The Best Business Model for Restaurants

By Markets Fool.com

Chipotle has the best business model in restaurants today.

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The company has managed to transcend fast food while keeping some of its cost structure in place. It has also been able to take a very limited menu and give consumers the feeling of variety.

Unlike many of its quick serve rivals, the Mexican chain has managed to deliver the appearance of value without coming off as simply cheap. Eating at Chipotle has become an affordable indulgence rather than a compromise over eating at a fancier establishment.

By carefully crafting its image, the chain has managed to avoid the dollar menus and discounts which cut into the margins at most quick-serve (fast food) restaurants. It's a recipe for success which Chipotle has been able to ride to same-store sales growth which took a big leap forward in 2014 as you can see from the chart below.

Year Sales per store
2008 $1.76 million
2009 $1.73 million
2010 $1.84 million
2011 $2.10 million
2012 $2.11 million
2013 $2.17 million
2014 $2.47 million

Source: Statista

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People pay full price
When Chipotle raised its prices in the second quarter of 2014, consumers shrugged off the increase. WhileMcDonald's and other fast food chains are falling all over themselves to offer discounts and value meals, the Mexican eatery has never had to resort to that tactic. Chipotle has no low-price menu nor does it offer any meal bundles or other deals.

It's a chain where the prices on the menu wall are the ones people pay and they don't seem to mind. R.J. Hottovy, a senior restaurant analyst for Morningstar, sharedthe three reasons he thought that is the case Slatereported:

(1) the food quality is thought to be higher; (2) the service is generally better; and (3) the customers that eat there tend to be more affluent.

"With strong customer loyalty scores and a perception of higher-quality ingredients, we believe the Chipotle brand possesses more pricing power than other restaurant peers, as evidenced by an average check of more than $10 per customer and menu price increases in each of the last five years."

That average check number is fairly stunning next to McDonald's, which gets about $5 per check, according toThe New York Times.

Chipotle sells quality as part of its value proposition. Yes, you pay a little more than at a standard QSR but you get something that both is, and is perceived as, a whole lot better. There's still value in the deal, but the company achieves it without giving the food away.

The Chipotle menu is very straightforward. Source: author

The menu is actually simple
While it seems like Chipotle offers a lot of choice, those choices come from how you can customize your meal. The company actually sells a very simple main menu where the serving vessel may change -- taco, burrito, or bowl -- but what's inside is all the same. Aside from those choices the chain has chips and salsa or guacamole (both of which do double duty as main course choices) and that's all.

It creates the illusion of diversity and choice, but it's really just picking how you want the same items put together. This lowers the company's food preparation cost and limits the kitchen equipment needed. It also impacts training employees and eliminates customer confusion while ordering.

By keeping it simple, but offering near- infinite customization within that simplicity, Chipotle has found the perfect way to keep costumers happy while avoiding the menu sprawl that has complicated things and cut into margin for many of its rivals.

Image matters
Chipotle also has a carefully crafted commitment to selling a certain quality of food. The company uses the phrase "Food with integrity" and offers transparency on how it sources its ingredients. This contributes to the company's business model by not only adding to the value proposition, but allowing the company to be out of an item and turn that into an advantage.

McDonald's can't not have Chicken McNuggets on the menu or fans of the fried treats would be angry. Chipotle, however, has been able weather shortages of pork by telling customers it was temporarily unable to source enough of the meat that meets its standards.

Instead of the company lacking a key menu choice, it's actually looking out for customers which turns a negative into a strong positive.

Chipotle is not unique
While the simplicity of the Chipotle menu gives it a leg up over other quality-based, non-discount QSRs, Starbucks andPanera Bread also employ variants of this business model to differing degrees of success. For years, McDonald's and other low-price fast food chains led the way, but Chipotle has proven it's possible to do something different and succeed.

The Mexican chain has proven that people will pay for better food and that's a much better business model than trying to wring margin out of selling cheap eats.

The article The Best Business Model for Restaurants originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He eats at Chipotle a lot. The Motley Fool recommends Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.