Is Chipotle About to Dethrone McDonald’s?

One cheesecake factory? We'll do $600,000 a year in profit. One little Chipotle, about a third of the size, we'll do $400,000. You can fit about 3 Chipotles inside this building. This—what's called profit per square foot—is part of the reason Chipotle has been on the verge of overtaking Starbucks as the second most valuable food service chain in the world.

But it's this excellent use of space in combination with what you get when you order at Chipotle. Let's put the company on a collision course with McDonald's, the most valuable food service chain in the world. Today, McDonald's is worth triple Chipotle, but Chipotle is starting to steal customers from McDonald's, and McDonald's has a ton of customers left to take.

This is a standard meal from McDonald's: double cheeseburger, medium fries. There are 770 calories in this, and it was $9.03. For every dollar you spend at McDonald's, you get back about 100 calories. There might be promos and other things to lure people in the door, but the regular menu is going to come in at about 100 calories per every dollar spent.

Now, this is a very typical meal from Chipotle: a chicken burrito. Tortilla, rice, beans, chicken, cheese, salsa, lettuce—1,080 calories. Cost? $10.85, about 100 calories per dollar. But just an eyeball test, and you can see the calories in this burrito are much higher quality than McDonald's.

There's fiber, real protein. Like, I can see the chicken cookingright over there. It's real. Vitamins, minerals. It's kind of crazy that you can get this quality of meal for the same price as McDonald's, which is why people in small towns love it when Chipotle comes to their town, and why Chipotle is focused on putting itself in those towns.

There are 3,800 Chipotle locations in the U.S.right now. The first 2,500 stores that opened were mostly in densely populated areas or strategically located in major shopping centers. For every 100 stores opened in those days, only about 15 would be in areas with a population under 20,000.

Today, of the last 100 stores open, 39 were in an area with a population under 20,000. And of the last 1,000 stores opened, 283. Like this Chipotle in Waycross, Georgia. Population? 13,942. Fairly isolated. A lot of empty land around it.

It has what you think of in a small town: a few local restaurants, the Chinese food place, a bunch of fast food, and then maybe an Applebee's. For decades, the food options in small-town America haven't changed, especially the quick food options.

So when Chipotle shows up, people are legitimately excited. You wouldn't think this is the type of area for fast casual like Chipotle. They want high-volume foot traffic,right? Well, it turns out what's at least as valuable as foot traffic is a population that wants anything but what they currently have.

Chipotle is now aggressively expanding into these areas because, as the COO of Chipotle has stated, and financial performance has shown, it's working. Well, fresh food gets the people going. And mastering that fresh, unfrozen food that contains a lot of produce is the secret ingredient in how Chipotle is able to do it.

You can't just set up shop in Waycross and expect to have fresh, organic meat and produce available. McDonald's has huge frozen distribution centers run by outside companies that take in frozen food from all over the country and then distribute it to the nearly 1,000 McDonald's locations for them to reheat.

McDonald's doesn't make its own food. One of just three chicken nugget suppliers, Tyson Foods v. One of them will send pre-made flash frozen nuggets to, for instance, a giant frozen distribution center outside of Atlanta owned by Maren Brower.

Maren Brower will store them in giant freezers, only delivering them to McDonald's when needed. If stored, frozen, and transported correctly, these things can last for years. This is how traditional fast food really started to gain traction: flash freezing, which started to become feasible at large scale in the '60s and '70s.

It is the single reason fast food chains were able to expand to all corners of the earth while also staying profitable. Prepare all the food in a few locations, quickly freeze it, and then ship it where it needs to go.

Thought? In the microwave or fryer. Boom. Happy customer. Much easier than how Chipotle does things where everything except the tortillas, taco shells, cheese, and sour cream are made in-house. Most of itright in front of you. Nothing is ever frozen, including the meat.

This is what set Chipotle apart from fast food, and it worked, but it's also been a huge liability.

How worried should we be about Chipotle in the wake of the E. coli outbreak?

Spread to 9 states.

The CDC now investigating another outbreak.

Specific food has not been able to be identified.

This is one of 5 disease outbreaks the burrito chain has had.

The company lost two-thirds of its value over the 3 years those outbreaks occurred. Unlike McDonald's, which has just 3 chicken nugget suppliers, where the process is almost completely automated, few human hands actually touch the nuggets, with flash freezing at the end.

