Chipotle: Steve Ells (2017)

In 1992, Steve Ells was a classically trained chef working in a high-end restaurant in San Francisco. But after eating a burrito at a local taqueria, he got an idea: to sell burritos and earn enough money to open his own gourmet restaurant. The first Chipotle opened in Denver the following year. Bringing his culinary training to taqueria-style service, Steve Ells helped transform the way we eat fast food. Order the How I Built This book at: https://smarturl.it/HowIBuiltThisSee Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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• 0:00Guy Raz?

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• 1:30Guy Raz?

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  NetSuite Next surfaces insights exactly when you need them, puts agents to work on routine tasks and problems, and lets you ask complex questions in plain language, like talking to a knowledgeable colleague. But technology is only part of the story. AI is also reshaping how people and teams work together, and that shift is already underway. That's why NetSuite wants to put a new expert-created business guide in your hands today. It's called Aligning for the Agentic Era: How AI is Changing Everyday Work. And right now, it's yours, absolutely free. Inside, you'll discover how AI could reshape work across your entire organization, and how to position your business to prosper from it.

• 5:06Guy Raz?

  If your revenues are at least in the seven figures, get NetSuite's free business guide, Aligning for the Agentic Era: How AI is Changing Everyday Work, at netsuite.com/built. The guide is free to you at netsuite.com/built. netsuite.com/built. Hey, everyone, and Happy New Year. We'll be back next week with a brand-new episode. But for today, we wanted to revisit the story of Steve Ells of Chipotle. In the introduction, you'll hear me say that Chipotle has about 2,300 locations in the US and around the world. Well, I recorded that in 2017, and since then, Chipotle has added more than 300 additional locations.

• 5:49Guy Raz?

  Anyway, if you haven't heard the story yet, it's a great one, so enjoy.

• 5:57Speaker 01

  Over a one-month period, 52 people got sick with E. coli.

• 6:03Guy Raz?

  Were you freaking out?

• 6:05Speaker 01

  Well, I don't know if freaking out is the right way to describe it.

• 6:11Speaker 01

  I mean, it was all-encompassing. I mean, it was really intense. You wouldn't wish this on anybody, that anyone would get sick from the food that you serve them is really a tough thing.

• 6:33Guy Raz?

  From NPR, it's How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.

• 6:45Guy Raz?

  I'm Guy Raz, and on today's show, how Steve Ells turned his love for San Francisco's mission-style burritos into Chipotle, a restaurant that launched America's fast casual food craze.

• 7:04Guy Raz?

  So there's a famous TED Talk by a guy named Barry Schwartz. It's called "The Paradox of Choice." And in it, Barry explains that virtually all current research on human behavior supports this idea that we humans, we don't really like to have too many choices. Anything beyond four to six actually makes us anxious and unhappy, which could help explain the success of Chipotle. Because if you've ever been in one, you can probably tell me the menu by heart: burrito, bowl, salad, tacos. Four options, that is it. There isn't a whole lot to agonize over. And it's one of the reasons why Chipotle just exploded in the 2000s. On the eve of the millennium, the company had just a bit more than 20 stores.

• 7:48Guy Raz?

  And today, Chipotle has nearly 2,300 locations across the US and in four other countries. And its value is around $14 billion. Now, Chipotle, as you will hear, was never meant to become what it became. It was supposed to be a one-off burrito joint in Denver, a burrito joint that would generate enough cash to finance a high-end restaurant. That was Steve Ells's plan. He's actually a classically trained chef, and he wanted to make Michelin-starred food, not foil-wrapped burritos.

• 8:21Speaker 01

  You know, the earliest recollection I have of being in the kitchen and cooking was in the third grade, and we lived in Germany. And I remember cooking scrambled eggs.

• 8:33Guy Raz?

  How'd you make them? Did you scramble them before? Did you, did you, did you crack the eggs into the pan and scramble them? Or did you scramble them before?

• 8:39Speaker 01

  No, no, I, I scrambled them before.

• 8:44Speaker 01

  With a fork.

• 8:45Guy Raz?

  Okay.

• 8:45Speaker 01

  In a bowl.

• 8:45Guy Raz?

  Right.

• 8:46Speaker 01

  And then my mom had a, a very well seasoned cast iron skillet.

• 8:51Guy Raz?

  Nice.

• 8:51Speaker 01

  I mean, it was very, very smooth and almost nonstick. And I used to push the curds into the center in, in a, in a square shape. A perfect square, maybe three by three or three and a half by three and a half, something like that. And then, and then when it was just set enough, I would flip it over. And, um, I mean, it was very controlling, like, and it says a lot about me because I'm a, I'm a little bit of a control freak. And of course I had no idea then, but, um, I don't know, it's just, it's an interesting, it's an interesting memory.

• 9:23Guy Raz?

  Like, at what point did you start to, because I've read like stories about you in college where you'd, you had dinner parties and, and people were like, what is this butter that you butter? You know, you'd be, you'd make like duck confit and stuff like, how did you even know about this? How did you get into foods at such a young age?

• 9:39Speaker 01

  Yeah, well, you know, my mom was a very adventurous cook and a really good one. Um, and she had a garden and she got all the cooking magazines and had a lot of cookbooks. And, and, and I used to, I used to spend time in the kitchen and, um, and, and follow along. And at some point I started watching cooking shows, Julia Child and, and Graham on the Gallup Bean Gourmet. And the PBS series, the Master Chef series. I really loved those and, and would duplicate the recipes and, and, and like to cook for, you know, my family. And then, um, when I was older in high school, I started having people over.

