Why Chipotle Won't Franchise
Almost every well-known restaurant chain is a franchise. McDonald's, Taco Bell, Panera – you name it, it's franchised.
Yet, there's Chipotle.
With more than 1,600 restaurants and plenty of potential franchisees eager to get in on the high-value brand, why hasn't the mega-popular burrito chain ever franchised? The short answer: It hasn't needed to.
"We believe that companies franchise for two reasons," says Chris Arnold, Chipotle's communications director. "Either they need money to grow or they need operators to run restaurants."
Chipotle doesn't need either.
In recent months, a number of established chains have turned to franchising and refranchising to expand and revitalize business. Burger King finished a year-long refranchising push that affected 360 formerly company-owned restaurants in February. In May, McDonald's announced plans to sell at least 1,500 company-owned restaurants to franchisees by the end of 2016, mostly outside the U.S. In August, Wendy's announced that following its refranchising of 418 restaurants in the U.S., it now plans to sell almost all of its 137 company-owned Canadian restaurants.
Franchising and refranchising can be great opportunities for companies to both profit from franchising fees and expedite expansion. But Chipotle, which was founded in Denver in 1993, has always resisted franchising.
Instead of growing capital by selling franchise opportunities in the late 1990s and early 2000s, founder Steve Ells turned his professional and personal networks for financing. Outside of Ells' friends and family, Chipotle's other major investor was McDonald's. The burger chain made its first investment in 1998 and, by 2001, was the majority shareholder. The investment helped provide much of the capital that would ultimately allow Chipotle to set itself apart from traditional fast-food chains.
After McDonald's divested in 2006, the burrito chain bought back the handful of franchises it had sold and became 100-percent company owned. It went public in 2007.
By turning to Ells' family and friends and McDonald's for capital investment, Chipotle was able to avoid franchising and remain in complete control of the variables that Arnold says define the Chipotle experience: food culture, food preparation and people culture.
When chains franchise, they often face pressure regarding food prices and production. Chipotle has aggressively advertised its commitment to using sustainable ingredients. Having complete control over stores removes the possibility for debate from cost-conscious franchisees.
Additionally, refusing to franchise has granted Chipotle control over employee culture that franchises lack, influencing everything from employees' wages to company structure.
"In traditional quick service, the focus is on value and speed and not necessarily the interaction with the workforce," says Sharon Zackfia, an analyst at William Blair & Company. "Fast casual may require a higher level of labor force."
Today, Chipotle's food and people culture are both established cornerstones of the brand. Surely, the chain could find franchisees who would adhere to these standards. There are certainly plenty of people willing to try: Cleveland-based franchise ownership advisor Joel Libava says hopeful franchisees often inquire about Chipotle as well as coffee giant Starbucks, which franchises minimally and primarily overseas.
Chipotle's refusal to sell stores to franchisees begging for a chance to become a part of the brand is a good thing, analysts say. The company's careful control is still a key part of what makes the burrito chain function as a fast-casual restaurant.
"Traditional fast-food is a less complex operation than a Chipotle or a sit-down restaurant," says Mark Kalinowski, lead restaurant analyst at Janney Capital Markets. "And the less complex, the easier it is to franchise."
Chipotle may seem huge right now, but it has a lot of expanding to do if it wants to catch up with the biggest players in the fast food business. The chain's 1,681 restaurants are nothing compared to true mega-chains, like McDonald's, which has more than 34,000 restaurants worldwide, or Starbucks and its 20,600-plus shops. Today, Chipotle has only 17 restaurants overseas, with plans to open more company-owned stores internationally in the coming year. Chipotle may one day have thousands of stores around the world, but if it does, the chain wants to do it without relying on franchisees.
Chipotle's goal to make it big without franchising may prove to be particularly enlightened following recent highly-publicized legal battles that threaten the franchise model as we know it. On the backdrop of minimum wage battles and conflicts between franchisees and franchisors, the question may not be whether Chipotle should franchise, but whether other chains should follow its lead.