SCRS 2018 Repairer Roundtable – Q&A with Jack Hartung of Chipotle (Part II)

I tell you my advice. No matter how big, no matter how small your business is, starting with a vision — could be a very humble vision — is important, because people want to work for something bigger than themselves. Yes, people work for a paycheck. You've got to pay the bills — rent, mortgage, car payments. But when there's something bigger, and if that stands for a higher level of quality, if it stands for trust — I will tell you, as somebody that doesn't know your business, and I'm not a mechanic, I'm very insecure when I'm bringing my car in. When I find somebody I can trust — trust can happen in a lot of ways. Trust can be transparency. When I go to a shop, especially with my babies, and they take me back and show me things I've never seen before, and take the time to educate. The place I take my cars to, they'll talk to me for as long as I want. I'm learning along the way, getting to know them, getting to know their family. There's a bonding that happens when you stand for something bigger. Every business can have a purpose, something bigger than themselves. It could be super humble, but employees and customers will rally around that if it's true, if it's real.

Jeff knows my son Matt.

We don't have coordination tests, but we do try to hire people that care. We try to hire people that really understand, or when they've heard about the purpose for the first time, they care about it. People will work hard if they believe in what they're doing. When you're in a restaurant and somebody's very energetic and working like a well-oiled machine — we've got a great leader there who's embraced the Chipotle purpose, hired like-minded people, and trained them very well. There's nothing worse than working in a job where you're insecure, not sure if you're doing the right thing because nobody trained you. That happens in our business too. If you've got people on the same page, buying into the purpose, hiring like-minded people, and investing in them with training — people will work really hard for you. If you just tell people to work hard and kick them in the ass every now and then, their energy and work ethic drops dramatically when you leave. For us, it's about hiring the right people who've bought into something bigger than the job itself, led by great leaders who can inspire them to be an important part of a bigger purpose.

Appreciate you, thank you. But I'm not — just ask my kids.

You're dead on. One way we look for efficiencies is in ways other than reducing the cost of our food — that's the last thing you want to do, that takes value directly from the customer. We've kept it simple. There's a lot of handwork before the doors open. Folks come in at 7:30 or 8 to do all the prep — skilled work with a knife, grilling the meats, making guacamole from real ingredients every day. By the time the food's ready, it's a very simple model. If everyone's well trained, making eye contact, energetic, and led by a manager who believes in them, they give a great experience because they work like a team. If one person's not bought in, it screws the whole thing up. But if all the front-line people are energetic, happy, and trained, it's a well-oiled machine. The fastest restaurant in the country serves 300 people an hour — one every 12 seconds. You'd think employees would be flying around, but they're not. They're just doing their role and passing it on. The line moves but the team stays in their positions. It's like the Patriots — they take role players and turn them into stars because the system works. My son Matt, when he first worked at Tesla, wanted to work harder and do more. The more he wanted to do, the more they put him off. He finally tapped the master mechanic on the shoulder and said, 'Can I help you?' He ended up doing master mechanic work under supervision for nine bucks an hour while the mechanic made a fortune off the job. Matt eventually left because there wasn't a system to satisfy his appetite. If you find people with passion in the industry and a leader who can pull that passion out — imagine a team of people wanting to work that hard, constantly challenged. Beautiful things happen.

We have pizza. We did have one burger joint but decided to abandon that. We had an Asian concept too. But listen, I get your question, it's a great one. One thing that's worked for Chipotle is when we've innovated — rather than add a bunch of things to the menu which would overcomplicate what we do, slow down the line, and mean the food sits longer, our innovation took place through a separate restaurant. That restaurant focuses on burgers, that one focuses on pizza. We chose to specialize rather than be all things to all people. If you look at a menu today at McDonald's or Taco Bell, there are items all over the place. That means you have to have all that food come in already processed — you can't make it all from scratch. We chose the specialty route. I don't know how to solve that in your business, whether you can specialize or not.

Southwest Airlines has one kind of airplane. The mechanics know how to fix one plane, the pilots know how to fly one plane. They chose a business model that's very focused, simplified things so they can focus on on-time service, customer service, and what they stand for. It gets back to a vision. If your vision is to be the collision choice for every single brand, you have to build a model around how to acquire and train that talent. Or maybe you want to be the best shop for German cars or American cars. It's hard to be great at everything. The Patriots probably won't win the World Series. This world is turning into one where people become real specialists, and when you're a real specialist with real passion, you can do extraordinary things. It's hard to be all things to all people.

