by:

Isaac Aso
Alegra Horne
Dana Woodruff

WAC
Fall 2015

1
Table of Contents

Memo: Strategy Assessment and Recommendations of Chipotle, Inc. 3

Exhibit 1 Organizational Strategy 5

Exhibit 2 SWOT Analysis
Strengths 10
Weaknesses 11
Opportunities 12
Threats 13
Exhibit 3 Financial Analysis
Consolidated Statements of Income 2011-2013 16
Consolidated Balance Sheets 2012-2013 17
Chipotle Financial Ratios 19
Peer Financial Ratios 20
Sources and Uses Analysis 22
Horizontal and Vertical Analysis 23
Exhibit 4 Strategy Assessment 25
Exhibit 5 Pro Forma Income Statement without Recommendation 28
Pro Forma income Statement with Recommendation 29

Exhibit 6 Porters Five Forces Analysis for Supplier Power 30

2
MEMO
Date: November 23, 2015
To: Steve Ells and Monty Moran
From: Consultants
Re: Strategy Assessment and Recommendations of Chipotle, Inc.

Per your request, we have analyzed Chipotle Mexican Grills (CMG) strategic initiatives. In 2014,

management maintained its position to change the way people think about and eat fast food utilizing

limited menu selections, fresh ingredients, classic cooking methods, and customer made-to-order dishes.

We have outlined the mission, vision, objectives, and major policies in Exhibit 1, and detailed the

strengths, weaknesses, threats, and opportunities to managements strategy in Exhibit 2. Based on our

assessment of Chipotles objectives and industry standing it is believed that the companys success is

constrained by (additional details in Exhibits 4 and 6) the following issues:

Declining year-over-year comparable-restaurant sales growth of -21.1%, -36.6%, and 409.1%,

respectively, in 2013, 2012, and 2011

Declining year-over-year average annual sales growth in the opening year of 2.65%, 4.97%, and

16.49%, respectively, in 2013, 2012, and 2011

Difficulty sourcing 100% of the necessary fresh, organic ingredients and natural meats to meet

restaurant requirements

Of these issues, the most alarming is the year-over-year declining comparable sales growth. With 13%

restaurant expansion growth we would have expected growth in revenue, but it decreased 2.6% from 2012

to 2013. Rising market prices and supply-and-demand shortages for organically grown ingredients,

natural meats, and packaging accounts for 33.4% of cost on revenue, as evident in the horizontal and

3
vertical analysis in Exhibit 3. Since a positive trend in revenue growth is vital to the companys long-

term viability we have identified three potential solutions:

Expand the vegetarian organic tofu menu line

Extend company operating hours and add a breakfast menu line

Direct capital toward the acquisition and operation of organic agricultural cooperatives

Of these options, we recommend using capital to acquire and operate organic farm cooperatives. Our

position is supported by the sources and uses analysis in Exhibit 3. We found that Chipotle increased total

assets while paying-off debts which provides a source of internal funding for future investments. Using

capital to purchase cooperatives to support the supply chain distribution may make operations more

efficient and cost effective. A reliable supply chain framework would allow Chipotle to reduce its

dependence on food distribution centers, manage price-cost risks, strengthen its bargaining power, control

product quality, and provide an assured source of supplies. As evident by our income statement analysis

in Exhibit 5, we believe that farm operations profit margins would be vertically integrated into Chipotles

supply chain network, resulting in a projected 2% decrease in its food, beverage, and packaging costs.

We believe spending capital on this initiative would ultimately allow Chipotle to capitalize on its

strengths and opportunities, and minimize its weaknesses and threats, as detailed in Exhibit 2.

A potential problem with this solution is the increasing capital expenditures and extension of management

resources. We fear that Chipotle may thin its management talent and lose its focus with managing

cooperatives. This may cause investors to question this move and lower its stock price expectations. This

potential de-railer can be minimized by communicating with the cooperatives Chipotles intent to keep

their management and workforce in place.

As with any complex issue there may be multiple solutions for optimizing results, thus Exhibits 1-6 are

enclosed should you require further details to adjust your strategy.

