Could Chipotle Change Their Mind About Franchising?

Almost a year ago, we published a blog called “Why Chipotle Refuses to Franchise,” in which we shared the benefits the Chipotle business would be missing out on because, as their spokesperson Chris Arnold put it, “they didn’t need to franchise.” But now, it seems like the tides may be turning. Recent news indicates that Chipotle might be putting on the franchise hat after all.

Hard Times for the Chipotle Company

Back in 2015, the Chipotle name suffered a series of e-Coli and norovirus poisonings, closing doors to specific locations for good. The disaster set the company back financially, curbing their annual sales from $2.5 million to $2 million and severely impacting store-level operating margins, dropping them from 28% in the second quarter to 15.5%.

In the past, Chipotle’s Co-CEOs Monty Moran and Steve Ells have been strongly against franchising. They have expressed the desire to control their restaurants and are not in favor of relinquishing that control to franchisees. At one point, the company did open eight franchised restaurants at the request of McDonald’s, the majority owner at the time. Moran described the moment as “an uncomfortable time for us.”

Why the sudden change of heart?

With the recent hard times in mind, could franchising really be back on the table? If Pershing Square Capital’s Bill Ackman has anything to say about it, then yes. Pershing recently revealed a 9.9% ownership in Chipotle. After the announcement, Chipotle shares jumped in value, despite being 45% off from its high value prior.

Ackman believes in the franchise business model, and his 9.9% interest overshadows the combined interest of Ells and Moran. But it is still hard to say whether or not Chipotle will venture down the franchise road. As of right now, Ackman has said that he will not press for a board seat if he feels “confident that the existing board already has appropriate shareholder representation.”

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