FOOD SERVICE 101

AMY SUNG

Supermarket food-service managers who want to do a better job competing with restaurants can learn a lot from the fast casual chain Chipotle Mexican Grill.

In fact, it could benefit retailers to study food-service strategies, since consumers spend 47.5% of their food budgets in restaurants, according to the National Restaurant Association, Washington.

"As Americans lead increasingly busy lifestyles, consumers are looking for quick meals that are still of high quality," NRA spokeswoman Annika Stensson said. "Quick-service and fast-casual restaurants have seen increases in sales, as have all types of restaurants, steadily over time, competing more with grocery stores and supermarkets for the consumer food dollar. To compete, retail stores have to offer restaurant-quality food items that can be easily prepared at home in little to no time."

Based in Denver, Chipotle, with over 500 Mexican eateries in more than 20 states, is having a good year. Revenue increased 31.1% to $204.9 million in the second quarter of 2006 vs. the same period last year, according to the company.

The chain is thriving for a number of reasons, said Thomas Miner, principle with Technomic, a food-service consulting firm based in Chicago.

"Chipotle's current model with the menu that they have is serving them very, very well," he said. "They're experiencing a very healthy same-store sales growth and average unit volume growth just through take-out sales or more efficient operations - in other words, faster service - and they have a lot of territory yet to develop within the United States.

"They've recently downsized their prototype model to about 1,000 square feet. That means they'll be able to put Chipotles in many, many more locations in the U.S., and that's going to keep them busy for a number of years. I don't see them radically changing their concept because of the need to grow."

Two strategies make up Chipotle's formula for success, Miner said.

"I think the two key strengths of Chipotle are that they focus on producing very few items and have a short menu and because of that, they are able to do everything very quickly," he said. "It's a convenient order and it happens quickly.

"The second most important aspect of Chipotle, I believe, is the fact that the quality of their product is exceptional and they're very focused on making certain that the high quality remains consistent. One of the ways that they keep that quality high and consistent is by having less of a production function in the units. In other words, there's not as large of a menu. So there's not as much food to handle and it's easier for them to control the quality."

Bob Sandelman, chief executive officer of Sandelman and Associates, a San Clemente, Calif.-based marketing research and consulting firm, offered a similar analysis.

"What might make Chipotle stand out above others is the quality of the ingredients and the freshness of their food," he said. "The founder [Steve Ells, also the CEO] was very determined to focus on the quality of the ingredients and even now, he's always looking for better ingredients, and sources of supply, but he's kept the menu very simple. Simple from the standpoint that there are not many ingredients to choose from, but there are enough different ingredients that the combinations of them provide enough variety to consumers. It's somewhat unique in that you get to pick and choose. The customer is really in control of what exactly they get."

Chipotle is a former subsidiary of the McDonald's Corp. McDonald's spun it off earlier this year, but still owns 51% of the company. The fast-food giant said it plans to spin off its remaining stake in Chipotle by the end of October.

Well-trained workers and good food are what make Chipotle a success, said Jim Adams, marketing director for Chipotle. The chain employed about 13,000 people in 2005.

"I think it's very important to make the food look appealing," he said. "Usually when you go into a grocery store, it doesn't necessarily look as appealing as it might actually taste. We're also staffed up. That's what we do. We serve people food. I know everyone's worried about labor costs and such, but I think it would be helpful to have resources dedicated to having people back there who know what they're talking about and who can help you and can help you quickly."

Visibility is crucial for order accuracy, which is one of the most important factors in peoples' decision-making processes, Sandelman said.

"In a nutshell, the reason Chipotle's so successful is because they have a combination of things that they do that are important to people and that they execute very well," he added.

Adams told SN that adding a little to the style and presentation at supermarkets could make food service more appealing to consumers.

"They use deli cases, essentially, to display everything and I've seen a couple different places, like Whole Foods, who display their prepared foods in big bowls and nice platters," he said. "It has a look like somebody has actually cared for it rather than dumped it into a bin or something like that. Adding a little bit of style, and making sure it's very visible [would help.] If you're using those kinds of cases, making sure the glass isn't fogged up and having clear signage about what you're offering would all better the food-service operation."

Sandelman agreed, adding he believes supermarkets could probably do a better job in what they offer and how they merchandise it.

Using an organized menu, customers can zip through the Chipotle line, ordering their burritos, hard or soft tacos, burrito bowls and salads with about four or five ingredients to choose from for each filling category.

"We don't have a lot of ingredients or things, but I would say to retailers or grocery stores, they might consider something similar that way," Adams said. "They should have research that says, here are the top 10 things we sell and here are the next 10. And if you're offering something that day in and day out doesn't sell, I would question why you're offering it."

For example, Adams suggested using rotisserie chickens as a basis for a meal, and offering two, three or four sides to go with it, and perhaps another protein option with side dishes.

It would make sense for retailers to simplify their operations, Miner said.

"Most supermarkets have food-service offerings that echo their retail offering, which is the more SKUs, the better, and in food service, that strategy does not work well," he said. "It works well for one or two exceptional players. The Cheesecake Factory comes to mind. But for most food-service operators, street operators, the more items you offer, the more difficult it is to control the quality and to convince the consumer that you can do all those things well. So, most food-service operators focus on a particular menu segment, a niche item, some signature items, things they can do really well and the customer will travel for."

Adams and Sandelman also suggested a dedicated checkout line in the prepared foods area to speed up the ordering process for shoppers.

Staying on top of consumer taste trends is also key.

"Following consumer and menu trends is another way to stay on top of consumer needs," Stensson of NRA said. "For example, today's consumers are increasingly prioritizing health and wellness, and nearly three out of four say they are trying to eat more healthfully now compared to two years ago when dining out. And, table service and quick-service restaurants have seen increases in sales of entree salads and bottled water compared to two years ago, while the demand for low-carb items has decreased."

Stensson also stressed the importance of putting into practice a food safety program and training staff on handling, preparing and storing prepared foods.

Miner of Technomic told SN he doesn't believe there has been a move among retailers to add new service ideas since about five years ago, when retailers who had decided to enter the food-service arena developed their strategies, stuck with them and continued to refine them.

"If retailers have a strategic commitment towards offering prepared foods, then I think they need to constantly refresh not only their food products but also their product mix," he said. "When you add something new, you take something old off. This is what we call the rationalization process, where you're constantly refreshing your concepts and your menus to make sure that they reflect the preferences of your consumers."