It’s the time of the Season for … Burritos?
A few days ago, Chipotle made the following announcement:
“Chipotle says it plans to hire 15,000 people in the U.S. as it opens more restaurants and tries to keep up with an expected increase in orders in coming months.”
If you think the surprising part of the announcement is the number of people they plan to hire, the reasoning behind the timing is borderline shocking:
“March, April and May are the busiest months at the fast-food chain, according to the company, which has dubbed it “burrito season.” A spokeswoman said better weather and more daylight bring people to its locations. Its restaurants near colleges do more business when classes are in session as well, she said.”
So many questions…
Why hire 15,000 employees?
Why announce you are hiring 15,000 employees?
But maybe before that: Is there such a thing as Burrito season?
Full disclosure: I like burritos. I rarely eat at Chipotle (the last time was four years ago), but there are other places (food trucks around Penn or local taquerias) I like to frequent. Nevertheless, I’ve never thought about it as a seasonal dish.
But as usual, I’m wrong.
Because the period between March-May is part of two different quarters, it’s not possible to see data from Chipotle’s disclosure, but other sources clearly demonstrate something that resembles seasonality.
For example, in the following graph (the data is computed by analyzing receipt data, and taken from Bloomberg Second Measure), data from the last few months show a jump in customer retention from March to May. This was true during March 2020 (when COVID and lockdowns hit the US) and also during 2021:
As evident form the graph, in March 2020 there was a significant increase in online orders (balancing out the huge drop in retail ordering):
We’ll return to the discussion of online vs. retail later. For now, it’s important to note that this trend isn’t unique to Chipotle. Based on the first graph above, it also applies to other Mexican restaurants, while other data sources also confirm this is not new:
Why Hire 15,000?
But let’s get back to the question: Why hire so many people?
Some reasons are obvious, but unrelated to Chipotle.
Let’s start with the fact that the global burrito market is expected to continue to grow at 3.54% over the next five years. Not at a breakneck speed, but at a pretty steady pace.
And within this market, Chipotle is one of the best-performing food chains. The firm has published its growth projections in terms of the number of stores:
And if we add the same-store sales growth, it starts to make sense that Chipotle needs to continue to add staff, as the firm has been doing for several years already (with the slowdown post-2016, the days of the E-Coli outbreak):
So considering the firm has increased the number of stores by around 9%, and its same-store sales by 15% (from 2.2 to 2.6), adding 15,000 employees seems more reasonable.
And indeed, the firm has done quite well over the last three years (since COVID) in terms of stock performance:
But also in terms of revenue growth and EBIDTA growth:
Overall, from the data above, Chipotle has come out of the Covid-19 pandemic stronger than other chains, while also managing to recover from its post-E. coli days.
But as usual, I’d like to take it a step further and understand why Chipotle is being bolder than other chains, especially given that the positions will be part-time but not temporary.
The Chipotle Assembly Line
If you’ve been to Chipotle, you know that, unlike burger chains, where the food is prepared behind the serving counters, Chipotle runs an assembly line-like operation in front of the customer. Customers choose from a rather simple menu consisting of a base (tortilla, taco shell, burrito bowl, etc.), followed by their choice of protein, rice, and various toppings:
Just like any other assembly line, performance is measured based on throughput rate: the number of customers served per unit of time. In fact, the chain has always been very explicit about the fact that this is its “north star”:
“With business booming both on-premise and via digital channels, the burrito chain this week said it is so laser-focused on throughput that it is now tying manager and crew-level bonuses to how many burritos and bowls can be sold every 15 minutes. ‘We know throughput, a foundational element of convenience that our guests value, is an opportunity for us,’ CEO Brian Niccol told analysts this week.”
Two questions emerge from this:
Why is throughput so important for Chipotle, and how is it related to their decision to hire so many new employees?
The importance should be clear.
First, customers care about speed, and long-time readers of this newsletter are familiar with my paper which shows that 7 seconds improvement in waiting time means 1% of market share. And on average, higher throughput usually means lower waiting times.
Second, because of the assembly line’s visibility, the rate with which the assembly line works is the rate with which the queue progresses, making it even more salient when compared to other chains. Relative research by Anat Rafaeli and her co-authors, shows that our satisfaction with waiting in lines (if we can even call it satisfaction) is correlated to the sense of progress we feel, measured by the speed with which we move in the queue.