4
EXHIBIT 1 Chipotles Strategy

Mission/Purpose/VISION
To change the way people think about and eat food.
To create operationally efficient restaurants
Becoming exceptional in food making and other operations.
To ensure that restaurant interiors are aesthetically pleasing to patrons.
To create a positive and interactive customer experience
Management believes this will help build loyalty and enthusiasm between
restaurant staff and customers.
To build a friendly, people-oriented culture
Employees motivated to achieve high standard.
Employees taking good care of customers.
Growth
To aggressively expand internationally.
To open new restaurants and expand market coverage in the US.
Philosophy/Self Image
To stay committed to Food with Integrity philosophy.
To be a leader in responding to consumers concern about food nutrition,
source, and means of cultivation, as well as how animals are raised.
Goals/Objectives
Prepare and serve meals less than 2 minutes after they are ordered.
Meals from Chipotles pizza business, Pizzeria Locale, should be ready in less
than 3 minutes.
Switch to 100% organic and natural meat.
Switched to ingredients that are not grown from modified seeds by the end of
2014.
Ensure 40% of restaurants opened in 2014 are bigger and in free-standing
locations.
Open between 180 and 185 new restaurants in 2014
5
 75% of restaurants in established market.
Major Policies
Culture
Building enthusiasm and loyalty among restaurant staff and customers.
Product strategy.
Keeping menu offerings simple
- Focused menu of burritos, tacos, burrito bowls, and salads.
Using high quality and fresh ingredients in preparing menu items.
Applying classic cooking techniques in preparing menu items.
- No automated cooking equipment
- No microwave oven.
- Food is prepared from scratch.
Preparing meals to order
- Customers are free to pick out ingredients in their orders.
Using organically grown produce for meals
Using animals raised in a humane manner, without hormones and
antibiotics, for food.
Serving a selection of beer in restaurants where alcohol is allowed.
- This will appeal to alcohol-loving customers.
Maintaining product flexibility
- Fulfilling special, off-the-menu, requests if ingredients are
available at the restaurants.
- Adding to restaurant menu in responds to customers taste.
Marketing strategy
Employing aggressive marketing techniques to create awareness for new
products.
- Digital, print and outdoor ads used to promote new catering
program.
The company engages customers and the public through a variety of ways.
- Word of mouth, publications and TV program features.
6
 - Print, outdoor, transit, theatre and online.
- Digital, mobile and social media
a. Engage customers on an individual level.
- Owned media: music, video and cultivate festivals.
Corporate social responsibility.
Maintain awareness and respect for the environment
Collaborating with animal ethics experts to support more humane farming
environment.
Pricing Strategy
Keep menu prices reasonable
Supply chain strategy
Sourcing of in-season ingredients locally.
- 350-mile radius of restaurant.
Setting food and pricing standards by which suppliers have to operate.
Monitoring food quality and safety from supply chain to service lines.
- Chipotles quality assurance team has this duty.
Inspecting farms and ranches from which it obtains ingredients.
Personnel management strategy
Hiring and retaining people that meet a set of conditions.
- Candidates must be team players
- Candidates must take pride in preparing food items correctly.
- Candidates need enjoy interacting with other people.
- Candidates need exhibit enthusiasm in serving customers.
Rewarding employees based on performance
- Top performing employees are promoted
- Crew members could rise to the position of general manager in 9-
12 months.
- 96% of hourly managers have been promoted from crew members.
Developing crew members into high-performing employees and
promoting them to leadership positions.
7
 Using experienced employees and managers to provide internal, practical
and focused on-the-job trainings to other employees.
Defining specific goals, on the bases of which employees and managers
are promoted.
- To get promoted to an apprentice team leader, an employee must
be a restauranteur.
- Four of the restaurants a restauranteur mentors must achieve high-
performance status.
- At least 1 of 4 managers of the high-performance restaurants must
achieve restauranteur status.
Evaluating general managers who are not able to achieve restauranteur
status, proffering and implementing remedial actions.
- New diagnostic and planning tool was put in place by co-CEO,
Monty Moran.
Operation Management strategy
Running two crew shifts at restaurants
- This method keeps scheduling simple and employee hours regular.
Total Quality Management (TQM)
Keeping restaurant operations simple
Resisting menu selections (e.g. coffee and desserts) that complicate
processes and operations.
Designing layouts that make food ordering and dish-creation process
intuitive.
Encouraging crew members to interact with customers.
Increasing the speed with which customers go through service lines.
Ensure face-to-face interaction with customers by employees taking orders
and preparing food.
Operating an open kitchen where a customer can watch the employee
prepare her food.
Monitoring public awareness and consumer sentiment.
8
 Exploring new markets and restaurant locations - Military bases, airports,
highway sites, outlet centers, economically mixed communities.
Investing $10 million to redesign all its restaurants with
- Better security.
- Operational reliability.
- Greater acceptability.
- Mobile payment.