• 10:16Guy Raz?

  So you go to college in, in Boulder, right?

• 10:20Speaker 01

  Yes.

• 10:21Guy Raz?

  And you study art history?

• 10:23Speaker 01

  I did. You know, of course it made zero sense to my father. What do you do with a art history?

• 10:28Guy Raz?

  Would he say that to you? Would he be like, so what are you going to do with that art history degree?

• 10:32Speaker 01

  Of course. And I would say, you know, I don't know. We'll, we'll see how this unfolds. And, and probably I was thinking that I would continue and go to graduate school. But my roommate suggested to me that I go to cooking school.

• 10:47Speaker 01

  She said this just weeks before graduation.

• 10:50Guy Raz?

  Why did she suggest that?

• 10:51Speaker 01

  Well, she knew I was into cooking and I think she had visited the Culinary Institute of America and said, Steve, you would love this place. So I applied and I went and only went because, you know, I don't think I knew exactly what I wanted to do, so it was an adventure. But I would say there is a halfway point where you go for a few months and work in a restaurant of your choice, and I chose to work at Stars Restaurant in San Francisco.

• 11:21Guy Raz?

  This was the most famous restaurant, like one of them in America at the time, Jeremiah Tower, right? It was the head chef.

• 11:27Speaker 01

  It was a really important restaurant and I had eaten at Stars a few times when I was in college and loved it.

• 11:34Guy Raz?

  What was he like? I mean, because I mean, I've read a little bit about him and Mario Batali worked for him, tons of really famous chefs. What was he like to work for?

• 11:46Speaker 01

  It's hard to describe really what he's like. I will say that he's an amazing visionary and quite a perfectionist. And so it was high pressure for sure. And it was super, super stressful, really, really hard work. But you would put your dishes up and all the cooks would put their dishes up and Jeremiah would come along and taste and, you know, it was, it was, you ranged from, you know, a nod like, you know, good job to picking up the plate and throwing it in the trash, which was, you know, really traumatic, but I loved it. I really did. And I'm lucky to have been able to work there.

• 12:28Guy Raz?

  When you were first in San Francisco, did you, did you encounter burritos or food that you would eventually, you know, would actually change your life?

• 12:37Speaker 01

  Sure. Well, the idea for Chipotle is a sort of a combination of food borrowed from Stars and sort of a technique and a service format borrowed from the taquerias.

• 12:51Guy Raz?

  In San Francisco?

• 12:52Speaker 01

  In San Francisco, mostly in the Mission District.

• 12:54Guy Raz?

  What was so special about those taquerias? Like, what did you notice?

• 12:58Speaker 01

  There were a few of them and they were quite good. And I used to, I used to go to these places before work. The first time I went, a friend of mine took me and I got the burrito. It was probably a carnitas burrito. Giant flour tortilla and all the things on the, on the inside, the rice, the beans, the meat, salsa, cheese, et cetera. And then wrapped up and then wrapped in foil and I, I take it to the counter and I, and I unwrap it and he's like, what are you doing? I'm like, I'm unwrapping my burrito.

• 13:28Guy Raz?

  You take all the foil off?

• 13:29Speaker 01

  Take the foil off. He's like, no, no, no, no, you peel the foil back and you know, I'm like, oh gosh. Okay, let me rewrap and try this again. And I, and I loved it. I just, I was intrigued and you know, growing up in, in Colorado, this is not how we ate burritos. Burritos were on a plate and then smothered with green chili and you, you ate them with a knife and fork. And so, and so this was, this was a really interesting experience for me and, and I went a lot.

• 13:56Speaker 01

  And I, I just started counting the number of people going through the line and thinking, oh my gosh, these are five bucks a piece. I did some quick math. There's a couple of guys cooking, a couple of guys serving. How much did they make? So I, you know, on the napkin, I was like, wow, okay, this is a pretty good economic model. Of course I wasn't calling it an economic model then. I was, I just said, I could probably make some money with this and, and with that money, I could afford to open up my, my full-scale restaurant.

• 14:26Guy Raz?

  Okay, just, just to understand, you, you thought that a, a taqueria could earn you enough money that you could open up a, a fine dining restaurant, right?

• 14:33Speaker 01

  Well, I, I mean, that, that seemed logical to me that, I mean, that seemed like the way to do it. And you know, these, these, these burrito shops, these taquerias were small. The investment would be low, the rent certainly was low and, and there were lines out the door. And, and I thought that, that I could make enough money to fund my full-scale restaurant. And so I knew I wanted to move back to Colorado to start this.

• 14:58Guy Raz?

  What, why?

• 15:00Speaker 01

  Well, there's nothing like it in Colorado.

• 15:01Guy Raz?

  Yeah.

• 15:02Speaker 01

  I certainly didn't want to compete with all the taquerias in the Mission. It was not, it wouldn't be novel to anybody.

• 15:06Guy Raz?

  Yeah.

• 15:07Speaker 01

  Maybe it would be really good. Maybe I could make better burritos. But again, I thought I wanted to go to a place where no one had seen this style of service before.

• 15:17Guy Raz?