I wish I knew more about your business model — I don't know that I can answer that to be honest. Maybe somebody from the audience has figured it out. You're intriguing me though. The thing Chipotle benefited from is this purpose — the reason I took you through that long story before the numbers was we had an identity so core to who we were that the business model was built to support it. I'm sorry, I just don't know enough about your business. But one thing you'll never regret is hiring and keeping the best people you can. The corollary is you'll never regret removing somebody who's not a great employee. If you have three great employees and two mediocre ones, those mediocre employees will repel the great ones. No matter what cars you repair, no matter how big your business, continue to attract great performers and repel those who don't belong. Sometimes it means tough choices. If somebody's been around a long time and they're a little sour, that sourness rubs off on the good ones and eventually causes them to leave. If you have one bad employee in a restaurant of 20 or 25, not only does nobody want to work with that person, they think management doesn't know or is too dumb. People feel underappreciated covering for the person mailing it in. Keep the best and periodically make sure you're not keeping the worst. Ask your people — they'll tell you. Just sit down during lunch and ask, 'How's the new guy doing?' You'd be shocked at how much they'll tell you. Get ready for the floodgates though — the first time you ask, you're going to get an earful.

It's a great question. We have two paths for people who are going to lead at Chipotle. One is we hire from the outside — someone with restaurant experience. We put them through an intense training, probably around eight weeks. Even when trained, they're still a rookie. They've had hands-on and classroom training, but they have an area manager — we have one for about every seven restaurants. A good area manager touches base during training, talks to others, keeps a close eye on them after. Before somebody gets really good, it's probably at least a year. Internally, we often hire at the crew level. A crew member could make it to manager in a couple years. A 19-year-old hourly worker could be a GM within a couple years, making fifty thousand dollars with full benefits.

We don't have it as a separate line, but we figure when we lose a crew person, we're probably losing four to five thousand dollars. A crew person is trained within hours and days — if we hire somebody this morning, they're doing something the very next shift. For a manager, depending on where we lost them in the process, we're probably losing fifteen thousand dollars. It's incredibly expensive.

It's hard to put a percentage on it. I would say there is incorrect information in almost every article that's written. They got the main facts largely right — we did have E. coli come into our system. The way it was portrayed made it seem like it kept coming. To this day we don't know where it came from — it came in and was gone so fast. We did thousands of tests in the restaurants, tested all the food and surfaces. None of our employees got sick, not one, and we give employees free food. About 52 people became ill. The most damaging thing was it made it seem like another case was still happening, when it was really a very discrete period. I would say they probably get 60 to 75% of the story right — they get the main stuff, but the fringes and the tone, they often get wrong.

Thank you. We have a trust gap there that we're going to work really hard to build back up.

We grade our restaurants on a grade-school A, B, C, D, and F scale. There are four or five main measurements — a few deal with customer satisfaction, one deals with financials, one deals with people (turnover, are you fully staffed, have you trained a full management staff), and there's a food safety component. The restaurants that do the best and maintain it can achieve something called 'Restaurateur' — the top 20 to 25 percent. There are financial awards and equity awards, you can get stock. It's a very elite award. We also tie folks to quarterly bonuses — restaurants doing the best in customer satisfaction, building sales, and delivering at or above plan margins get incentive pay as well.

We learned a ton. Because we didn't know which ingredient caused the E. coli, we had to pretend like every ingredient did. We went through with our suppliers, in every restaurant, in every way. We've hired food safety experts throughout the country and now have a Food Safety Council. We changed everything. High-quality, fresh, real food was so important to us — rather than give up on that and become like every other restaurant company, we wanted to become leaders in food safety as well. We were above industry standards, but we're way above now. If other restaurants want to emulate the Chipotle model, we'll gladly show them what we've done. What we need to do is control the narrative — have marketing that talks more about why Chipotle is special. You'll see more experimentation with new menu items using our ingredients. Nachos, for example — we have chips, queso, salsa, and meat. All the makings, but nachos aren't on our menu. That's a problem we can solve. Let me give you an analogy. If one spouse cheats, and the cheating spouse just keeps saying 'I'm sorry, I won't do it again,' that makes very little progress. But if they do things to show how much they value the person — buying flowers, doing the dishes, going to movies on Friday — you rebuild trust through actions. We've been saying what we're doing to make sure our food is safe, but customers don't want to hear that. They want a reason to come back. When they come back, don't forget about it. We're in this for the long term. We started 'Food with Integrity' in the early 2000s, before it was profitable or fashionable. Our balance sheet has no debt, we've never had debt, and we own all our restaurants. We control our own destiny and we're going to bet on the long term.

