How to Make a Billion Dollar Burrito

Here’s how you can cash in on the hottest fast-food trend since the burger hit the bun
000000000000000.jpg Steve Ells never set out to be a fast-food mogul. He wanted to be a chef. But one night in 1992, he found himself looking for a cheap way to fill his gut after a grueling shift at Stars, the upscale San Francisco restaurant where he was working as a line cook. Ells wandered over to the Mission District, and there in the fluorescent glare of a seedy taqueria, the 27-year-old smelled more than rice and beans: He smelled money. As the old man behind the counter was assembling his burrito, Ells had an epiphany. What if he opened a taco place that used fresh, healthy ingredients—the kind of ingredients he was working with at Stars?

He knew nothing about business, having majored in art history at the University of Colorado before training as a chef at the Culinary Institute of America. Undaunted, he moved back to his hometown of Denver, where his normally supportive dad didn’t initially share his son’s vision. “He was skeptical,” says Ells. “Starting a burrito joint after working in one of the country’s top restaurants didn’t make sense to him.” Nevertheless, Papa Ells eventually fronted him the $85,000 start-up cash, and in 1993, the chef opened a compact, 850-square-foot restaurant just down the street from his alma mater in Boulder, Colorado.

Today that one little college restaurant has spawned more than 500 franchises, and at 41, Ells’ net worth is more than $68 million. In January, the Denver-based company went public and doubled its $22 offering price to close at $44 a share. According to market-information giant Thomson Financial, the IPO was the best opening gain by a U.S.-based company in 5 years. Fueled by the money it raised in the market, the company is on a growth tear, with plans to open 90 new locations this year, and Chipotle’s CEO envisions a  future where thousands of his restaurants pepper the country.

Like many a successful entrepreneur, Ells created a great product, but he was also in the right place at the right time. Once a regional specialty, taquerias have exploded into a national phenomenon. In the process, they have set the stage for a full-blown theater of culinary combat—a war that the average investor can join. (See Put Your Money Where Your Mouth Is.) McDonald’s, Wendy’s, and Jack in the Box—all desperate to expand beyond the bun and tap into the browning of America—have invested in this genre of fast food, called fresh Mex. McDonald’s has a stake in Chipotle; Wendy’s owns Baja Fresh, a California chain with more than 250 locations; and Jack in the Box owns Qdoba, yet another fresh-Mex brand, with roughly 280 restaurants in 40 states.

The conglomerates’ hunger to turn queso into pesos says a lot about how the country’s dining habits are changing. People are increasingly tight on time and willing to buy convenience. “As people age, the fast-food model doesn’t work. It’s just less acceptable to eat a Double Whopper,” says Baja Fresh chief marketing officer Mark Chmiel. The nouvelle taquerias allow consumers to build healthier meals from food that is fresh and grilled, and doesn’t come in a combo with supersize fries.

Ells is committed to delivering what he calls “food that is fast, but not fast food.” Since 2003, some of Chipotle’s pork has come from the Niman Ranch, based in Northern California (the same purveyor that New York’s Daniel restaurant uses). Half of Chipotle’s chicken (and one-third of its beef) is also naturally raised. “Our mission is to feed the masses,” he says. “Unfortunately, what’s available to the masses is highly processed. ”

Ells may remain a chef in his heart, but he could never have become a national tastemaker until he found his Daddy Warbucks in a clown named Ronald. Buying 90 percent of Chipotle in 1998 was also a shrewd move for McDonald’s. After spinning off the company in the IPO, McDonald’s is still a majority shareholder, sitting on a stake worth about $3.2 billion, but plans to divest itself of the company by the end of the year. From an investment standpoint, fresh Mex was a perfect vehicle for the Golden Arches to break into a booming style of restaurants called fast casual. This hybrid between fast food (McDonald’s) and casual restaurants (Cheesecake Factory) consists of players like Pei Wei (owned by P.F. Chang’s), Cosi, Panera, and of course, the fresh-Mex segment. According to the National Restaurant Association, fast casual is estimated to be a $7 billion market. Compared with the roughly 5 percent growth rate for casual restaurants, fast casual is hitting double-digit growth at 12 percent, and analysts predict it will become a $100 billion market by 2015.

Chipotle’s rapid expansion has made the company a Wall Street darling, but it also makes Chipotle the brand to beat. Nobody knows this better than Martin Sprock. Although he is the same age as Ells, Sprock came to be a kingpin in the fast-casual space in a different way. If Ells is the crunchy Coloradoan whose chain features signage that reads “Ingest No Evil,” Sprock is the NASCAR-loving serial entrepreneur. Born in North Carolina and based in Atlanta, Sprock has tried to dominate the fast-casual sector with not one but nine different chains—among them Moe’s Southwest Grill, Mama Fu’s Asian House, Boneheads Grilled Fish & Piri-Piri Chicken, Doc Green’s Gourmet Salads, and Shane’s Rib Shack.

His philosophy is simple: Keep it lean. Even though his company, aptly named Raving Brands, threw off $260 million in revenues last year, Sprock prefers to make his weekly trip between his home in Charlotte and his office in Atlanta by car. Asked what it’s like chasing Chipotle, he’s quick to say, “Nah, nah, nah—they’re chasing after us.” He speaks in a high-speed, nonstop drawl, particularly when he’s dismissing Chipotle as “burger guys.” He finds his rival’s four-item menu and minimalist interior offensive: “We want people to brag when they come into our stores, not just be pleased. We want people to go friggin’ nuts!”

Walk into any of Moe’s 325 stores (they’re building 50 more this year and have 800 franchise deals signed), and workers greet you with a rowdy “Welcome to Moe’s!” The music is classic rock, and the decor is joyfully obnoxious. A typical poster reads “If you don’t have fun saying guacamole, you’re probably saying it wrong.” Moe’s sticks to the signature fresh approach that defines the category; all food—even its burritos—are prepared from scratch. Stores boast that they don’t even own a freezer, and they claim not to use animal fat or lard. But Moe’s doesn’t take itself too seriously. Last winter, the chain began testing a bacon cheeseburger burrito.

Sprock has never met Ells, but he keeps tight tabs on him—particularly in markets where they go head-to-head. “I know Chipotle is paying $20 a square foot more than we are for real estate in Atlanta.” Nevertheless, he wishes Chipotle well, because he sees his competitor’s success as a barometer for the sector. “That just means the burrito world is worth that much more,” he explains. “I just think McDonald’s bought the wrong company. If they’d known about Moe’s, they’d have bought Moe’s.”

Sprock’s and Ells’ rapid growth is not without risk. In the history of restaurant ventures going public, Chipotle is bested only by Boston Chicken’s 143 percent first-day bounce in 1993. Yet, 5 years later, Boston Chicken was in bankruptcy (October 1998) and bought for scratch by none other than McDonald’s (who would later recycle some of Boston’s prime real estate for Chipotle locations). Of course, the steadying hand of an established chain doesn’t always guarantee a fledgling concept’s success. Wendy’s was bullish on Baja Fresh, but is now looking to unload the taqueria.

Whatever happens to Chipotle, the fresh-Mex trend has made Ells a wealthy man, a chip off the old Kroc. His language becomes less financial and more evangelical when he lays out his vision for the company’s future. He talks about freeing the consumer from the yoke of agribusiness and processed foods, and his role model isn’t the Golden Arches. “Look at what Whole Foods has done to improve offerings at grocery stores across the country,” he says of the path he has embarked upon. “I think that is awesome. Will we have the same effect? I hope we do.”

read more | digg story

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