Chipotle 2005 Annual Report Download - page 10

Where We Get Our Ingredients: Provisions and Supplies
Close Relationships With Vendors. Maintaining the high-quality levels we expect in our stores
depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our
specifications from reliable suppliers. We purchase from various suppliers, carefully selected based on
quality and their understanding of our brand, and we seek to develop mutually beneficial long-term
relationships with them. We work closely with our suppliers and use a mix of forward, fixed and
formula pricing protocols, although we do not have long-term supply contracts or guaranteed purchase
amounts. We’ve tried to increase, where necessary, the number of suppliers for our ingredients, which
we believe can help mitigate pricing volatility, and we follow industry news, trade issues, weather, crises
and other world events that may affect supply prices.
We do not purchase raw materials directly from farmers or other suppliers. Instead, we train
suppliers to purchase ingredients and other supplies for us based upon our specifications and to
negotiate the terms of purchase with raw materials suppliers on our behalf.
Distribution Arrangements. We deliver ingredients and other supplies to our stores from 16
regional distribution centers. Of our 16 distribution centers, 13 serve McDonald’s, its subsidiaries and
its franchisees exclusively, while the other three have customers other than McDonald’s. Although this
network is comprised of independent distribution centers, there is a possiblity that we may need to
replace some of them as we become more independent from McDonald’s.
Relationship With McDonald’s. Our relationship with McDonald’s gives us substantial credibility
with our suppliers, and we have used McDonald’s knowledge of purchasing and supply chain
management to negotiate lower prices. For example, McDonald’s relationship with Coca-Cola has
helped us contain our beverage costs. We also use many of the same suppliers for our paper and
packaging products. As we increase our independence from McDonald’s, we may face difficulties
replacing services it currently provides to us and entering into new or modified arrangements with
existing or new suppliers or service providers.
Customers Who Sell For Us: Marketing
We believe the best and most recognizable brands aren’t built through advertising or promotional
campaigns alone, but rather through deeply held beliefs evident in how a company runs its business. All
of the ways that we project ourselves—beginning with each customer’s experience in our stores, the
look and feel of our stores, our advertising and promotional programs, and the design items that carry
our name or logo—influence how people think about us. By adhering to this principle, we believe that
Chipotle is well positioned to become a highly recognized brand.
When we open a new store, we plan a range of activities to introduce our food to the local
community to help create interest in the store from the start. And our advertising, which includes print,
outdoor, transit and radio ads and most recently a sponsorship of a cooking show on the Public
Broadcasting Service, has a low-key and irreverent tone that has been popular with customers. In
addition, a number of publications have written favorably about our food and store concept, and our
food and stores have been featured in television programs produced without our involvement.
Although our marketing program has many components, we believe the single greatest contributor
to our success has been word-of-mouth, with our customers learning about us and telling others. Some
of our customers have gone so far as to develop websites about Chipotle, providing a way for Chipotle
customers to share their stories. This kind of support helps us grow without requiring additional
advertising expenditures.
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