Why Did McDonald’s Sell Chipotle?
Founded in 1993 by Steve Ells, Chipotle Mexican Grill is an American chain of fast-casual restaurants that serve Mexican-inspired foods such as tacos and burritos. Their growth from then to now is quite remarkable, with McDonald’s helping them along the way.
It all started when Ells saw the incredible popularity of taquerias and burrito places in San Francisco’s Mission District. This pushed him to open his first Chipotle in Denver, Colorado with an $85,000 loan from his father.
To remain profitable, they needed to sell 107 burritos a day. After a month, Ells’ Chiptole proved a success: it was selling over 1,000 burritos everyday .
Using this cash flow, Ells opened a second Chipotle in 1995and a third one in 1996 with an SBA loan. Later that year, Ells’ father invested another $1.5 million to fund further growth of Chipotle while Ells created a board of directors and raised another $1.8 million.
Most notably, McDonald’s invested $360 million in Chipotle in 1998. At the time, Chipotle was a five-year-old company with just 16 locations around the country. But with McDonald’s continued investment, it rapidly expanded its footprint to 500 locations by 2005. Meanwhile, McDonald’s became its largest investor, holding a 90% stake in Chipotle.
On January 26, 2006, Chipotle went public with its stock rising 100% on the first day. The money raised from its IPO was used to open more stores.
McDonald’s suggested Chipotle operate a drive-thru and add breakfast items to their menus. They also suggested the brand name to Chipotle Fresh Mexican Grill in order to compete with other Mexican chains such as Baja Fresh.
Additionally, they recommended changing the menu for certain parts of the country. They also forced Chipotle to franchise some of their restaurants. Ells ignored almost all the suggestions of this, although McDonald’s was able to franchise eight of Chipotle restaurants.
However, in October 2006, McDonald’s fully divested all their non core businesses– Chipotle, Donatos Pizza, and Boston Market– to focus solely on the McDonald’s brand.
This seemed like an impetuous move in hindsight, the catalyst being unhappy shareholders who had seen 0 to negative return over the previous 7 years of McDonald’s stock price.
As it turns out, McDonald’s initial investment of $360 million reaped $1.5 billion, but at current share prices, the investment could have been worth over $50 billion!
At an annual McDonald’s shareholder meeting in 2015, an attendee questioned why McDonald’s sold its stake in Chipotle. Steve Easterbrook(pictured below), the McDonald’s then-CEO, said that investment in Chipotle and the other businesses were a distraction to McDonald’s. Company executives wanted to put 100 percent of their efforts to grow the McDonald’s brand, thus they sold all of the shares.
However, there could be a different explanation.
In a Bloomberg interview with Chipotle founder Steve Ells in 2015 on his former relationship with McDonald’s, Ells said, “What we found at the end of the day was that culturally we’re very different. There are two big things that we do differently. One is the way we approach food, and the other is the way we approach our people culture. It’s the combination of those things that I think make us successful.”
No matter what the reason was, at the end of the day, McDonald’s is seen as the big loser here as they lost out on potentially making $50 billion.
Alternatively, could Chipotle have been even larger today if it had McDonald’s as a partner? It is also possible that McDonald’s, though playing devil’s advocate, could have adversely affected Chipotle’s growth over the last nearly two decades.
Today, Chipotle has over 2,800 locations worldwide and is expected to hit the 3,000 mark sometime next year. While McDonald’s sales have been slowing down recently, Chipotle continues its success story.
Why Did McDonald’s Sell Chipotle? Written by Jay Devon
Edited by Ryan Cunningham & Hantong Wu