Great question. Our new leadership with Brian coming on board — he's a branding and marketing guy — along with a new marketing hire, means we can do a much better job. We've never been a company that brags; we did things because they were the right thing to do. We need to be more aggressive getting the word out. People should feel good knowing we offer healthcare to every employee who wants it, plus education assistance and tuition reimbursement — employees can get a four-year degree for a few thousand dollars, and college is very expensive these days. Now, as for why Chipotle trades at a higher multiple than McDonald's: two main reasons. First, McDonald's franchises most of its restaurants, collecting largely fixed fees — it trades more like a bond. We company-operate 2,400 restaurants versus McDonald's roughly 1,500 company-run locations. Because we own the entire P&L, every incremental dollar of sales generates about 50 cents in cash flow versus roughly 15% for McDonald's. Second, we have a much greater growth trajectory — we think we can at least double from 2,400, with only a dozen in Europe and a couple dozen in Canada. A younger growth company typically commands a higher multiple than a mature one.

I hope it's okay if I answer this as a customer, because that I can do. Trust is incredibly important to me — I don't do what you do and I don't do what my son does, so I need to trust. Two ways trust manifests for me: one is on a personal level — getting to know the business leader who spends time sharing knowledge that helps me be a better decision maker, not to get more of my business. When I see you investing in me, not because you'll make more money but because you just spent 20 minutes explaining something that's not going on the bill, that builds trust and piques my curiosity. The more you invest in that knowledge, the more questions I'll ask. If you stand for quality, you want your customers to know as much as possible. The other is common standards — some kind of certification. The thing I might worry about is going to one shop that does it to their standards and another that does it differently. I saw the CNN piece and it would be horrifying to think I'm putting one of my kids into a car repaired with second-hand parts. So as a consumer: on a personal basis, show me you're investing time and satisfying my curiosity. And broadcast the certification — get the word out that there's a seal of approval, that if I go there I'm getting real, new parts.

Great question. You don't have to buy cheap meat, and you don't have to use cheap products. We don't have to do those things either. I see this a lot in industries — playing the victim card: 'I'm forced to do this, forced to buy this.' But we don't have to. We can take that step above. Yes, you'll spend more on product, training, and equipment, but you make that individual decision. The moment you break away from being forced, you find freedom. Let me tell you a story. About four years ago, in late 2014 or early 2015, we found a pork supplier wasn't following our protocols during an audit. We asked what they were going to fix. They said they didn't want to fix them — they thought our protocols were wrong. So we said, 'You can't be our supplier anymore.' We fired them on the spot. We took all the pork from our restaurants and distribution centers and donated it — perfectly safe, delicious pork, but it didn't meet our protocols. We took a stand. Our sales were lower because we disappointed customers, and we were short maybe 25-30% of pork supply with rolling blackouts across markets. But the media and customers applauded that move. They saw a company that cares, that stands by what it says even if it hurts financially. If you have enough power, you might have to pick a stand against certain insurers someday. I use Hagerty — I went to my body shop and said, 'If one of my babies gets wrecked, is Hagerty going to pay to get it back with OEM parts?' And they said yes. So I have Hagerty for my insurance. When you have a purpose and something you stand for, there will be times when the rubber meets the road and you have to make the tough decision. Taking that stand gets publicity — that's not advertising. If you make the right decisions along the way, I believe it'll pay off in the long run. When you compromise on things that matter most — safety, quality of parts — it's a slippery slope.