  And by the way, how did you figure out how to do the recipes? I mean, obviously, you're a chef, but you know, there's techniques and there's ways of really making refried beans or pinto beans or whatever it was. And Karina, how did you come up with your method?

• 15:33Speaker 01

  Sure. Well, the Stars was really good training. You know, we would, we would come in at noon and, you know, we would learn at that time what we were going to cook that evening. And, you know, there wasn't a set menu per se, and there weren't recipes per se. You had to, you know, figure it out based on the style of the restaurant and what, you know, Jeremiah and Mark, the executive chef, wanted. And so it wasn't like I had to, you know, labor over the recipes. It was, it's relatively simple food. Or I should say, it's, it's really simple food at Chipotle.

• 16:09Guy Raz?

  So, all right, so you want to, you want to go to, back to Colorado? And, I mean, was the idea to maybe open it up in Boulder, Colorado?

• 16:17Speaker 01

  Yeah, I thought I would open it up in Boulder and had trouble finding a location that I liked, that I could afford. Nothing seemed right. And a friend of mine was working in Denver and somehow met a commercial real estate broker. I went to his office and made a pitch and just said, here's, here's what I'm thinking of doing. And I described Chipotle, pretty much as you see it today.

• 16:43Guy Raz?

  What was your, what was your description to him? What was it going to be?

• 16:47Speaker 01

  Well, I, you know, I described the food. I described the service format. I said, I said, first of all, you know, it's going to be an open kitchen and we're going to be grilling meats and cooking whole beans and mashing avocados for guacamole and grating the cheese and dicing the tomatoes and jalapenos and onions and chopping fresh herbs like cilantro and oregano and.

• 17:12Speaker 01

  And you know, he seemed very excited about the prospect. And so he said, well, give me, give me about a week. I'll identify, you know, a few potential real estate sites and we'll go on a tour. And we saw a Dolly Madison Ice Cream Store. This was the first site we saw, near the University of Denver campus. It was 850 square feet. It was in terrible condition. It needed a lot of work. I think the rent was $800 a month, something like this.

• 17:45Guy Raz?

  Wow, that's pretty good.

• 17:46Speaker 01

  Yeah, basically nothing. And so I convinced my father to lend me the money. It was actually, you know, part investment and part loan.

• 17:55Guy Raz?

  How much did you need at that point? This is 93.

• 17:57Speaker 01

  I, you know, I forget how much I told him initially, but it ended up being $80,000, $85,000.

• 18:05Guy Raz?

  So, so it was a substantial, but not insane amount of money. I mean, you, you basically needed that money to clean up the place and make it look nice?

• 18:16Speaker 01

  Yeah, I mean, I had to strip off the vinyl tiles on the floor to reveal the oak wood floor underneath, which I refinished, and painted the walls and built out a kitchen and tiled it and put up stainless steel on the walls in the kitchen.

• 18:30Guy Raz?

  Who designed all that stuff?

• 18:32Speaker 01

  Well, so I had an architect of record to get the, to get the permit and found a contractor and then sort of designed and built as we go. And I was there every day and I was, I was hands on helping him build the thing.

• 18:45Guy Raz?

  Do you have a, just natural design aesthetic? Is that like, are you, is your, is just a, you know, something that you're naturally good at?

• 18:54Speaker 01

  Well, I would say that the design aesthetic came out of the necessity to be frugal. So the, so the table bases were, were pipes. The service counter was faced with barn metal. Just, just materials that were inexpensive and that, that were easy to, to install. And I remember making the tabletops with the, with the contractor and, and we were applying the stainless steel. To the top of the plywood. And then he wanted to put stainless steel on the edges also. And I said, no, no, no, no, you have to, you have to let people see the plywood. They have to see the striations of the plywood. They have to see how it's built. And so the aesthetic for Chipotle was very much about how it was put together.

• 19:39Guy Raz?

  Yeah.

• 19:39Speaker 01

  And, and I think this spoke to the food. So as you looked past the counter into the kitchen, you could see the basic ingredients. You could see, you know, chicken and steak and avocados and rice and beans and all the things and how it was simply put together. And so I think this connection to the built environment was something that made the brand special. And I don't think it was obvious to most people. I don't think, I mean, it wasn't even obvious to me at the time.

• 20:10Guy Raz?

  So you, so you opened the first door in 1993, right?

• 20:14Speaker 01

  Right.

• 20:15Guy Raz?

  And, and it was, it was just gonna be like a temporary thing?

• 20:18Speaker 01

  Yes. This was gonna be one restaurant and this was going to be a cash cow that could fund and help support a full-scale restaurant. You know, I knew, I knew that full-scale restaurants were a dicey proposition. I mean, they go out of business often, it's, it's hard to make margins, very difficult to operate. And so I wanted Chipotle to be a backup.

• 20:40Guy Raz?

  Yeah.

• 20:41Speaker 01

  I deliberately made it very simple to operate. Only a few items and simple cooking techniques, not a lot of ingredients and able to operate with just, just a handful of, of crew members.

• 20:57Guy Raz?

  How did you come up with the name Chipotle? Cause I remember when I first saw a Chipotle, I, I knew what a Chipotle pepper was, but I was like, what, how is that pronounced? Is it, and this is like in the early, you know, like the mid 90s. I was like, is it tri-potl or is it keep-potl? Like how, and, and I could not have been the first one. So how did you come up with that name?

