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Scaling Exclusivity

Conor Sen, What Chipotle Can Learn From a Fast-Food Guy, Bloomberg View, February 14, 2018

Reconciling Issues

Chipotle became a darling of Wall Street when the labor market was bad. When the rapid ascent of its stock price tapered off in the summer of 2014, the unemployment rate was still above six percent. Labor costs comprised 21.8 percent of revenues, according to its earnings report for the second quarter of 2014. By the fourth quarter of 2017, labor costs had risen to 27.5 percent of revenues.

One reason for Chipotle’s growing labor share is the lasting damage done by the norovirus outbreaks at its restaurants in the summer of 2015. If you don’t have lines out the door during peak hours, then your workers won’t be fully utilized, hurting profitability.

 

 

Through the WI Lens

This is an important read for all companies whose business model is predicated upon access to exclusivity. It begs the question of whether scaling what are essentially “scarce goods” is not an impossible proposition. In the article, the portfolio manager argues that the era of cheap organic food at scale might be over. Could this also be true for businesses that are trying to scale wellness solutions? The answer is worth pondering. It’s probably a yes because what is true for organic food (increased demand for quality, perceived impact to health, affordability, availability) has similar parallels to wellbeing in general and many of its sub-segments in particular: spas, high-end gyms, boutique fitness classes etc

It is an ultimate irony that Chipotle is now turning to a fast food executive to fix its existential problems: sustained wage inflation, supply chain issues, expensive ingredients, rising prices, slowing growth and squeezed profitability. As the author argues, these are all the pain points that led to the creation of the fast food industry in the first place. So how will the new CEO restore the profitability of the business without sacrificing what makes it unique: its exclusive offering?

It’s doubtful that he’ll be able to reconcile these contradictory goals (profitability versus exclusivity) in an economy that is expanding. Now that the US economy, like many others, is running at almost full capacity, a large number of companies operating in the hospitality and wellbeing industry will realize that scaling exclusivity doesn’t work. The simplest reason is this: companies for which labor costs constitute an important part of total costs, wage inflation can be a killer.

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