When Jack hard Tongue joined Chipotle twenty years ago, it was far from the powerhouse it is today. Chipotle was a special brand. It was an unknown brand. It was very small, founded in by chef turned entrepreneur Steve Els. The company stood on the brink of the growth spurth that would create a category fast casual dining. It was really simple idea of Steve at It was, look, why is fast food crap? Why can't great food be done fast?
I was there when there was a couple of dozen restaurants, and I would visit restaurants like this where Steve would go behind the line and he'd see somebody cutting an onion and saying, well, hold on, let me let me show you how to do it. Two decades later, Jack hard Tongue is still the chief financial officer of Chipotle. He's had a hand in just about every area of the operation. I feel like I've always been able to
dabble in things outside of just financials. And while his central task is to create greater value for a chain that now has about three thousand restaurants, he insists on staying true to the values that have defined Chipotle from day one. I think I'm really open minded, but um, I really do want to protect the heritage of Chippotle and make sure that we don't lose the essence. It's a powerful blend a consistent mission that sustains the brand
with a commitment to innovation that drives the business. Chipotle's future depends on investments that address both priorities. Jack har Tongue embraces that challenge. He's always had a passion for what we do next at our company because he's always been really a champion of growth. I've got to make sure that the financials, the balance sheet, the way we source food, the way that we provide food, the way that our business works needs to be strong so that
we reach our full potential. I love working with people that can figure out how to thread the needle between the numbers and the purpose. Frankly, not everybody can do it, but luckily Jack does it really well, and you know, we're pretty fortunate to have him at our company. Chipotle's growth in the last five years has been nothing short of spectacular. Revenues have jumped nearly sev the company's market
capitalization has more than quadrupled. All this despite a global pandemic that's disrupted the restaurant industry, and all this following a food safety crisis that caused sales at the company to created and forced to shake up in the c suite. Individually, the team was phenomenal. Individually, people were very talented, but it's almost like they didn't have the right people in the right places UM to handle how big the brand
and the platform became. The enhanced food safety procedures, enhanced standards and training they really enhanced. Hence, the management team took marketing dollars, you know, transition them to more effective marketing brand building efforts with a big focus on reminded consumers of why they love Chipotle. The breakdown was the human capital. The breakdown was in culture, and that's what
they've repaired and that's why they're coming back stronger. What have you learned in your CFO position going through those crises? What was what was the Which one was the most challenging? The food safety issue was the most challenging because we were alone in that one UM that was unique to Chipotle. UM. The pandemic is certainly a challenge, but everyone's in it together. The things that really got us through it is we
stay true to our purpose. So during each of these challenges, we made sure we invested into things that made Chipotle specially invest in higher quality food, invest in our people, and then invest in our growth and invest in things like technology. We have a saying around there. I think it actually comes from west Point. You know, we will
choose the harder right over the easy role. How do you and Jack work on things like that, those black Swan events, those things that can be you know, fundamentally changing for you as a company. When we are successful in focusing on the really important things that can strategically drive growth for us, they seem to be having resiliency in these unexpected events. And the other thing I think is to make sure you have a strong balance sheet to make sure you can weather the storm. And we've
had a strong balance sheet. We've never had debt. We've always had more cast and the balance sheet than we need for our normal ongoing business. And that has come in you know great, you know really happy. Chipotle carries no long term debt and it's free cash flow almost tripled in When you think about the future, how do you take advantage of this and and what is the flexibility that that enables What it really affords us is we're going to be able to invest in our future
no matter what. Like we accelerated are open, we accelerated our pursuit of new restaurant sites during the pandemic when some of the restaurant companies were laying off their development team. CHIPOTLEI not only expanded its footprint over the last two years, it reshaped its restaurants, ventured to drive through dining that began several years ago, became a thriving profit center when
the pandemic struck. The thing that's changed the most is just most of our restaurants and I'll have a Chipot Lane. So three years ago we had maybe five or six Chipotle length and now we have over three fifty and eighty percent of our new openings have each polne. The sales and our Chipotlelane restaurants are higher, and our margins are higher too, because the digital orders are our highest