• 21:20Speaker 01

  So I knew always that I was going to use Chipotle peppers in the marinade and, you know, for the braised, for the barbacoa in the beans. And I, and I wanted to use Chipotle because it really adds a depth. It's, it's not about the heat necessarily, but a smoky character that I think really adds complexity to the food.

• 21:42Guy Raz?

  Yeah.

• 21:42Speaker 01

  And, and I was introduced to Chipotle peppers at Stars. And Jeremiah was a big fan of Southwest cuisine.

• 21:49Guy Raz?

  Yeah.

• 21:50Speaker 01

  And it just occurred to me as I was looking at a can of, of Chipotle peppers. And I said, oh my God, that's the name. I'll call it Chipotle. And, and of course, nobody knew what a Chipotle was.

• 22:03Guy Raz?

  Yeah.

• 22:04Speaker 01

  And every thought, everyone thought I was silly for, for choosing a name that people couldn't pronounce.

• 22:09Guy Raz?

  Yeah. What do people say when you said, oh, here's the name. It's Chipotle. And people were like, what?

• 22:13Speaker 01

  Well, yeah. So imagine choosing a name that people can't pronounce and they don't know what it means.

• 22:18Guy Raz?

  So did you ever think, so did you ever think maybe they're right? Maybe this isn't the right name?

• 22:23Speaker 01

  Chipotle was not an easy place. I remember customers coming in, they'd have to say, well, what is that place? Chapoodle, Chipotle, Chipotle, all kinds of, all kinds of pronunciations. I've heard it all. And then you had to walk up to the counter and actually sort of build your burrito. And, and this was, this was confusing to a lot of people. They said, well, what do you have? And I said, well, we have all these things here. There's burritos and in the burrito, I can put rice and beans and meats and salsas. And I mean, you look, you think about it now and it just seems so obvious how you, you would use Chipotle, but in the early days, it was a very novel experience.

• 23:06Speaker 01

  It was also a novel experience to have an open kitchen so close to the customer. I mean, the grill was just a few feet away from customers. And so they were really, they were really involved in the production that was, you know, the cooking and the, and the service.

• 23:22Guy Raz?

  Yeah.

• 23:22Speaker 01

  And it was, it was by design. I mean, you know, every time you have a dinner party, people are in the kitchen. People want to be in the kitchen. And so. So Chipotle was designed to invite people in, to bring them close to where the action is.

• 23:35Guy Raz?

  And you were the chef and also the cashier and you had like a couple of people helping you at the beginning? Was that it?

• 23:42Speaker 01

  I opened with really only a handful of people.

• 23:47Speaker 01

  And I asked some of my friends if they wanted to help work the line.

• 23:53Guy Raz?

  Yeah.

• 23:54Speaker 01

  It was really sort of cobbled together.

• 23:57Guy Raz?

  And did you just make stuff or did you actually have recipes written down?

• 24:01Speaker 01

  No, no, no, there's nothing written down. I just made stuff. The menu was developed the day before I opened.

• 24:08Guy Raz?

  Yeah.

• 24:09Speaker 01

  And it was interesting because when I trained the cooks, how to make all the different ingredients, it was how I learned at stars. It was about technique and then about tasting as you go. And it just didn't occur to me to write down recipes.

• 24:24Guy Raz?

  Yeah.

• 24:25Speaker 01

  Because I wanted people to taste the food and really understand the techniques of cooking, not just think about adding a cup of this, a tablespoon of that and be done with it. Probably when we opened, I can't imagine there was another fast food restaurant where the crew actually tastes the food. I just don't think they did that, right?

• 24:46Guy Raz?

  Yeah. You start this restaurant and like, what, are people immediately? Is it a hit right away? Because you said a burrito in Colorado was this thing on a plate smothered in green chili sauce. So did all of a sudden people say, all right, burritos, San Francisco style burritos here in Denver?

• 25:05Speaker 01

  So I remember opening July 13th and I opened for dinner. It was mostly friends and I think the sales the first day were probably $240 or something like that. And the next day, a little bit more. And the next day, a little bit more. And we got faster and more efficient and word spread pretty quickly. And students got back to campus in September. And so that helped business a little bit. But the turning point was in October.

• 25:38Guy Raz?

  Of 93.

• 25:39Speaker 01

  Of 93.

• 25:41Speaker 01

  And the restaurant reviewer for the Rocky Mountain News was named Bill St. John. And he came in a few times and then introduced himself and said, hey, I've been in a few times and I'm going to write a restaurant review. I said, yeah, that's great. How's the review going to be? And he said, well, I'm not going to tell you. I'm like, OK. And the next day, a review came out. And it was a really glowing review. And there was one particular sentence that stood out. And I'm paraphrasing, but it went something like this. Chipotle is unlike any fast food you've had.

• 26:26Speaker 01

  Everything has depth, character, nuance, and layers of flavor.

• 26:33Speaker 01

  That really struck me. I'm like, well, this guy has got it. Because when I think about cooking and seasoning food, I'm thinking about those things. And what happened next, though, we were completely unprepared for.

• 26:47Guy Raz?

  What happened?

• 26:48Speaker 01

  A line out the door that did not stop.

• 26:51Guy Raz?

  Just mobbed.