Hundreds of local suppliers sending fresh food ingredients to thousands of different restaurants where thousands of employees would prepare and serve it adds an enormous amount of opportunity for hands to not be washed, storage temperature to be wrong, raw food to contact cooked food.

Figuring out how to prevent that, how to work with thousands of local suppliers, saying, "Listen, this is what must be done to keep people from getting sick." Staff training has absolutely helped, but the big leap they've made ahead of other restaurant companies, what they had to become competent in, was tracking their supply chain.

RFID tags get stuck to every box or crate of everything that goes to a Chipotle location. Each one throws off a radio frequency that contains data about what's in the box. All anyone has to do is be near it, and a device automatically picks up the data it sends out.

Stuck on each box at the farm, automatically scanned by the driver that picks it up. At the distribution center, it's taken to. Again, when it's moved out of the distribution center, then when it gets to the restaurant, all without any employee having to do anything.

After years of testing, this is being rolled out in full this year. It's something no other restaurant company has. Completely freeze up employees while providing near real-time visibility into the supply chain. So that should something go wrong, somebody get sick, and it's traced back to Chipotle, they know exactly where that box of lettuce was at all times, what other boxes it was near, who touched it, what farm it came from, without question.

You would think this is how things are done by default, but it's not. There are tens of thousands of farms and food manufacturers in the country. Getting them all to standardize how they process, transport, storage, share data about their products is an enormous challenge.

In 2018, the FDA asked for all romaine lettuce in the entire U.S. to be destroyed after people started getting sick because they had no way of determining what lettuce came from where. So these outbreaks? Not great. Nobody wants to get their customers sick.

But they forced Chipotle to invest in this type of technology and make their supply chain safer. And because of that, they can now confidently expand into these rural towns and even internationally. But none of this really matters if a customer doesn't get their food fast.

You can easily cook at home and get 100 calories per dollar. The point of eating out at a fast food or fast casual restaurant? You want your food quickly. Chipotle has made some obvious signals they intend to fulfill that wish by stating things like aiming for the make line.

That's this, where they make your burrito. To complete one entrée every 40 seconds during peak rush times, lunch and dinner. Inside of McDonald's, the order begins when you either start telling it to the person at the counter or tapping on the big order touchscreen.

The order is taken in, payment is made, passed to the back, made, brought out. This data is not available publicly, so I went out and collected it myself, spending hours in both McDonald's and Chipotle during the busy lunch rush hours.

On average, this process takes 4 minutes and 46 seconds at McDonald's. The longest order in our sample was over 11 minutes. At Chipotle, the order begins when you begin telling it to the person that will be making your food.

The order is said, and then this is where things become distinctly different from McDonald's. As the order is said, your food starts being made. It doesn't wait for you to finish the whole order and pay. Your food is slid along the line, you pay, done.

On average, the ordering process at Chipotle takes 1 minute and 45 seconds. And with the way Chipotle manages the make line, bringing more staff to it when people are waiting, if there are less than 10 people in line, you're likely to get your food faster than if you went into McDonald's and there was no line at all.

But if you didn't want to go inside, Chipotle has put a huge emphasis on its Chipotle lanes. Of the 128 stores open last quarter, 110 of them have Chipotle lanes. 25% of Chipotle is above a drive-thru window by the end of the year.

This is the big signal that Chipotle wants to be thought of as fast food. Drive-thrus are so important to fast food, accounting for about 70% of all sales, that there are entire companies dedicated just to measuring the metrics of drive-thrus for all the fast food companies.

Across the major fast food restaurants, the average total time from the point at which a car arrives at the drive-thru line to being handed the order is 6 minutes and 12 seconds. McDonald's is 6 minutes and 51 seconds.

Technically, the average wait time in a Chipotle lane is 30 seconds, but that's because you can't order in a Chipotle lane. It's pickup only, and this is by design so that it is only 30 seconds for you to get your food.

You don't have to wait for people ahead to order before you can grab your pickup order. This isn't something available at McDonald's, but we can all probably agree that to be thought of as true drive-thru, you shouldn't have to think about ordering ahead.

Making this a bit of an apples-to-oranges comparison. So pros and cons to both, but Chipotle lanes are a huge boost for delivery orders because drivers don't have to go inside. Store sales go up 10 to 15% if there's a Chipotle lane.

Price check? Totally competitive. Long list of places to expand to. And a serious and innovative supply chain to back up that expansion. Chipotle is starting to compete with fast food in a way that this country has never seen before, and they're just getting started.