IV. Chipotle’s Cost of Production
Analyzation of Different Costs it Faces that Affects its Profitability
For A firm to function effectively, it has to incur costs related to the acquisition of services and goods that contribute directly to revenue generation. Typically, a firm faces two types of costs namely direct costs and indirect costs. Direct costs are linked to product creation, and they include, costs for labor and materials used in the production process. On the other hand, indirect costs cannot be identified with the product like firm’s overheads. Therefore below is a discussion of various costs that Chipotle faces and ways in which they affect the company’s profitability.
The labor costs of Chipotle Company are estimated to be around 22% of total revenues. As reported in the firm’s annual reports, the labor costs have been declining as a percentage of sales. In the second quarter of the year 2013, the rate fell from 22.7% because of higher profits realized during the period (Chris, 2014). After that, the revenues of Chipotle have increased by 29% year-over-year. However, the total costs rose by 23% each year. Thus, this is an excellent example of using the operating advantage value since the costs of operation reduce as sales increase over time.
The restaurant industry has been facing heightened pressures to on the minimum wage rates. This is evident from a demonstration conducted by workers demanding their employers to improve wage rate from a minimum of 8 dollars to 11 dollars for an hour. Chipotle's competitors like Fiesta Restaurant Group (FRGI), and Panera Bread (PNRA), and other food industry firms will be negatively impacted if the minimum wage bill was implemented since it can increase the overall labor costs that may call for a reduction in the labor force.
The occupancy costs of Chipotle Company are estimated to be 5% of revenue percentage, and this is 50 basis point decreases over the previous quarters that added up to 6% of revenue percentage (Chris, 2014). The overall occupancy costs of Chipotle declined due to the higher revenues thus spreading the operation costs. However, the company reports that the general increase in the prices of food did not offset with favorable operating leverage from occupancy and labor costs.
Other Operating Costs
Reports from the company’s management stated that around 11 % of the total percentage of sales added by 40 basis point every year, as compared to 10% realized during the second quarter of 2013 (Chris, 2014). Other costs of operation of Chipotle included credit card and bank fees, utility costs, promotional costs, restaurant maintenance costs, and marketing costs. Primarily this increase was attributed to the promotional and marketing costs. Thus, the company’s management uses this guide to improve in subsequent years.
The Concept of Fixed and Variable Costs.
Usually, the cost of producing a company’s output relies on the amount of physical capital and labors the company employees. The cost involved in the manufacture of clothes is entirely different from the costs of producing cars or even production expenses in a fast-food meal company like Chipotle. However, firms can break their production cost structure into some familiar patterns. When a corporation finds overall short run production costs, it is important to start by dividing overall costs into two types: Fixed costs that are unchangeable in the short term and variable costs that can be quickly changed in the short run.
Fixed and Variable Costs
Fixed costs can be referred to those costs that do not change no matter the level of production shortly. For instance, even if the firm produces either a little or a lot, the costs will remain constant. A good example is company’s rent costs or retail space. Once the company signs the lease agreement, the rent will remain constant even if the firm produces a lot or little until the time when the contract is revised. Fixed costs can also be of many types: for instance, the costs of purchasing equipment or machinery used to produce the product, development and research costs for new products as well as the expenses incurred when advertising so as to make the brand name popular in the market. Usually, the level of fixed costs differs according to a particular line of businesses. For example, a factory manufacturing computer parts need an expensive plant as compared to a local restaurant that serve a small niche in the market.
On the other hand, variable costs are incurred during the manufacturing process. The greater the level of output the higher the variable expenses. Usually, labor is treated as a variable cost since if a constant need to produce a large quantity of goods and services it has to employees more workers or increase the hours of work. Variable cost can also include raw materials. For the case of Chipotle, it needs to have raw materials that are food to run the business successful. When a firm can acquire many materials required in the production process, it will produce a higher output.
V. Exploring Chipotle’s overall market.
A) Discussion of the market share of the company and its top competitors.
When comparing the overall performance of Chipotle Restaurant Grill regarding the market share and that of its competitors like Fiesta Restaurant Group (FRGI), and Panera Bread (PNRA): it is said to have increased revenue by 4% in the year 2015. This sales growth was above all the competitors whose average revenue was 3.7% in the third quarter of 2015. The quick service, casual dining, and fast-casual food industry have a high competition regarding, price, taste, food, presentation, service ambiance and location of the restaurant. Chipotle faces competition from many restaurants ranging from local and international firms in the same industry (Khan, Powell, & Wada, 2012). Most of these competitors offer to take away, delivery, and dine-in services. The main competitors of Chipotle include multi-market, multi-unit Mexican food restaurants, some of which are growing their businesses internationally.
Barriers to entry in the food industry.
The main barrier to entry into the food industry is that the market is currently saturated. It is so difficult for a new firm to start a business since the competitors have already done a lot to do which gaining customer trust and popularizing brand name that can require a lot of new entrants regarding finances and time (Satran, 2012). This poses a tremendous challenge to Chipotle since the firm has to ensure that it continuously betters its services and products and do much to attract and retain the current clients to avoid situations where the company may knock out of the market (Dugan, 2013).
Market Structure of Chipotle
The market structure in the food industry is perfectly competitive. This is to mean that many sellers and buyers of a product or service characterize the market. Therefore, the market structure implies that it is the price taker, and a firm cannot sell above the prices of their competitors (Best, 2014). Thus, Chipotle is faced with a significant challenge, as it has to take the market price even when it may be incurring losses. Also in this type of market structure, parties have perfect knowledge, and there are no barriers to entry, which further heightens challenges to already existing firms.
How to Manage Future Production
For Chipotle Mexican Grill to stay relevant in the market, the management should always consider reports of past performance and the current market trends. This is a great way to ensure that it counters increased competition from firms in the same industry. The company should evaluate its current production to ensure that costs are reduced as revenue increase as well as raising the volume of output.
Suggestion on the Firm’s Position in the Market
Since the business is currently performing better than its competitors, it can even grow its services and increase market share because of its sound capital base. In addition, the business can reduce some costs that are not too necessary, and this will make revenue go higher
Ways on how Chipotle can Sustain Success.
Having understood that the price of a service or product affects the demand, it is important that Chipotle adopt a reasonable price compared to competitors to increase demand for their services and products (Larsen, 2014). Also, the firm should be keen on the changing prices in the market to make informed decisions to increase demand.
Best, A. L. (2014). Youth Consumers and the Fast-food Market: The Emotional Landscape of Micro-Encounters. Food, Culture & Society, 17(2), 260-332.
Dugan, A. (2013). Fast Food Still Major Part of U.S. Diet. Gallup.com. Retrieved 8 January 2016, from http://www.gallup.com/poll/163868/fast-food-major-part-diet.aspx
Chris, A. (2014). Chipotle Investor Relations - Press Release. Ir.chipotle.com. Retrieved 8 January 2016, from http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-newsArticle&ID=1900443
Satran, J. (2012). Chipotle Design Influence Palpable in Revamped Taco Bell, Wendy’s. Huffington Post
Khan, T., Powell, L. M., & Wada, R. (2012). Fast food consumption and food prices: evidence from panel data on 5th and 8th grade children. Journal of obesity, 2012.
Meyer, K. A., Guilkey, D. K., Ng, S. W., Duffey, K. J., Popkin, B. M., Kiefe, C. I., & Gordon Larsen, P. (2014). Sociodemographic differences in fast food price sensitivity. JAMA internal medicine, 174(3), 431-446