• 26:53Speaker 01

  Mobbed. And we ran out of food the first day. And so we got a bigger order the next day and ran out of food the second day and just could not keep up.

• 27:07Guy Raz?

  And that started a chain of events that would forever change the way we think of fast food. Stay with us. I'm Guy Raz and you're listening to How I Built This from NPR.

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• 29:46Guy Raz?

  Hey, welcome back to How I Built This from NPR. I'm Guy Raz. So it's October 1993. Chipotle has a single store in Denver that's been open a few months, and it got a great first review from a local paper. And people started showing up to buy burritos, like, a lot of people.

• 30:04Speaker 01

  It was crazy, crazy busy. And remember, this is 850 square feet total.

• 30:09Guy Raz?

  Yeah.

• 30:10Speaker 01

  And so a little less than half of that was the kitchen.

• 30:14Guy Raz?

  So you were presumably profitable in your first year?

• 30:19Speaker 01

  Oh, I was profitable in the first few months.

• 30:21Guy Raz?

  Wow.

• 30:22Speaker 01

  And I remember paying my dad back the loan part, you know, probably that year.

• 30:28Guy Raz?

  And still taking a salary for yourself?

• 30:32Speaker 01

  You know, at that point, I was living in the basement of a friend's house. He had a couch in the basement, and I slept on the couch. I was working from first thing in the morning until, you know, late at night, and doing that, well, every day.

• 30:47Guy Raz?

  Yeah.

• 30:48Speaker 01

  And I remember I paid my dad back, and he said, "Well, Steve, wait a minute. You can't be-- you can't be making that much money." And I said, "Well, Dad, I really-- I think it's doing very well." And, you know, he knew that I hadn't taken any business classes and had never demonstrated an ability to, you know, balance my checkbook or be frugal about organizing my finances. So he said, "Well, you really ought to get a bookkeeper." I said, "Well, I do have one." He goes, "Well, really, let me sit down with him next time I'm in town." And I'm like, "All right." And so we-- I remember we sat down with the bookkeeper, and he was blown away. He's like, "This thing is really efficient, making a lot of money." And it continued to get busier and busier and busier. And then everybody

• 31:31Speaker 01

  started asking me when I was going to open up the next Chipotle.

• 31:36Guy Raz?

  Were you still in your mind planning on opening a fine dining restaurant?

• 31:41Speaker 01

  Oh, that was what I was thinking about for sure. And I had no intention of opening another Chipotle. And so I'm like, okay, maybe I'll open one more. So I called my dad and I said, you know, everybody's pressuring me. So I said, Dad, I think I'm going to do it. He's like, all right. So I think maybe he put in a little bit more money, but it was mostly cash flow that opened the second restaurant. And that opened about a year and a half later. And it opened up much busier than the first one. It was extraordinary. And so I said, all right, I'll open up one more.

• 32:17Guy Raz?

  Wow. All in Denver?

• 32:20Speaker 01

  All in Denver.

• 32:21Guy Raz?

  Because people are probably saying like, wait, three in Denver?

• 32:27Speaker 01

  Actually, that was one of my dad's questions. He's like, Steve, do you think Denver can have two of these? I'm like, I think so, Dad. And now it's a one per 50,000 or something in Denver.

• 32:38Guy Raz?

  At what point does, I mean, does somebody say, or do you say, or do you think, maybe, maybe this is it? Maybe this is the thing that's going to, that we should be pursuing? Maybe this is bigger than just Denver?

• 32:52Speaker 01

  Well, so that happened after I had a dozen restaurants or so. Maybe less, maybe eight restaurants. Honestly, I forget. But I thought I would go to Kansas City. It seemed like a neat food town. People were really into barbecue. It's a really strong barbecue culture there. I like that. And I thought there could be a burrito culture, too.

• 33:14Guy Raz?

  Yeah.

• 33:14Speaker 01

  And so, you know, it didn't open up super strong, but it did pretty well.

• 33:20Guy Raz?

  And was that the idea? Were you just going to keep expanding, like one store after another?

• 33:25Speaker 01

  Well, the idea of expansion wasn't about building an empire. There wasn't a number I was going after. I never thought, oh, my gosh, if I could only have. You know, ten restaurants, or twenty, or fifty, or a hundred, or a thousand. It was never, it was never like that.

• 33:40Guy Raz?

  But I mean, you were still expanding. So how are you, how are you funding that expansion?

• 33:45Speaker 01

  As you know, my dad funded the first restaurant.

• 33:49Guy Raz?

  Right.

• 33:49Speaker 01

  And then I started signing up leases for restaurant four, five, six, seven. And then I went to my dad and said, you know, I'm signing up leases. I think I'm gonna need a cash infusion. Would you like to invest? And luckily, he said, yes. We opened those restaurants and they were successful. And I said, well, I'm gonna continue to open up some more. Would you like to invest again? And he said, you know, why don't you go raise the money yourself? And I said, well, how do you do that? He said, well, you need to write a business plan and you have to, you know, go pitch it to people who are qualified to invest.

• 34:25Guy Raz?

  Wait, just to be clear, you had already had a bunch of stores at this point. You did not have a business plan?

• 34:30Speaker 01

  No, no, there was no business plan.

• 34:32Guy Raz?

  You were just making burritos.

• 34:34Speaker 01

  I was, I was just making this up as I, as I, as I went along.

• 34:37Guy Raz?

