Chipotle vs McDonalds

Recently the business world has been abuzz with the contrast between McDonalds and Chipotle. Chipotle is almost unbelievably popular, especially among millennials, whereas McDonalds is experiencing “sluggish growth” due to problems in China, Ukraine, and the United States. Just a few months ago, McDonalds’ former CEO, Don Thompson, said McDonalds experienced a significant decline in business over the past year, and needed to “fundamentally change” the way they do business. Unfortunately, Thompson did not act forcefully or quickly enough, so he lost his job early this year. Steve Easterbrook, the new CEO, is moving a little faster, but it is not clear if he is really being bold or fast enough to stem the tide. Same store sales, both in the US and globally, fell by 3.3% over the past year, and revenues overall are down by 4.66% to $6.99 billion. Meanwhile, Chipotle has people lining up to get in. Chipotle experienced 19% comparable store sales growth last year and expects to grow by 15% this year.

Chipotle has done an excellent job promoting the quality of their food. They promote themselves using words like “sustainability”, “local sourcing”, “anti-biotic free” meat and poultry, etc. McDonalds uses similar words, but most people just don’t believe them. People know McDonalds is inexpensive for a reason. They talk about sustainability, but are they really doing anything about it?

How serious are the problems at McDonalds? Is the traditional fast food business model going the way of the dinosaur, or can McDonalds make some relatively minor changes to their operations to get back on track?

Of course nobody really knows, and even the “experts” don’t seem to agree. Some say this is serious, and others say McDonalds just needs to tweak their menu and refine their message. Others point out that McDonalds has gone through hard times before and come out just fine.

McDonalds stock dropped from 45 to 14 between January 1999 and January 2003 due to management issues, lawsuits and marketing/perception problems. For most of the past ten years the stock price went up, and it passed 100 in May 2014. Today McDonalds stock hovers in the low to mid 90s.

McDonalds is huge, with billions in cash and far more in real estate. Beyond that, they are innovative, in their own way. Despite their huge size and inertia, McDonalds invests in research and development, and listens to their franchisees and their customers. They have veered off track recently, and need to adjust their menus, marketing and even their operations to the realities of the marketplace: people want healthier food. I don’t believe this is a minor course correction. And it won’t be easy. But I do believe they will eventually turn things around.

Chipotle, of course, is another story. Chipotle is relatively small and nimble, and has been taking McDonalds to school for the past few years. But Chipotle’s management sometimes comes across as arrogant; and a quick ride to the top often means an even faster fall to the bottom — remember Krispy Kreme? But Chipotle could continue to grow and lead the fast food industry for many years to come. Only time will tell.

The moral of the story is that the biggest and best businesses struggle with the same issues the rest of us face. They underestimate their competition, lose touch with customers, and get stuck in their ways. The difference is that giant corporations are generally much more diversified, have far greater assets, larger cash reserves, and vastly greater access to capital than small businesses. Small businesses have to react faster, and more decisively, or they just run out of money.