margin transaction. And when you can serve the customer through the pot lane without the delivery fees that we pay in the customers paper, it's it's it's a great margin opportunity for us. The convenience of Chipot lanes contributed to soaring digital sales in there was little erosion in one even as in restaurants sales returned to eight of twenty nine levels. Meanwhile, membership and loyalty programs has boomed, giving
Chipotle valuable insight into its customers omni channel preferences. Is what we've seen is that our digital customers they come to most often, and they spend the most each time they come. Customer loyalty could face a test if inflation continues to push higher. Chipotle hiked menu prices roughly. Jack Harton says, it's not just wages and food costs that are putting on the pressure. It's hitting everything. Sitting materials to for a restaurants or new restaurants are costing more
as well. You guys have had incredible pricing power. Is there kind of a tipping point where it's like enough? We haven't seen it? U. Why is that, Jack? Well, part of it is um we've over the years been slow to raise prices. We've always tried not to go to the menu board to raise prices. Whenever we've had a challenge from a cost standpoint, we'll do other things to try to find efficiencies. Somewhere along the line. We
raise prices in the second quarter of last year. We did that just to cover the cost of raising wages. We raise wages up the fifteen dollars. It was an average increase, and we raise prices just to cover the dollar costs of app So we didn't increase our margins. Our margins actually went down, but our profitability stayed the same. Our customers actually said, we really applaud what you're doing.
We're fine with a four percent price increase, not a chi cambrito that's thirty cents, but the fact that you increase wages to that extent. We like to eat a morgo. CEO Brian Nicol has warned that Chipotle may raise prices again if cost pressures intensify. With the cost of eating out already at historic levels, consumers may just have to get used to paying more. The industry is used to tepid inflation, call it two you know um level inflation. They take you know, a little bit of priced offset
it flows through and margins are just naturally restored. The fact of the matter is labor was the pressure point. So the industry today is definitely sitting on a high single digit price versus what is typically a low single digit price inflation or level of menu price increase in relative terms. Everyone has to do this. In fact, I would say, Carol, we we could be more patient than
others because we own all of our restaurants. When you're a franchise organization, when you have franchise z s that have borrowed to invest in their business, they can't necessarily afford to let inflation eat away at their at their ability to pay the debt for very long. It is full speed ahead when it comes to store growth. Chipotle just up to its goal to seven thousand from six thousand restaurants in the US, thanks in large part to strong performance at seeing in smaller towns based on we're
are already in more than a hundred of them. Based on the ones that we're in, based on the results so far, which are extraordinary, we think there is as many as almost a thousand more restaurants. And so even though you talk about a small town with you know, maybe twenty thirty thousand people, the sales volumes are almost the same as if you you know, we're in a city like Chicago or a Chicago suburb, but the investment
costs are lower. The rents are certainly lower and the operating costs are lower, so you end up getting higher margins and higher returns. She probably reaps the full benefit of these return earned since it owns and operates all its stores, and advantage that's not lost on Wall Street.
It's extremely unusual, and not only restaurants, but from a restaurant stock perspective, to have a large cap stock that's growing its unit level economic model, meaning the revenues are getting better and the margins are getting better as growth
is accelerating. It's just it's like almost unheard of. So there's little reason for Chipotle to begin franchising in the United States, but for the chains forty five international restaurants, Bloomberg Intelligence notes that partnering with local operators overseas might boost margins and accelerate expansion. We're open to the idea of some kind of franchise model. UM. You know, there are areas of the world where it's going to be harder for us to to own UM and to run
the businesses ourselves. When the process of bringing our digital system to Europe that's going really, really well. We've also opened up some alternative sites. It gives us great optimism that international is going to be a growth vehicle for and you know, hopefully not for this computer. Like Chipotle's menu, Jack Hartungue's professional resume isn't patted out with exotic ingredients.
After earning a bachelor's degree in NBA at Illinois State, he went straight to an accounting job at Cooper's and library his next stop eighteen years at McDonald's. They called me up and McDonald's was just a few miles down the road, and they said, this place is great. And what they what they told me was great about it was you started in one area, but then when a job opens up, they would post it and you can interview for it. So I felt, well, that sounds great.