  Right.

• 34:37Speaker 01

  And I remember I, I hired a, a college buddy who went off to get his MBA. So I hired him and said, well, we have to put this business plan together. And so as we put the business plan together, what emerged was this economic model. The investment, the sales, the resulting margin.

• 35:00Guy Raz?

  Did you understand any of that stuff, by the way?

• 35:02Speaker 01

  Well, I didn't as we were contemplating the business plan. But after having to pitch it, you know, it was my MBA, really. That was, that was my quick and dirty business school. And so during the, the time where I was pitching it, I met one of our early investors who turned out to be a, a board member. And, and he was really instrumental in helping me understand. How special the economic model was at Chipotle.

• 35:29Guy Raz?

  What was it about the economic model that was so special?

• 35:32Speaker 01

  Well, it was very, very efficient. First of all, the investment cost was was very low. And, you know, typical fast food at the time had to have room for a drive-through. They were usually freestanding. And so all of that required a sizable investment. With Chipotle, we were going into strip malls, often in the inexpensive center units, not the more desirable end caps. This was early on, so the investment was very, very modest. And our production system or our service format really was an assembly line. And as volumes increased, as we served more customers, you would get, you know, a higher and higher margin, a higher contribution margin.

• 36:17Speaker 01

  And so the resulting returns on investment were extraordinary. And again, nothing like this in the restaurant industry at the time.

• 36:27Guy Raz?

  Did you go to like private equity companies or venture capital?

• 36:32Speaker 01

  I did. So I started to go to institutions. And then one of my initial investors, Al Baldocchi, suggested that I send a plan to McDonald's. And he had met someone in McDonald's that was thinking about new restaurant ideas.

• 36:49Guy Raz?

  Right.

• 36:50Speaker 01

  And so I thought, well, that's a really bad idea, Al. You know, Chipotle and McDonald's are so completely different. He said, well, just just send them a plan, see what happens. And so I did. And within a few weeks, I got a call and a visit. And a couple of weeks later, I got another call and they said, oh, can we bring some more people? And that kept going on for about a year. It culminated in a visit from the CEO and their CFO.

• 37:20Guy Raz?

  What did they eventually do? They made an offer to invest in Chipotle? Or did they want to buy it outright?

• 37:25Speaker 01

  Well, initially, I think they wanted to buy it outright. And I wasn't willing to sell. And so they made a very, very small investment, enough to open a few restaurants. And then annually, they would put in more money. Over a seven-year period, I think they put in $360 million or so. But the majority of that was in the last couple of years.

• 37:46Guy Raz?

  But that McDonald's investment, which may have been tiny for them, because it's a multi-billion dollar company, that cash infusion for you guys was tens of millions of dollars. That was transformational.

• 37:57Speaker 01

  Completely. There was no... I was very lucky in that I don't think there's anyone else who would have been able to invest that way and bet on the come. And what I mean by that is, we opened some markets, California is a great example, where sales were really soft and the restaurants weren't making money. But McDonald's was very patient and they believed that the sales would come in some of the markets that were softer. And indeed, they did.

• 38:27Guy Raz?

  So they basically put in some money. And that means McDonald's had a chunk, owned a chunk of the company at that point, right?

• 38:33Speaker 01

  They owned the majority of the company toward the end of the seven-year period. But as we developed the relationship over the years, we realized that our way of doing things was more appropriate than what their system had to offer.

• 38:52Guy Raz?

  Yeah, because you guys did things like source your meat from a specific ranch farm. Like, you found this ranch that had free-range pigs and you went with them, right?

• 39:03Speaker 01

  Right. I was reading a quarterly magazine called The Art of Eating. And this particular issue that I was reading was about Nyman Ranch and the pork farms in Thornton, Iowa. And at the time I was reading this, I was thinking about changing the recipe for our carnitas. And so as I was reading this article, I was learning about, you know, the way they they raise their pigs, which I guess was much different than the typical way that pigs are raised in the United States. The vast majority of pork is raised in confinement.

• 39:41Speaker 01

  So if you contrast that with with what I saw at Nymon Ranch, I mean, it's just, it's such a stark contrast. So after sampling their pork, I decided that I wanted to switch all of my supply to Nymon Ranch. Took about a year to get there, but eventually we did.

• 39:59Guy Raz?

  Was McDonald's ever saying to you, hey, look, you know, it doesn't make sense that you're buying, you know, these expensive products? I mean, you look at our supply chain, look how efficient it is, you know, you can save a lot of money, you can increase your profit margins. Or did they just keep out of that?

• 40:15Speaker 01

  You know, they would ask questions, not dissimilar from the questions you asked, but they would see the results. So, you know, I remember when I put Nymon Ranch pork on the menu, I had to increase the price of the carnitas burrito, and I think it increased by about a dollar or something. And so in the world of fast food, that was just not understood. I mean, I remember this is the time when fast food had the 59, 79, 99 price point, I think that was at Taco Bell, and the dollar value menu and things like this. Here I am raising the price of the carnitas burrito by a dollar. And after we did that, we started selling more carnitas burritos.

• 40:58Guy Raz?

  I mean, obviously, your business approach and theirs were totally different. And so I would imagine that you were, you weren't going to last in a partnership forever, right?