9
EXHIBIT 2 SWOT Analysis
Strengths
Chipotle inspires confidence in investors.
- With stock price at $661, investors believe that Chipotle can expand
domestically and internationally.
Chipotle has the infrastructure to open stores at a fast rate.
- According to co-CEO, Steve Ells
Chipotle has a history of profitability
- A revenue of $3.2 Billion and net income of 327.4 million in 2013.
- Between 2007 and 2013, revenue grew at a compound average rate of
19.8%
- Average annual sales of restaurants opened at least 12 full month climbed
from $1.085 million in 2007 to $2.169 million in 2013.
Chipotles co-CEO, Steve Ells, graduated from the Culinary Institute of America
Chipotle understands and leverages McDonalds expertise in supply chain
logistics, expanding restaurant chain and operating efficiently.
Chipotle embraces innovation and constant improvements, led by co-CEO, Steve
Ells.
The company attracts increasing number of customer visit.
Chipotles sale per customer is also growing.
Chipotle keeps cost low by offering limited menu items.
The company has established long-term relationship with reputable food industry
suppliers.
Chipotle employees are trained to work at a variety of stations.
- This minimizes the business impact of employee absenteeism.
- Provides the employee with a variety of skills.
- Boosts labor efficiency during busy periods.
Crew members generally believe in Chipotle strategy.
- They took jobs at Chipotle because of their own dining experiences.

10
 Chipotles employees perception of long-term career at Chipotle is positive
- The company promotes from within
- The company was opening new restaurants in new and old markets fast.
Chipotles new diagnostic planning tool is proving effective.
- Customer throughput on the service line increased by an average of 6
transactions during peak lunch hour and 5 transactions during peak dinner
hour.
The company has a positive media image.
- There are favorable articles about Chipotles food, restaurant concept and
business in general.
The companys marketing outreaches are well received.
- 90% of attendees plan to attend marketing events again.
- Ad films were viewed online 12 million times
- Ad games were downloaded 600, 000 times.
- There are 500 million media impressions.
Inexpensive advertising
- Chipotle saved $5 million in advertising money by using scare crow
marketing.

Weaknesses
Food preparation is time consuming and laborious
- Due to the use of classical cooking techniques.
Chipotle has not completely switched to natural and organic meat.
Some Chipotle restaurants reverted to using conventionally raised animal because
of shortage of responsibly raised animal.
- Although, this was disclosed on a signage, it has the potential of hurting
Chipotles business.
Chipotle purchases ingredients from regional distribution centers instead of
directly from suppliers.

11
 - The introduction of middlemen - regional distribution centers is likely to
increase the costs of ingredients.
Chipotle is projected to incur 5% more in cost for when it opens new restaurants
in 2014.
- Some of the restaurants will be free standing and they cost more capital.
- The restaurants will be in the North Eastern part of the US which has high
construction cost.
Chipotle will also incur an increased capital investment (remodeling) cost of
between $15,000 and $20,000 in 2014.
Chipotle does not seem to offer or focus attention on kids menu
- The competitors do.
Potential for conflict with co-CEOs
- Although Steve Ells and Monty Moran seem to be complementing each
other as Chipotles co-CEOs, their opinions on the direction of Chipotle as
a business might diverge, leading to business disruption.
Risk of losing trade secrets and recipes
- By allowing consumers, some of whom may be spies to watch as their
orders are being fulfilled, Chipotle risks disclosing their recipes, which
could then be replicated by other restaurants and customers, thereby
undermining Chipotles business.
Opportunities
More small farmers and larger agricultural enterprises are expected to go into
organic crop cultivation and responsible animal rearing.
There is a growing demand for organic produce and natural meat.
- This is the reason Taco Bell lost customers between 2005 and 2011 when
it did not offer organic and fresh meals.
Price volatility and supply shortages expected to decrease.
The restaurant industry if forecast-ed to grow at a compound rate of 3.9%
between 2010 and 2014.

