the hybrid center in Broomfield, Colo.

Chipotle is a good tenant for strip centers because it plays to higher demographics than quick-service restaurants (QSRs), according to Peter Romeo, editor of Restaurant Business, a New York City-based trade publication. “It’s not the Taco Bell crowds. It’s not the young guy coming in to fuel up,” he said. “It’s unique. It’s not going to come in and duplicate the market of a lot of players that might be in that strip center right now.”

Chipotle has restaurants in Washington, D.C.; Baltimore; the Ohio Valley (Cleveland, Columbus, Cincinnati and Dayton); Minneapolis/St. Paul; Chicago; Kansas City; Dallas, Fort Worth, Houston and Austin, Texas; Denver and Colorado Springs, Colo.; and Phoenix and Tucson, Ariz. Its strongest markets are Denver and Columbus, Ohio, according to Rex Jones, Chipotle’s director of real estate.

In late July, the company entered the California market with a restaurant at La Jolla Village Square, a community center near the University of California’s San Diego campus.

Chipotle will roll out nine more stores in the state’s remaining major markets — Los Angeles, Sacramento, San Diego and the San Francisco Bay area — at a pace of about two a month, Jones said.

It plans to have 115 restaurants open by year-end, but it will not enter any more new markets this year. The company said it will open from 75 to 80 stores next year, spread evenly among its existing markets.

By next April, Jones said, Chipotle will roll out two or three units in regional malls. The restaurants will all have exterior access, in order to preserve the company’s signature decor, which features such elements as raw birch veneered plywood and corrugated metal.

McDonald’s has big plans for Chipotle, Patrick Flynn, the fast-food giant’s executive vice president for strategic planning, told SCT. “I think that five years from now we will be pretty much in all major U.S. markets.”

McDonald’s may also expand Chipotle overseas, but it hasn’t set any time frame, Flynn said. “This is a concept that has got legs beyond the United States. It’s a sophisticated taste that will play well in major metropolitan areas abroad.”

Chipotle’s expansion will likely be driven by franchising given that it has the world’s premier franchisor in its corner. While he declined to reveal specifics, Flynn said he expects to have several McDonald’s franchisees take over some existing Chipotles by the end of the year.

“Its appeal to adults was a different niche,” Flynn said. “We were very impressed by the quality of the product and the great customer regard.”

The concept Chipotle created has been termed adult Mexican by food-service experts. The hallmarks of the category include more expensive and fresher ingredients, higher price points and better service.

“They’re in one of the hotter emerging segments,” said Ron Paul, president of Technomic Research Associates, a Chicago-based food-service consulting firm. Paul expects the whole adult Mexican category to outperform the entire QSR sector. Chipotle, which takes its name from the smoked jalapeno peppers that are a staple of Mexican cuisine, is likely to continue its robust growth, Paul predicted. “Given McDonald’s backing, Chipotle stands to be the category leader.”

Chipotle declines to release sales figures to the public. However, Technomic estimates its 1999 sales were $35 million. “It’s safe to say they’ll run between $75 and $100 million for 2000,” Paul said.

Unlike many QSRs, Chipotle uses all fresh ingredients, and makes its own guacamole, chips, tortillas and taco shells each day. Its menu is built around three items: burritos, tacos and fajita burritos. All feature items found in traditional Mexican peasant food, but with a twist from Chipotle’s 34-year-old founder and CEO Steve Ells, a gourmet chef-turned-entrepreneur.

The idea for Chipotle was inspired partly by Ells’ visits to the taquerias of San Francisco’s Mission district, which serve authentic Mexican food, such as tacos and burritos.

As for the relationship with McDonald’s, Ells says, “We’ve found the very rich uncle every restaurant wishes it had behind it.”

That uncle, however, takes a hands-off approach when it comes to Chipotle’s day-to-day operations. “They understand the importance of caring for the brand as you grow. They understand that Chipotle has its own brand qualities and are very interested in seeing us preserve yet at the same time develop those.”

Most customers coming to Chipotle would have no idea McDonald’s is involved, said Ells. “There’s nothing in the restaurant that would link the two.”