• 41:11Speaker 01

  Right. Well, so McDonald's has a very strong franchise system, and their franchisees obviously wanted a part of Chipotle. And, you know, certainly, they would have been capable of operating Chipotle. There are a lot of good operators in the McDonald's system. But the economic model was so good that we wanted to own it.

• 41:34Guy Raz?

  You did not want to franchise the business?

• 41:36Speaker 01

  We didn't. No, and that was that was perhaps the biggest point of contention.

• 41:43Guy Raz?

  Right.

• 41:43Speaker 01

  And McDonald's, you know, sort of had a duty to their franchisees to to offer Chipotle as as a as a growth vehicle. It just did. It wasn't going to be a fit. And we felt like we were ready to to go our own way.

• 42:02Guy Raz?

  The expansion of Chipotle was unbelievable. I mean, after that McDonald's investment, it was like it was like a rocket, you know? I mean, and everybody and their and their brother and sisters wanted to create the next Chipotle. How did that affect your your personal life? I mean, were you just like on top of the world, like so excited about this? Or were you stressed out about this? Because you went from 13 stores to 500 stores very quickly and then from 500 stores to, you know, thousands now. But but did you enjoy that? Was it exciting or were you overwhelmed ever?

• 42:40Speaker 01

  So if you think about my original plan for Chipotle.

• 42:43Guy Raz?

  Yes.

• 42:44Speaker 01

  I failed.

• 42:46Guy Raz?

  OK.

• 42:46Speaker 01

  Because the intention was to to start one little Chipotle and then to be able to step away from it and and use the funds from that restaurant to open and operate my full scale restaurant. So I failed because I never stepped away from Chipotle. In fact, I don't I don't think I took a day off in the first year. The only time I left was when I had to run out, you know, to take the money to the bank or go to a supplier or something like this. Certainly, there was stress to it, but it was it was really exciting. On the other hand, though, as it as it got bigger and and the challenges got much larger,

• 43:27Speaker 01

  the challenges of operating a large business, I just always wondered if I was qualified. So it was, you know, it's like I never went to business school. I didn't think of myself as a CEO. You know, how on earth am I going to learn to do this? So so there was a lot of doubt, self doubt along the way.

• 43:43Guy Raz?

  I imagine there was, and that I to me, that seems like a very healthy thing because that would be I would not I would not feel confident if you didn't have self doubt. I mean, that's the thing, like you, you're a chef and and you are all of a sudden. At the helm of this massive, growing empire with tons of employees scaling quickly.

• 44:02Speaker 01

  Right.

• 44:02Guy Raz?

  How did you even know how to deal with personnel and management and all this stuff?

• 44:07Speaker 01

  Well, you learn along the way, and there have been so many transformations along the way. And so, over the last 24 years, it's about reinventing yourself, learning new things. But I got good at finding really good people. I think that's probably what I'm best at.

• 44:31Guy Raz?

  So you go public, your share price just skyrockets, and this is, I guess, in 2006. And then you have a pretty big crisis in 2015. What was that like for you to deal with? This is, we can talk about the details, but first of all, what was that like?

• 44:54Speaker 01

  Sure, well, that, you know, that anyone would get sick from the food that you serve them is really a tough thing.

• 45:02Guy Raz?

  Yeah.

• 45:02Speaker 01

  And so immediately, you know, we tried to figure out what could be causing this. And it was a very difficult thing to figure out, and there were a lot of experts who we brought on immediately, and, you know, the CDC and lots of investigations.

• 45:19Guy Raz?

  This started in, I guess, the Pacific Northwest. There's some people who got sick from, after eating it.

• 45:25Speaker 01

  And so, you know, over a one-month period, from basically mid-October to mid-November, 52 people got sick with E. coli.

• 45:37Guy Raz?

  Were you freaking out?

• 45:39Speaker 01

  Well, I mean, freak, I don't know if freaking out is the right, the right way to describe it. You know, we were really...

• 45:48Speaker 01

  Well, I mean, it was all encompassing. I mean, it was like, it was really intense. You know, you wouldn't wish this on anybody. But if you back up and think about it, you know, nobody was bringing in as much fresh food, as much fresh produce and meat as Chipotle. So what we realized is that we needed to develop protocols to prevent any kind of pathogen from coming into the system.

• 46:14Guy Raz?

  Which is impossible to do 100% of the time, right?

• 46:17Speaker 01

  You know, you can never say 100%.

• 46:21Guy Raz?

  Yeah.

• 46:21Speaker 01

  But you can, you can get very close to zero. So, you know, I'll give you an example. Think about an avocado. There are potentially pathogens on an avocado. But you wash the avocado, right? The avocado is washed after it's harvested. But what if that avocado could be infected somehow? Falls on the ground and hits, hits a little rock or something. And that, and just that little spot where the pathogen is pushed under the skin.

• 46:51Guy Raz?

  Yeah.

• 46:52Speaker 01

  And now you wash it, but you, you don't wash that little spot. And what if, as you put your knife into the avocado?

• 46:58Guy Raz?

  It hits that spot.

• 46:59Speaker 01

  It hits that exact spot.

• 47:01Guy Raz?

  Yeah.

• 47:01Speaker 01

  Well, what are the chances of that? One in a million?

• 47:04Guy Raz?

  Yeah.

• 47:05Speaker 01

  One in 10 million?

• 47:05Guy Raz?

  I'm thinking about all the avocados I cut at home and I don't wash them.