12
 The restaurant industry sales are forecasted at $683 billion among 990,000 food
establishments in 2014.
There is increased popularity of healthy foods that are produced and prepared
locally in an environmentally responsible manner.
Fast-food casual chains are perceived to have enhanced service and higher-quality
food than traditional quick service restaurants.
- Compared to quick service restaurants, fast-food casual restaurants have
seen increased every year since 2010 (6%) to 2013 (9%).
Fast casual is the fastest growing restaurant category
- It grew from 5% to 15% in 10 years.
- 85% of surveyed consumers eat at a fast-food casual restaurant at least
once a month.
Meals at fast-food casual restaurants could be perceived as being less expensive
than meals in full-service restaurants.
- In 2013, guest checks at fast-food casual restaurants average $7.40
compared to $5.30 at full-service restaurants.
Threats
Increased competition from companies like Taco Bell
- After losing customers to food organizations that use organic and natural
food, Taco Bell responds with
Organic menu selection e.g. Doritos Loco Taco
More reasonable pricing structure than the competition, e.g.,
average ticket is $4.50 in Taco Bell compared to $7 - $9 elsewhere.
- Taco Bell leads the industry with 49% market share.
Chipotle has work to do.
Some of Chipotles competitors, like McDonalds, have more reach
- McDonalds has
35,000 company owned and francize restaurant locations
(compared to Chipotles 1595 locations).

13
 70 million customers per day (compared to Chipotles 1
million/day).
Presence in 119 countries (compared to Chipotles 43 US states,
London, Paris and Frankfort).
There is also increased competition on Chipotles pizza business, Pizzeria Locale.
Limited supply of locally grown produce and natural meat.
- Because consumers purchase the same ingredients from their local
farmers markets and supermarkets.
- Also, chefs at fine-dining restaurants have started to incorporate the same
ingredients into their dishes.
Organic crops take longer to grow compare to non-organic ones.
Farmers of organic produce and natural animals incur high costs which are then
passed on to Chipotle and its customers.
The yield of organic crops could be lower than those of non-organic ones.
Lower growth rate and weight gain in naturally raised animals than in non-
naturally raised ones.
Higher prices for organically grown produce and natural meat.
- Organic produce and natural meat are expected to continue to be more
than conventional produce and meat.
Periodic demand-supply imbalance produces market conditions in which certain
organic produce and natural meat are either unavailable or very expensive.
Some food related issues are complex and confounding to customers.
- Pros and cons of ingredients from genetically modified seeds
- Pros and cons of organically grown vegetables and fruits.
- Benefits of eating meat from animals that were raised humanely, without
antibiotics.
- Benefits of eating nutritious food.
- Reasons for food with integrity mission.
There are a lot of dining establishments that specialize in Mexican food.

14
 Meals at fast-food casual restaurants could be perceived as being more expensive
than meals in quick-service restaurants.
- In 2013, guest checks at fast-food casual restaurants average $7.40
compared to $5.30 at quick-service restaurants.

15
EXHIBIT 3 Consolidated Statements of Income 2011-2013

The income statement data appears logical with individual line items increasing in
an expected manner. Trends are more closely analyzed in the horizontal and
vertical analysis. Total revenue has increased year over year as expected by
Chipotle management but the sources of revenue (e.g., new stores or revenue
growth in existing stores) cannot be determined from the income statement alone.
16
EXHIBIT 3 Consolidated Balance Sheets 2012-2013

17
The balance sheet, like the income statement, does not present red flags. The data trends as
expected though there are some observations on how accounts changed between 2012 and 2013.
Accounts Receivable as a percentage of revenue increased by a small percent. In cash terms the
increase is approximately $7 million dollars. As revenues and accounts receivable increase the
collection period should be monitored throughout the year to prevent the accumulation of large,
non-collectable accounts.
Cash and cash equivalents did not see an increase in proportion to the increase in revenue
though short term and long term investments experienced healthy balance increases.
Goodwill remained unchanged implying that growth in 2013 was organic rather than through
acquisition.
It is observed that Additional Paid in Capital rose in proportion to treasury stock. It is not clear
what the advantage management found in buying back roughly the same amount of stock issued.
Retained Earnings rose in proportion to the increase in net income.

