The Fast-Food Giant Has a Hankering for Mexican

The world’s largest fast-food chain has developed a taste for Mexican food. In February, Oak Brook, Ill.-based McDonald’s Corp. broke with tradition by making its first-ever equity investment in another restaurant concept.

McDonald’s paid an unspecified amount for a minority stake in the 16-unit, Denver-based Chipotle Mexican Grill chain and has the right to acquire a larger stake. McDonald’s executives are now studying the concept to determine how well it might travel to other parts of the country.

“One of the initial screens we used when we looked at taking an interest in Chipotle was whether it could be franchised,” said Pat Flynn, McDonald’s executive vice president of strategic planning. “And we think it’s a concept that is replicable. Our intention is to move it along as a franchise opportunity for our existing franchisees.”

Named after a pepper used in Mexican-style dishes, Chipotle is a noticeably different concept than McDonald’s burger business. The average Chipotle tab runs about $6.50, well above the average for McDonald’s. The Mexican restaurants, mostly in urban locations, also sell beer and margaritas.

Rather than ordering at a central counter, like McDonald’s, Chipotle’s customers move from station to station as restaurant employees assemble their burritos and tortillas.

“It’s designed to let people see the fresh food being prepared right there,” Flynn said.

Steve Ells, Chipotle’s founder and chairman, opened his first restaurant in Denver in July 1993 after working as a chef in a restaurant in San Francisco. McDonald’s learned about Chipotle when a board member at the small chain dropped a business plan off with a friend in Oak Brook.

“A few weeks later, some [McDonald’s] people came by and, a week or so after that, three more people came by,” Ells said. “It was then a process of McDonald’s doing due diligence for about a year.”

McDonald’s won’t say when Chipotle will be ready for franchisees. Flynn said McDonald’s is content to share its real estate, purchasing and distribution knowledge with Chipotle. But Flynn said Ells is still in charge: “We’re still learning about the business. Steve is the visionary, the guy who is running the business. Our job is to help him build the business.”

McDonald’s isn’t alone with its expectation that the “fresh Mex” segment of the food business is poised for dramatic growth. Los Angeles-based La Salsa, one of several strong regional players, is franchising its concept in Eastern states.

“We obviously think fresh Mex is a category with a great future that’s growing by leaps and bounds,” said John Butcher, La Salsa’s vice president of marketing. “And McDonald’s appearance is a pretty good indicator of what the future of the category holds.”

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McDonald’s toehold in the Mexican segment is a logical move, but success isn’t guaranteed.

“Chipotle is a good, competitive concept for Denver,” said Irvine-based restaurant consultant Randall Hiatt. “But you have to question how competitive it will be in Southern California with chains like La Salsa. The other question is how well it will travel around the country.

“Taco Bell has educated a lot of consumers around the country as to what Mexican is,” Hiatt said, “but consumers haven’t always taken the step up to more expensive fresh Mex.”