Chipotle Mexican Grill, Inc. (CMG): One Vital Clue in the Hunt for the Next 18-Bagger

Fast-casual restaurateur Chipotle Mexican Grill, Inc. (NYSE:CMG) has delivered an 18-bagger return since 2006. What’s more, this incredibly delicious return has been backed by sustained growth over that period. That said, as desirable as it sounds, you should always look beyond the returns — and focus on how it sustains its hiring of good people to run its growing business. With it, you may just get that vital clue you need.

High Growth of Slow-Cooked Food

The table below captures the growth that Chipotle Mexican Grill, Inc. (NYSE:CMG) has experienced since 2006:

Metric	2006	2012	% Change
Annual Revenue	$627,695	$2,731,244	335%
Earnings Per Share	$0.66	$8.75	1226%
Cashflow	-$0.22	$7.08	3379%
Number of Restaurants	489	1410	188%

Note: Revenue in thousands.

In order to sustain its revenue growth, Chipotle Mexican Grill, Inc. (NYSE:CMG) has had to increase its employee count by almost three times. The graph displays an equally sustained pace for both.

Source: SEC Filing and Annual Report

Enter Packard’s Law

The need for this sustained balance of growth and hiring new employees is not new. The essence of this is well captured by author Jim Collins as Packard’s Law, which is describedbelow:

“… no company can become or remain great if it allows its growth rate in revenues to exceed its growth in getting the right people in a sustainable way”

So, how did Chipotle Mexican Grill, Inc. (NYSE:CMG) sustain its pace of hiring of good people to support its business needs and growth? We should first start with its business needs.

Chipotle’s Business: Simple, But Not Easy

To understand Chipotle’s business needs, you can start with its daily menu. At first glance, it looks simple, with only about 17 different menu options. However, the execution of its menu is not as simple as it looks. As Chipotle’s Chief Culinary Manager Nate Appleman explains, unlike your typical fast-food restaurant, Chipotle Mexican Grill, Inc. (NYSE:CMG) does not cook according to a formula or a recipe. Instead, it cooks by the ingredients it sources. This approach has its complexities:

1. Chipotle is increasingly sourcing its ingredients locally for freshness, and the source of its ingredients changes constantly.
2. The preparation of Chipotle’s menu options is continually customized to suit the changes in local ingredients.
3. This continually customized preparation has to be done at a scale of 1,410 restaurants on a daily basis.

While the approach is complex, its cook-by-ingredient approach gives Chipotle the advantage in freshness and flavor, which keeps customers coming back. But it also means that the Chipotle Mexican Grill, Inc. (NYSE:CMG) needs 1,410 teams of high performers to execute this plan on a daily basis.

This is where Chipotle’s Restaurateur Program is key.

The program, according to co-CEO Monty Moran, recognizes and empowers high performers, and in turn, provides them incentives to form teams of like-minded people. Successful burrito rollers who demonstrate this ability are selected to the position of Restaurateur, where they are given further incentives to build more high-performance teams. Restaurateurs are also given a $10,000 bonus whenever one of their staff becomes a store manager.

The program has proven to be a huge success. According to Chipotle, 97% of store managers are hired internally. The benefits of the program are also clear. In the last six years, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s employee and restaurant count may have increased by almost three times, but its revenue grew by almost five times.

In contrast, its competitor Qdoba, a subsidiary of Jack in the Box Inc. (NASDAQ:JACK), only managed to double its stores during the same period. Recently, Qdoba announced the closure of 67 underperforming stores, putting it further behind Chipotle.

In other words, this elegant approach to managing Packard’s Law has been one of the keys of Chipotle Mexican Grill, Inc. (NYSE:CMG)’s sustained growth. With its Restaurateur Program in place, Chipotle looks to further build on it for its international expansion and new concepts such as ShopHouse.

Does Your High-Growth Company Solve Packard’s Law?

Multibagging returns often require companies to have years of sustained innovation and growth in earnings. You should remember that behind the innovation and growth in earnings for each successful company lies the sustained hiring of good people. Arguably, every company which desires sustained profitable growth over the long term has to solve Packard’s Law.

Looking for it may just give you the vital clue for the hunt for the next multibagger. And in doing so, it may just lead you to the next 18 bagger.

The article 1 Vital Clue in the Hunt for the Next 18-Bagger originally appeared on Fool.com and is written by HL Chin.

HL Chin owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. HL is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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