18
EXHIBIT 3 Chipotle Financial Ratios

The financial ratios demonstrate, overall, an improving financial picture year over year.
Chipotle has outperformed the industry median in each of the three years for each financial ratio
considered.
The Current Ratio is three times the industry median. Industry median Quick Ratio
demonstrates that 40% of current assets are held as inventory. Chipotles Quick Ratio
demonstrates that less than 10% of their current assets are held as inventory. This implies good
inventory management by Chipotle and good liquidity.
Inventory Turnover is more than twice that of the industry median. This implies brisk sales and
good inventory management. Good inventory management implies inventory is served fresh to
the customer which is one of Chipotles strategies.
Profit margin, Return on Assets and Breakeven metrics remained steady which, given increased
revenue, implies higher costs were incurred year over year. There had been slight improvement
in these metrics between years 2011 and 2012. Return on Equity is greater than Return on
Assets which means that leverage is being used to the shareholders favor.

19
EXHIBIT 3 Peer Financial Ratios

Chipotle compares favorably to its peers and arguably presents the best overall picture but does
trail one or more peers in some metrics. None of the peers examined outperform Chipotle across
the range of metrics.
Chipotle outperforms all examined peers in the metrics of Current Ratio, Quick Ratio, Financial
Leverage and Inventory Turnover. This implies good financial health and brisk sales (which
implies the potential for good continuing operations). Chipotles Current Ratio is significantly
higher than competitors which, while favorable, may mean that the company is over invested in
current assets and may find it beneficial to re-invest a portion of these funds elsewhere.
Chipotles lower Financial Leverage implies less volatility in its earnings per share.
Chipotle trailed McDonald's with a lower profit margin. Chipotle leads the hamburger giant in
revenue increases. This implies that McDonald's is either cost cutting, which can be detrimental
to long term customer satisfaction, or is benefiting from economies of scale.
20
Chipotle outperforms its peers in its Return on Assets but trails in its Return on Equity.
Chipotles performance is closely aligned with Paneras performance in these two metrics.
McDonald's and Taco Bell are noted to carry more debt than Chipotle and Panera. The higher
Return on Equity is due to the return on the use of the borrowed funds exceeds the cost of the
borrowed funds. While this can be attractive in some circumstances it is a dangerous strategy
because in a downturn the leverage can turbocharge poor financial performance to the point of
insolvency. While Chipotles Return on Equity is not as robust as Taco Bells there is
considerably less risk and as such Chipotles current strategy is deemed sound.
Chipotle outperforms her peers in both Revenue and Net Income growth both year over year and
in a three-year average.

21
EXHIBIT 3 Sources and Uses Analysis

The increase in assets is nearly identical to the increase in liabilities and equities. The current
assets increased significantly compared to current liabilities indicating increased liquidity.
Total assets increased compared to total liabilities which resulted in an increase in shareholder
equity. This indicates good return on their investment and provides a source of internal funding
for future investment in the company.

22
EXHIBIT 3 Horizontal and Vertical Analysis

As previously noted, Chipotles financial statements present a logical trend without alarming
inconsistencies. However, in the vertical and horizontal analyses there are potential trends to
watch for development of.
Food, beverage & packaging per revenue remains the highest expense item on the income
statement at 33.4% of revenue in 2013. It held constant between 2011 and 2012 but increased by
0.8% in 2013. Potential reasons could include higher ingredient cost due to inflation without a
corresponding increase in cost to customers.

23
Labor cost as a percentage of revenue year over year decreased between 2012 and 2013. This
implies increased store efficiency either from an economy of scale perspective or through
greater efficiency by the staff in the number of customers served by each staff member.
Operating income as a percentage of revenue is steady- just a 0.12% decline in 2013 year to
year. While this signals good management of operations it also suggests that Chipotles current
market may be saturated and expansion into new markets should be considered. Decreasing
expenses, e.g. food, beverage and packaging costs, is another potential strategy to increase
operating income.
Even though revenue continues to grow from year to year the rate of growth declined in 2013
from 20.3% to 17.7%. The reason for this should be examined to thwart a trend from developing
or to recognize when aggressive growth targets are unable to be sustained due to market
saturation and full optimization of store capability.
Other operating costs increased significantly though this was offset by the decline in Selling,
general & administrative expense. This implies some leveraging of economies of scale in the
corporate offices but the local stores are unable to realize the same benefit.