So I can learn a job and then if I'm looking for another opportunity, I can interview for it, and if I've done a good job, I'll get those opportunities, which is what happened. I am curious when you went from McDonald's to Chimpole. Were folks like Jack. Here, you've got the established company, You're going to a startup. I mean, did people think you were crazy? Yeah? I mean a
lot of people thought I was crazy. Um. In fact, one memorable person was the CEO of McDonald's at the time, because I had a great career at McDonald's and the future looked really, really really good at a tootle. It was in its infancy and it and it had this vision for food, um that was like no other that I've seen. How much of it was but Dowald, Oh, Chipotle, how much of it was? Alright, Jack, keep an eyeing these guys, you know, That's how it started. Okay, And
it wasn't keep an eye on it, but it was more. Um, their food culture was very advanced, their business culture was not, and so it was more of bringing some of your experience to Chipotle just so you can get them on a you know, on a on a stronger track. Once I got into Schopotle, the environment and I realized, oh my god, I want to be part of this. There was a passion about what we were doing. So it wasn't a finance job anymore. It was a job that
was really changing food culture in this country. Um, And it was it was a mission and it was a mission that I that I totally bought into. The Chipotle's culture and mission have long differentiated it as a place to eat. With restaurants competing fiercely for employees in the wake of the pandemic, companies are going to have to show that they are great places to work as well. It's not just about that person coming back to work
in the restaurant. They're going to come back, but they're not going to come back and work the way they did before. I think that the companies that win are those that are investing in their employees, their teams, that are developing a strong culture that people want to be a part of. The real win on a micro level is if restaurants can figure out how to make that employee work better and more efficiently, but in a way
that makes them more satisfied. At this new location just outside Chicago, Jack hartone, tell me what it will take to build a workforce to meet Chipotley's goals. You've got to start with attractive wages, but then you've got to go away beyond that. You've got to offer developmental opportunities,
promotional opportunities. We have a hundred thousand employees. As we grow from three thousand restaurants to seven thousand restaurants, we're gonna need two hundred or two or fifty thousand employees. So our feature depends on hiring great crew today that will be great managers and that your turn, double the locations, double the staff. And along with investing in people, Chipotle
plans to invest in technology to support them. There is so much still that can be done with artificial intelligence robotics. When you think about our system, there are a lot of processes that frankly people don't love doing. Cutting and couring avocados in the restaurant. Not a fun job, very repetitive, you know. I think there's a way where we could
use robotics to help us do that. And then as you think about artificial intelligence, we could be better at figure out how many avocados that we have to cut in court today so that we never run out of backamore lee throughout the day. As digital orders have surged, Chipotle has adapted its processes. The most dramatic change has
been the addition of a second make line. This is very familiar to customers, our frontline, and this is what for the first you know, call it eighteen years at coleg this was you come into pole along the line, you interact with the crew, and you customize your mail.
