(Use bullet points instead of descriptive paragraphs to answer the following questions. Your answers are due before class on Thursday, 2/25/21. Please do not delete the questions but type your answers in blue font below each question. Maximum 5 pages, excluding this page, your exhibits (tables and graphs, if any), and references. Do not copy and paste any exhibits from the case.)
- Should Kevin Smart divest his investment in Chipotle? Why or why not? (5 points)
- Based on Chipotle financial performance analysis, Kevin Smart should not divest his investment in the entity.
- One of the critical reasons why Smart should keep his investment is because of Chipotle’s good earnings per share (EPS). Smart may enjoy higher returns from the amount he invested in purchasing the company’s shares if he maintains his investment.
- Smart should also keep his investment in Chipotle because of the favorable high stock prices. The increase in stock prices implies that the company is more profitable; thus, Smart may earn higher dividends from the positive change.
- What was CMG’s strategy? How did Chipotle position itself in the restaurant industry?
(5 points)
- CMG’s key strategy is a differentiated business model.
Unlike other fast-casual segment participants that relied on processed ingredients and automated cooking techniques, CMG leveraged classic cooking techniques and real premium ingredients sourced directly from farmers.
- Chipotle positions itself in the restaurant industry as an entity of ‘food with integrity”.
The company’s brand positioning reflects its commitment to serving sustainably grown food. Moreover, Chipotle is committed to using high nutrition products such as rBGH-free dairy products such as sour cream, queso, and cheese. Additionally, Chipotle is highly committed to supporting local farmers that grow organic food. In essence, Chipotle’s daily activities substantiate its positioning as a “food with integrity” brand.
- Using Porter’s industry analysis model, discuss Chipotle’s bargaining power and profit potential in the restaurant industry. How many stars would you give to Chipotle in this industry? (10 points)
- Chipotle’s bargaining power can be analyzed from two perspectives: the bargaining power of suppliers and buyers.
Suppliers:
- Chipotle is keen on its supplier selection because it is vital to the final product’s quality. Considering Chipotle’s commitment to “food with integrity”, it must source its products from suppliers with a good reputation in organic farming and the highest standard of animal welfare. Therefore, unlike other firms that source products from multiple suppliers, Chipotle has a limited supplier base whose selection is based on their ability to meet Chipotle’s product quality and standard. Therefore, Chipotle’s suppliers have a moderate bargaining power that can decrease the entity’s profits in the market by threatening to raise product prices or lowering quality.
Buyers:
- The restaurant industry is highly competitive with multiple players such as McDonald’s’. The industry’s competitiveness provides buyers with a myriad of options to choose from based on metrics of quality and price. Therefore, buyers in the restaurant industry have high bargaining power and can potentially reduce Chipotle’s profits by shifting purchases to other entities.
- Overall, I would give Chipotle a 3-star in the industry because it serves exceptional cuisines, including its premium product, Carne Asada, that the company was planning to reintroduce.
- Conduct a thorough analysis of Chipotle’s financial performance using common size statements and ratios. What are your conclusions about Chipotle’s performance? Do you see any red flags in the data? (10 points)
- An analysis of CMG’s income statement shows a significant increase in revenue and profits between 2016 and 2019. Notably, the company’s gross profit rose from $498,214,000 to $1,142,490,000 while the revenue increased from $3,904,384, to $5,586,369.
Ratios
- Solvency
- Quick ratio: (current assets-inventory)/current liabilities
(1,072,204-26,096)/666,593= 1.569, implying that the company is highly liquid to meet its short-term liabilities.
- Liquidity ratio
- Inventory % of revenue: inventory/revenue
- Inventory % of revenue in 2019: 26096/5,586,369= 0.00467
- In 2018:21,555/4864985= 0.0044306
The inventory % of revenue increased from 2018 to 2019, implying that inventory investment is multiplying.
- Capital Structure Ratio
- LT-Debt as % of invested capital: long term debt/invested capital
- 1,466,060,000/2,678,374,000= 0.5473 implying that the company is using less debt to run its operations.
The statements and ratios show that the company’s performance has improved over the years. Moreover, I do not see any red flags in the data because Chipotle’s capital structure reveals efficient use of debt capital to finance its operations.
- Evaluate the value CMG created for its stakeholders, including shareholders. (5 points)
- From the information in the case study, it is evident that CMG created significant value to its stakeholders by indulging in social responsibility such as charities and giving grants to farmers. Moreover, CMG created value for employees by providing a safe working environment, increasing their bonuses and salaries.
- CMG created value for shareholders by maximizing their wealth through generating more profits and revenues over the years.
- Assess Chipotle’s strengths and weaknesses by analyzing CMG’s resources using the VRIN framework. (10 points)
Valuable
- One of the brand’s key strengths is its valuable ingredients, which boost quality food products.
- Chipotle’s distribution network is also valuable because it enables the company to reach physical and online customers, thus leading to more significant revenues.
- However, its cost structure is not valuable because it leads to higher operating expenses than its rivals. Unautomated production is also a weakness because it increases its cost and adversely affects the net profit.
Rarity
- Chipotle’s financial resources are rare, notably in a pandemic where most companies in the industry filed for bankruptcy.
- The firm’s distribution network is also rare because very few firms would have adequate investment to fund such an effective channel.
- Chipotle’s local products prepared from organic produces are not rare because other competitors can access the local resources and prepare similar food products.
Imitability
- Chipotle’s spent years and resources developing its distribution channel. Therefore, it may be costly for new entrants to imitate a similar channel.
- The firm’s financial resources and current profits have been generated for years through prolonged operations. Hence, it may be difficult for new market entrants to imitate these financial resources.
- The classic manner in which Chipotle makes its food from real-ingredients is inimitable.
Substitutability
- Chipotle positions itself as a “food with integrity” brand; therefore, its food products are non-substitutable because they are the source of its competitive advantage.
- What did you learn from this case? (5 points)
- Besides evaluating a firm’s sustainability in the industry, its performance can be assessed by analyzing its financial statements.
- I also learned that paying attention to an entity’s organizational design is vital in avoiding crisis. For example, in this context, Chipotle changed its corporate design and added two management positions to propel itself through its 2015,2016 and 2018 crises.
- I also learned that social responsibility is vital for the long-term success of companies.
- I also learned that it is vital for corporations to take responsibility for mistakes that occur in their entities just like Chipotle was committed to paying for foodborne illness outbreaks in its restaurants.
- I also learned that employee satisfaction is key to a firm’s performance. In this context, Chipotle invested significantly in keeping its employees satisfied and well-trained, which explains their outstanding performance.
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