Conclusion
Chipotle has seen consistent performance in her bottom line. Some leverage was effectively used
to maintain a consistent net income percentage between 2012 and 2013 despite a small decrease
in operating income percentage. However, there seems to be room for improvement, especially
in lowering food, beverage and packaging costs. One way of achieving this is eliminating the
middleman in its supply chain through mergers and acquisitions.

24
EXHIBIT 4: Current Strategy Assessment
Are there built-in contradictions of Chipotles strategy?
Keeping menu offerings simple vs. serving off-the-menu items when a customer
orders them and ingredients are available.
It might be difficult to keep menu and operations simple if Chipotle continues
to cater to customers who order off-the-menu items.
Increasing throughput vs using classical cooking method
It might be difficult to improve on efficiency and cut down the time it takes to
fulfill a customers order when Chipotle uses classical cooking methods,
which are more laborious and time-consuming.
Do all of the strategy elements fit together?
In spite of few apparent in-built contradictions, Chipotles strategy elements seem to fit
together. The companys food with integrity philosophy appears set to continue to create
value and take advantage of a market where people are becoming more conscious of healthy
food consumption. Training employees, establishing loyal suppliers and creating nutritional
and environmental awareness in a cost-effective manner seem to work together.

Does Chipotle have the strengths to pull off the strategy?

Chipotle seems to have what it takes to execute its strategy. With a history of profitability
($327 million in 2013) and investor backing, and manageable operating cost, the company
will have the financial resources to build new restaurants in the US and overseas. Also, the
inspired and well trained employees at the company will be instrumental in executing the
companys strategic mission of providing customers with special dining experience. Overall,
Chipotle boasts of innovative and people-oriented leadership in Steve Ells and Monty Moran,
who have designed performance metrics to track company performance and employee
development.

Are there significant weaknesses in Chipotles strategies?

Although Chipotle looks strong enough to be able to execute its strategies, there seems to be
some significant weaknesses that need to be addressed.
By sticking to classical method of cooking and not opening up to innovation in that
aspect, it might be difficult for Chipotle to reduce customer wait time significantly in
comparison to its competitors like Taco Bell or McDonalds.

25
 By serving meals made with regular ingredients in some of its restaurants, Chipotle
risks diluting its message of healthy and organic eating habits. And perhaps, more
critical, is the risk of alienating customers and employees who have been inspired by
the companys campaign for meals made with organic produce and responsibly raised
animals.
There is also the risk of compromising the availability, pricing and quality of
ingredients because of the middlemen food suppliers and regional distribution
centers that exist between Chipotle and its source of menu ingredients. For
example, poor management in the supply chain will have a profound effect on
Chipotles operation.

Are there significant threats to Chipotle?

Limited supply of locally grown organic produce and responsibly raised animals.
Chipotle competes with local consumers, restaurants and chefs in accessing
local ingredients, some of which are already in short supply.

Cost of menu items

Cost-conscious consumers might prefer to patronize a restaurant like Taco
Bell, which has started incorporating organic produce into their menu, to
Chipotle as Chipotle commands higher prices that Taco Bell.

Lack of infrastructure and scale

Compared to a restaurant like McDonalds, Chipotles limited infrastructure in
the US and overseas will make their aggressive expansion both costly and
operationally challenging. Issues to be addressed as the company ventures
overseas include

- Sourcing organic local ingredients

- Building a brand name and excitement among customers
- Adapting Chipotles strategy to local culture

Does the current strategy position the company to take advantage of

opportunities?
There is the lingering risk of ingredient supply that Chipotle has to work hard to
overcome. However, the company seems to have the resources personnel and

26
 financial to do that, even though it might be challenging at outset. Having a handle
on supply can potentially help to drive down cost.
Chipotle successfully trialed Shophouse SouthEast Asian Kitchen and has 6 locations
in 2013. Therefore, the company can leverage on that experience as it expands and
gains market coverage.

Has the current strategy created a competitive edge?

Name recognition and reputation: Chipotles food with integrity philosophy has
created excitement in the media and among customers. This enhances its brand
recognition more than the average restaurant in the industry.

Menu selection: Chipotles limited assortment of menu gives it focus and helps it to
hone its expertise in offering exciting and nutritious meals.