Every now and then we do have to raise prices. When the cost of every grocery item goes up, you have to pass that along. A typical restaurant company increases prices every year. We increased last year for the first time in three years — before that was 2014, and before that 2008. We don't nickel-and-dime customers. We're very patient, we try to find efficiencies, and raising prices is the last resort. We'll eat some of that pressure. We're company-owned so we don't have franchisees feeling bank debt pressure. We've been very patient. Sometimes food costs cycle up and then cycle back down — we can afford to let that happen and have lower earnings during one period knowing it will recover. So yes, we have to raise prices, but we do it very thoughtfully and diligently.

Great question. Our digital or online ordering — what we call the 'second make line' — is the fastest growing part of our business. It's about 9% of sales, growing about 40% per year. We have a second make line in the back, condensed, separate from the front line. Phone-in orders should not be made on the front line — they should be made in the back, for the very reason you mentioned. The second make line is a safety valve, and we've been building them for 15-20 years. We used to have fax orders — offices would get ten people together, fill out a fax form, and send it in. It's so important that our main line keeps flowing. As soon as you make another order in the middle, it slows down the whole line and it's a bad experience for everyone. What you may not know is we're investing behind the scenes — replacing all our second make lines with digitized screens instead of paper. Our teams can go about 30% faster with about 30% better accuracy. It's a win for employees and customers, and we're going to continue investing.

I wish I could say everyone in every store knows. I'm sure there's a wide variety — some managers are really sharp and sat down right away, some read the email and didn't follow through. We tried to keep it simple. We've had more complicated bonus plans in the past, but we kept it to just three measures. First, customer satisfaction — last year we changed from mystery shops once a month to getting 20-25 real customer comments per restaurant per month. That's legitimate feedback they can act on immediately. Second and third are sales and cash flow, which are pretty straightforward. A well-trained manager can communicate that easily. But with 2,400 managers, some did a better job than others. We've got 70,000 employees and we're constantly training, retraining, and communicating. That job will never be done.

Great question. You've got to deliver. If we went to Wall Street and said we're going to deliver 20% returns instead of the industry's 30% — we're at 40 to 45% — because we're investing in better food, and we didn't have a vision for how that 20% would grow to 25, 30, 40, and 50%, Wall Street wouldn't accept it. Capital flows where it's put to its best use. That's why our business model and sustainability allows us to invest in higher quality food with higher margins and higher returns. I couldn't sell Wall Street on accepting lower returns for food with integrity. Even socially minded investors want returns — they want both. If you told them you'd do everything socially but they'd get a lower return, they're not okay with that. So in your model, look at areas not as visible to the customer — things on the fringes. Look at your employee base: if people aren't carrying their weight, there's opportunity for efficiency, and swapping a mediocre one for a great one means way better customer service. I've been with Chipotle since 2002 — I came from McDonald's. I saw the big company and wanted to help a little company turn into a big one. We had time to build this business model around our vision, and it didn't happen overnight.

What we've invested in instead is our food — a better approach. PR is the other option, but PR is very difficult nowadays. It used to be you could pitch a story to the main networks and papers, but now with the internet, misinformation travels just as freely as real information. We've invested in what we thought would matter most to our customers. We did increase marketing investment a bit over the last couple years, but we're going to pull back because telling people is less important than showing them. If we have new news in the restaurant — whether it's nachos or something else — and it causes people to say, 'Chipotle has something new, I should try it,' and we deliver a great experience, hopefully they come back and come back. There's no substitute. Marketing can't substitute for an extraordinary experience. Word-of-mouth happens when you deliver an extraordinary experience. Invest in a great experience and complement it with credible, informational advertising — not cheesy — and I think you have something special.

Great question. You got the wrong guy — you should hire Matt, my son. He's got a natural knack for it. I'll take that as a compliment, but you wouldn't believe how I could fumble things up. I know the numbers and spreadsheets, but when something's broken in my house, I'm calling my 24-year-old son Matt to come over and fix it.

I appreciate the risk you guys took to invite a restaurant guy to come talk to you. I had a ball. I learned more about your business and your challenges through this process, and I can have a better conversation with Matt about some of the things he does — he's not in collision, but he's still in the industry. When I go to see how my babies are doing, I know a little bit more now. Thank you, Aaron, for inviting me. And Jeff, thanks for thinking out of the box in bringing a guy who normally wouldn't belong in this meeting. Thank you.