Third, Chipotle’s economics (and here, it’s not unique) are directly tied to its cycle time. Looking at the cost components beyond food and beverages which grow the number of customers, the rest is fixed: labor and occupancy are fixed. So the higher the throughput, the lower the cost per customer.
What’s the throughput target?
“During Chipotle’s best times, restaurants were able to sell “in the low 30s” total entrees every 15 minutes, Niccol said. Now, though, the burrito chain is trying “to get back to those mid-20s,” Niccol said. “So, still a lot of headroom for where we can grow from here,” he said. “So, lots of work to do, lots of opportunity, though, with it.”
Just to get an idea, in 2012, the chain claimed to be able to make 350 burritos during lunchtime, which amounted to a cycle time of 11 seconds (or 85 burritos every 15 minutes). I’m not sure I fully believe that.
Throughput and Hiring
The interesting angle is that in order to meet these throughput goals, the firm needs experienced employees:
“Right now, the most crucial restaurant job is that of the expeditor, Niccol said. That’s the person who is ‘in between the last phase of making your bowl or burrito and getting the cash,’ he said. ‘And if the team isn’t deployed correctly, then sometimes that’s the spot that doesn’t get the right support. And as a result, it kind of slows the line down.’ Having an experienced person in that role is key, he said.”
Of course, it’s not only a human effort. There’s technology involved in making sure the right people are at the right positions:
“Chipotle is in the process of launching a new scheduling tool, to help ensure that the right workers are staffing the right stations at all times, the chain said. The tool offers forecasting via real-time information to project what business will look like in the coming week for more accurate labor deployment.”
Returning to online vs. retail and the question of hiring people ahead of demand:
“The burrito chain said staffing has reached pre-pandemic levels, but newer workers are less versed in operating with heavy in-restaurant business. The company is kicking off an operations effort to fix it. Customers have started returning to Chipotle Mexican Grill restaurants much like they did before the pandemic, abandoning the digital orders they’d relied on for the past two-plus years in favor of simply ordering at the counter. But now the company finds itself with an unusual problem: Its workers are not quite used to all that in-store business.”
Online operations are less stressful, and usually don’t involve meeting demand under the watchful eye of the customer, constantly taking comments, questions, and instructions. This task is not trivial, so offering a big boost of employees and training them for the “long term” has a higher return on investment compared to other chains that are more “manufacturing-like”.
“‘We’ve got a lot of new people that are still getting trained up on, frankly, the basics of great throughput,’ Niccol said. ‘That’s what our business is about. We’ve got to have our aces in places. You’ve got to have the expeditor. You’ve got to have the linebacker. You can’t work around those places and try to service the business. We have a lot of people who don’t understand how important some of those roles are.’”
And it’s not just frontline workers. Managers’ compensation is now tied to throughput to make sure they are aligned.
Interestingly, the chain reported that its restaurants are now staffed at 85% to 90%, a rate higher than pre-pandemic levels when locations were staffed at about 80%.
My students know that the computation for safety inventory (and I’m not suggesting that workers are inventory) is the product of the service level you want to achieve, the standard deviation of the forecast, and the lead time (or the lead time’s square root). So if the lead time to train workers is long, a higher excess inventory (or in this case capacity) is required. Staffing at 90% just doesn’t offer the necessary flexibility to handle peaks and bursts of demand.
The final question is…
Why Announce it?
There are two reasons I can think of:
First, it’s a tight labor market. And while many tech firms are laying off employees, they are not the ones who will work for Chipotle. Announcements bring publicity, which can only be a good thing since the positions are fairly well-paid and long term.
But there is one more factor. The study on fast food waiting times shows that people first decide on whether to have fast food and then choose the fast food chain and location based on speed and price. This brings us to the second reason, as people will associate the new hires that Chipotle has announced with faster service, which will bring additional demand and increase expectations for higher speed, which will ultimately allow the firm to lower the cost of providing that speed.
I am not sure it’s burritos season for me, but it’s definitely a good season to go back and focus on fundamentals, and nothing is more fundamental in operations than the good old throughput.