Does financial performance indicate the recommended strategy is

effective?
The financial analysis indicates a successful strategy with a couple of metrics to watch
like year over year - revenue growth and operating costs. With peers not outperforming
this indicates a market risk that Chipotle may need to consider new strategies to address
should it continue.
The successful performance of Chipotle compared to traditional fast food competitors
indicates customers like the vision of healthier, locally sourced meals and believe in the
value the higher meal cost provides. The success of Panera, who has a similar strategy,
demonstrates the need for Chipotle to defend market share from competitors of that
caliber. Because of its low financial leverage ratio, excellent current ratio and cash
position, Chipotle has the ability to reduce liquidity to defend market share if strategically
necessary and remain in a healthier financial position than competitors. The Current
Ratio, in particular, is significantly higher than competitors which means that the
company may find it feasible to re-invest a portion of these funds to execute strategy.

Is the strategy workable?

Chipotle has the financial characteristics to execute its strategy.
Governments and employer health plans are urging people to care more for their health.
The busy work lives prevent many from cooking for themselves and Chipotle stands
ready to provide socially consciously resourced meats and vegetables prepared relatively
quickly.
Chipotle has contained these costs well year over year but should remain vigilant of
supply chain issues and trends in procurement costs. Labor cost decreased and this is
attributed to higher store year over year sales though overall operating costs increased.
27
EXHIBIT 5: Income Statement Forecast with Current Strategy

Income Statement
In Thousands Last Year Forecasted
December 31, 2013
Assumptions December 31, 2014

Revenue $3,214,591 19% $3,826,006

Restaurant & Operating Costs
Food, beverage & packaging 1,073,514 33.4% 1,277,696
Labor 739,800 23.0% 880,510
Occupancy 199,107 6.2% 236,977
Other operating costs 347,401 10.8% 413,477
General and Administrative 203,733 6.3% 242,483
Depreciation and Amortization 96,054 3.0% 114,323
Pre-Opening Costs 15,511 0.5% 18,461
Loss on Disposal of Assets 6,751 0.2% 8,035
Total Operating Expenses 2,681,871 3,191,963
Income from Operations $532,720 $634,043
Interest and other income (expense), net 1,751 0.05% 2,084
Income before Income Taxes $534,471 $636,127
Income Taxes (Benefit) (207,033) -6.4% (246,411)
Net Income $327,438 $389,717

This Pro Forma forecast assumes no strategic changes between 2013 and 2014. The forecast
incorporating our recommendation is on the next page. Both are provided for comparison.
The income statement forecast includes a revenue growth assumption calculated as the average
of the 2012 and 2013 revenue growth realizations.
The balance of assumptions is the 2013 realized percentage of revenue figures.
The largest potential de-railer in the forecast is the food expense which represents 33.4% of
revenue.

28
EXHIBIT 5: Income Statement Forecast with Recommendation Implemented

This Pro Forma forecast assumes that the recommendation to buy and operate farm
cooperatives is implemented. The forecast without incorporation of our recommendation is on
the previous page. Both are provided for comparison.
The profit margin for the farms operation is vertically integrated into Chipotles supply chain
resulting in a 2% decrease in Food, beverage & packaging costs resulting in higher net income.
Chipotle will capitalize the purchase costs of this strategy on its balance sheet through the use of
equity and debt to the best advantage of shareholders.
This strategy reduces Chipotles dependence on suppliers and decreases the risk of high price
increases or losing the supply to a competitor. Chipotle can more closely monitor the manner in
which animals and plants are raised. This latter point provides Chipotle the ability to deliver on
its promises of socially responsible sourcing to its customers.
29
EXHIBIT 6 Current Porters Five Forces: Supplier Power

HIGH

Supplier Power
Low Medium High
Cost of Changing Ability to Substitute Number of Suppliers
Size of Suppliers
Uniqueness of Service

Chipotle faces a high threat from Supplier Power. Chipotles strategy for fresh, organic
ingredients can be difficult to source in urban markets. Organic farms are outnumbered by non-
organic farms. The competition for these unique ingredients increases as market competitors
emulate Chipotles strategy. While Chipotle does have the ability to substitute at a low
changing cost, it is even possible the substitutes cost would be lower, it is probable that some
customers will be disappointed.

30