The PESTLE analysis of Chipotle would help in understanding the impact of external environment of the fast-food industry on the operations of the company.
Introduction & Background
Chipotle is a fast-casual restaurant chain that serves Mexican-inspired cuisine. The company was founded in 1993 in Denver, Colorado by Steve Ells, who was inspired by the traditional taquerias he encountered while traveling in San Francisco.
Initially, the restaurant served a limited menu of burritos, tacos, and salads made with high-quality, fresh ingredients, and quickly gained a loyal following. In 1998, McDonald’s became an investor in the company, helping to fund its expansion. However, in 2006, McDonald’s divested its stake in the company, and Chipotle became an independent publicly traded company.
Chipotle’s commitment to using high-quality, sustainably sourced ingredients has been a major part of its brand identity. The company sources its meat from farms that raise animals without the use of antibiotics or added hormones, and its produce from local farms whenever possible. In recent years, the company has also made a commitment to using more organic ingredients.
Chipotle has over approx. 2,800 locations across the United States, Canada, the United Kingdom, France, and Germany, and continues to be known for its focus on high-quality, fresh ingredients and customizable menu options.
Political Factors
The political stability is one of the factors that determine the ease of doing business in a country and the growth chances that an organization has due to long term stability. Chipotle is primarily operating in the US, which has stable political environment. Factors such as increased tax, poor trading relations and higher tariff can change the business environment for a company.
The US government was considering making changes in the tariff and increasing it up to 5% for Mexican items. The higher tariff could disturb the profit margin of Chipotle as it would drive up the cost of supply chain for accessing Mexican goods (Rogers, 2019). The company was considering making changes to items pricing in case of the tariff increase.
Another way political influences affected Chipotle was the procurement of avocados, which primarily are provided by Mexico based firms. The US government had to temporarily close down the supply of avocado from Mexico owing to the turmoil and hostile attitude towards the impending plant visit.
Economic Factors
The economic stability of a country drives the consumer buying patterns in the fast-food industry. An unstable economy where inflation is at an increase, the impact is evident in the form of higher food prices. Consequently, consumers have to make a choice between purchasing meals that are within their budgetary limits.
The income of the household and unemployment rate are also influencing on the sales growth of Chipotle. Lucas (2022) has reported that increased inflation had a negative effect on the sales generated by the company as there has been a decline in the customers visiting the restaurant. Moreover, the higher unemployment adds to the reduction in consumer spending.
Furthermore, economic factors such as high labor cost and increased prices of fuel add to the financial input required by company operations. Increased fuel price affects the cost of delivering the goods to the company. It carries implications on the delivery to the customers as well as the company may have to respond to this challenge by raising the prices of menu items.
Currency exchange rate fluctuations denote another way that the external environment can affect the profits gained by an organization. Chipotle has a portfolio of suppliers belonging to different regions, and changes in exchange rate effects the cost of accessing the materials from suppliers based outside the US.
Social Factors
Fast food segment is targeting the customers that are from different age groups. However, Chipotle’s main focus is on the younger segment of the population that is interested in buying Mexican food. Besides age, the focus of people on health conscious food items has opened up new business opportunity for the company, resulting in the launch of Farmesa brand.
Another significant event that shaped consumer behavior was COVID, which created a greater dependence on online delivery. Fast food purchase during COVID changed from in-store visitors to customers placing orders online. Chipotle had observed an increase in the online orders as people preferred to maintain social distance due to pandemic.
Fast food restaurants have to maintain a positive image to continue the inflow of customers. Risk of the spread of contagious diseases due to contaminated food has a massive impact on the sales generated by fast food companies. Chipotle experienced low sales as its food items were deemed as not meeting safety standards and contributing to the spread of E.coli (Gillespie, 2016).
High prices discourage the customers from purchasing fast food items and they are more likely to direct the spending towards lower cost food items. Chipotle had revised pricing to deal with the rising cost of food material, but experienced lower sales due to the higher prices.
Technological Factors
Online food delivery was made possible by the availability of technological infrastructure. Chipotle has significantly benefited from online presence as during COVID, a large number of people shifted to online ordering. Thus digital technology has helped the company to maintain its sales despite the lockdown and slower in-store business (Chipotle Mexican Grill, 2022).
Chipotle has also integrated advanced technologies to manage its product preparation in an effective manner. The use of AI and machine learning technology enables the workers to get information about the production requirement and schedule to adopt for managing food preparation.
Legal Factors
Company needs to follow the labor laws pertaining to the country where it is operating and treat the employees with fairness. In addition, unionization process can’t be stopped by force as it can lead to litigation. In an effort to stop its employees from becoming a part of the labor union, the management has made some decisions that have caused backlash on the legal grounds.
Chipotle also had to deal with legal challenge when the violation of Fair Workweek law created conflict between the employees and the company. The management had not adhered to the legal requirements of scheduling the work routine, and also overlooked the hiring requirements. As a result, a fine of $20 million was imposed on the company (Scheiber, 2022).
Environmental Factors
The environmental initiatives of Chipotle include the plan to reduce greenhouse gas emission up to 50% by 2030 (Chipotle Mexican Grill, 2022). The company has developed waste management protocols to lower the impact of different waste materials on the environment. The sustainability initiatives also include the use of renewable energy to limit the fuel usage.
The restaurant designs are developed keeping in view the environmental impact and the company even recycles the building material. In case of suppliers, Chipotle selects those organizations that adhere to the environmental standards and maintain sustainable practices through carbon reduction.
Conclusion
Chipotle has been impacted by various external factors that have influenced its business operations and financial performance. Political stability, economic stability, social trends, technological advancements, legal obligations, and environmental concerns have all had a significant impact on the company. The COVID-19 pandemic has accelerated the shift towards online ordering, and the company has leveraged technological infrastructure to maintain sales.
However, legal violations have resulted in significant fines, while environmental concerns have led to the development of sustainability initiatives. Despite the challenges, Chipotle has continued to adapt and evolve its strategies to ensure it remains a prominent player in the fast-food industry.
References
Chipotle Mexican Grill (2022). Form 10-K. Retrieved from: https://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=117226801&type=PDF&symbol=CMG&companyName=Chipotle+Mexican+Grill+Inc.&formType=10-K&dateFiled=2023-02-09&CK=1058090
Gillespie, P. (2016). Chipotle profits tank after E. coli scare. CNN. Retrieved from: https://money.cnn.com/2016/02/02/investing/chipotle-earnings-e-coli/index.html
Lucas, A. (2022). McDonald’s and Chipotle say customers are trading down, visiting less often as inflation hits budgets. CNBC. Retrieved from: https://www.cnbc.com/2022/07/27/mcdonalds-and-chipotle-say-customers-are-trading-down-visiting-less-often-as-inflation-hits-budgets.html
Rogers, K. (2019). Chipotle says Mexican tariffs could cost it an additional $15 million, possibly forcing price rises. CNBC. Retrieved from: https://www.cnbc.com/2019/06/03/chipotle-says-mexican-tariffs-could-boost-costs-by-15-million-in-2019.html
Scheiber, N. (2022). Chipotle Agrees to Pay Over $20 Million to Settle New York City Workplace Case. New York Times. Retrieved from: https://www.nytimes.com/2022/08/09/business/economy/chipotle-labor-nyc.html