• 47:09Speaker 01

  Well, that's right. If you, you, you cut dozens, we cut millions and millions. And I'm not saying that the avocado was responsible for, for this particular incident. But we've looked at every single item we bring in. And we've ensured that there are a number of interventions along the way. And so what we do with this avocado now is after we wash it, we plunge it into boiling water for five seconds. This is called blanching.

• 47:37Guy Raz?

  Yeah.

• 47:38Speaker 01

  And, and it's not long enough to cook the avocado, but just long enough to bring the temperature of the skin and the area under the skin just high enough so that it would kill any pathogen that might be there. We do this with lemons and limes and bell peppers and jalapeno peppers. It's a process that is very, very thorough. And, and the chance that a pathogen can survive through that is certainly near zero.

• 48:08Guy Raz?

  Steve, you had this incredible run from the, literally from the first story you opened that was profitable, and then you hit this crisis point in 2015, and I can't imagine you ever dealt with anything even remotely close to that. So were you mentally prepared for it?

• 48:28Speaker 01

  Well, you know, I'm here now, so I got through it.

• 48:32Guy Raz?

  Yeah.

• 48:33Speaker 01

  But we weren't, we weren't prepared as an organization for it, obviously.

• 48:41Guy Raz?

  Yeah.

• 48:41Speaker 01

  And, and, and since that incident, we're two years away from it now, we are, we are a different company. We have a top-notch board of directors that are independent and very critical, in a, in a good way, in a challenging way, and, and we are prepared now for a lot of success ahead of us.

• 49:07Guy Raz?

  I mean, when you think about the, the valuation of the company, this number, I mean, I guess, it, it's taken a little bit of a beating because of the crisis you faced, but I mean, at its highest, it was, it was what, like, like near $20 billion?

• 49:21Speaker 01

  Yeah, 21, 21 billion, I think, was the highest.

• 49:24Guy Raz?

  21 billion. I mean, for a burrito restaurant started in Denver in 1993, that's pretty insane. You know, I mean, when you think about that, I don't know, do you sit back and say, wow, how awesome is that? Or do you don't even think about that?

• 49:43Speaker 01

  It doesn't really work that way. It's, it's not big stair-step sort of increases. It's relatively linear, you know, and sort of, you know, just it getting bigger, taking on more responsibility, the valuation, all this sort of thing. It's just, it's been a relatively linear.

• 50:01Guy Raz?

  And do you think, and so is it that amount of money just abstract?

• 50:08Speaker 01

  I don't understand the question.

• 50:09Guy Raz?

  I mean, does it mean anything? I mean, because I would think, I would be incredibly proud of that. You know, that you grow this thing to such a huge place in that period of time.

• 50:21Speaker 01

  So, again, I've always, so when I, before I started the first restaurant, I used to tell people that I wanted to show that just because food is served fast doesn't mean it has to be a typical fast food experience. And that evolved to saying that I want to change the way Americans think about and eat fast food. And I remember when I started saying that, we weren't very big. That, that sounded like a big, audacious goal. But, but the basic idea behind our purpose is that, you know, food that's raised right should be people's everyday food.

• 51:01Speaker 01

  And as I see others who have open restaurants that are based on the Chipotle model, you know, I'm, I'm very excited about that. That's, that's what, that's what drives us.

• 51:15Guy Raz?

  How much of, of your success do you think is because of luck? And how much because of your hard work and skill?

• 51:22Speaker 01

  So, you know, my success in the early days was, I think I, I caused a lot of that success. But I, then you have to layer on being in the right place at the right time. I was lucky to have a father who could, who could invest $85,000 in my first restaurant because I couldn't have raised that money myself. That McDonald's allowed me to basically run the company and tap into their resources. You know, it's a combination. But also a lot of it is, you know, if I, if I go back to this, this concept that I learned in cooking school, it's, it's this French term called mise en place.

• 52:06Guy Raz?

  Everything in its right place, yeah.

• 52:07Speaker 01

  Yeah, everything in its place. And it's, and it's basically, you know, you could think about it, you know, before service, you have your mise en place. And that means that once service starts, everything you need for a successful service that night is laid out just so.

• 52:21Guy Raz?

  Yeah.

• 52:22Speaker 01

  And, and so I, I think about, I think about, you know, my overall mise en place, that I've, that I've set myself up for success. And that seems to make sense for me.

• 52:36Guy Raz?

  That's Steve Ells, founder of Chipotle. By the way, Steve stepped down as CEO from the company in 2018. And despite the fact that Chipotle now makes enough money for Steve to fulfill his dream and open up that high-end restaurant he always dreamed about, he says that moment has kind of passed. And, you know, there's still a lot of money to be made in burritos.

• 53:04Guy Raz?

  Thanks so much for listening to the show this week. You can subscribe wherever you get your podcasts. You can also write to us at [email protected]. And if you want to follow us on Twitter, we're at HowIBuiltThis or at Guy Raz. And on Instagram, it's at Guy.Raz. This episode was produced by Ramtin Arablouei, who also composed the music. Thanks also to Farah Safari, Liz Metzger, Derrith Gales, Julia Carney, J.C. Howard, Neva Grant, and Jeff Rogers. I'm Guy Raz, and you've been listening to How I Built This.

• 53:40Guy Raz?

  This is NPR.