We've got this separate makeline and it's digitized, and so the orders come in and they're they're really kind of stage so that if you say at noon, I want to come in at one o'clock, we hold that order and we will send it to the crew like it maybe ten to one, so it's already right when you pull up your car. How do you manage these kind of two different staffing needs right and making sure you have the right amount of people at the at the
right right time. We spend a lot of time projecting sales of a lot of it is you know, it's part art, part science. We're trying to bring more science and more AI into it because if you get the right sales projection, then you know exactly what you're saying, what you're staffing needs to be. So if you get the sales right, you can get the entire restaurant staffed perfectly with just a couple of people. Our our average restaurant now does about um over a million dollars per
restaurant in digital sales. Data science meets culinary art. In Chipotle's commitment to menu innovation but releasing several new items each year, management hopes to boost same store sales. It seems to be working, but it's more complicated than it looks. The most important thing is to make sure that the economics work, meaning when you bring something new UM, does it bring in additional customers? Does that bring existing customers
more often? There's always going to be trade off from you know, one menu item to another UM, and there could be economic either advantages or disadvantages. So we just want to understand that. You know, when a customer comes in, if they're trading from a high mar den itum to lomar den it um, that's gonna be a loser for us. And any new offering must meet Chipotle's rigorous sourcing standards. It will take us a year and a half up from the time that we are are experimenting in the
test kitchen. Two. We'll put it into a few restaurants to see how does it work operationally and do customers like it? But it'll take us a year and a half because we've then got to build up the supply chain. It's a challenge, but we take our time and we're not going to roll it out before it's ready. Jack Harton clearly places a high value on the customer experience, and the experience of those who work at Chipotle restaurant. He's a people person and a family man with five
children and ten grandchildren. Even his favorite hobby brings family into play. It's a passion for collecting and restoring classic cars. I drive here very conservatively, so I'm not like ripping down the highway or anything. But these are cars that I really cared about and really admired and aspired to when I was young, and so I still love these cars. There's a bonding that goes on as well. One of my sons is a mechanic, so he was a mechanic for tesla Um and he loves cars, and so we
spend time to car shows together. We'll go to auctions and look for cars um, and so we have a great time. And he knows how to fix the cars, and I know how to drive the cars, and so that's kind of the partnership that we have. We have a great time together. Essential pillar of Chipotle's business has always been a commitment to fresh food and support of
sustainable agriculture. From responsibly raised meat to local and organic produce, the company has crafted a supply chain carefully over decades. Every company is facing supply change, leunges. Chippotle has a great infrastructure. They have a sophisticated team. They have relationships with their suppliers, a lot of whom are local, and a lot who have gotten to know Jack hard Tongue. He's done much more to build those relationships than just
sign checks. Within my first year, I was spending time on hog farms, cilantro farms. Believe it or not, I was. I drove a combine, you know that's like the size of this restaurant, um to harvest rice, organic rice, and
these are things that they had. They had a lasting impression on me because when I would go back to my office and I would be working on spreadsheets and financial analysis, I saw how the hogs were raised, and I saw how they were raised conventionally versus with our farmers, and I'm like, I've got to make sure that our financials and all everything we spend money on needs to be thoughtful so that we can invest in the better way raising food. It's more expensive to buy this food.
I was trying to make sure that the economic model supported in testing in this food and not through higher menu prices. Jack is bought into our purpose and cultivating a better world. One of those key planks is sustainability and doing the right thing for the planet. And as a result, he's all on board with investing in it and understanding the implications on the business and then obviously our purpose. We know it matters. We know it matters not just to our customers, to our crew as well.
We do the right things. We do what's right for people. We do it's right for the farmers, we do it's right for the environment. For the last twenty years at Chipotle, Jack hard Tongue has made strategic decisions based on what matters, even in times of turmoil in crisis. Looking back, more often than not, it's paid off. So I wanted to know what he sees when he looks ahead, what's the
opportunity for Chipotle and the next ten years. It excites you the most, well, I think the most exciting thing is that we're not even halfway to our potential um in the US. So you know, when I joined the company with a few hundred restaurants and we're talking about a thousand, maybe two thousand. Here we are three thousand, talking about seven, and I believe as we approach seven that number is going to be higher, a lot higher. Well I don't know how much higher, but for sure
it's going to go up. And international we're just scratching the surface. And we've been very responsible in international where we've taken the same food ethos we've owned the restaurants so far, and so it's been a very slow let's make sure we get this right. You know, sometimes you have to go slow before you go fast, and that's kind of been our approach. We've gone slow, and now we're positioning ourselves too, I think in the not to Distan future go fast into international. So those are two
things that excite me the most. All Right, what's the challenge for the next ten years that is on your mind the most, that maybe even keeps you up at night? People, Um, when we run all of our restaurants like we do today, Um, we have around a hundred thousand employees. As we grow, we're gonna need more employees. Uh. We promoted nineteen thousand people last year of our of our promotions were in house.
So we always have to be on our game in terms of hiring great people that believe in Chipotle and our purpose today, that have the desire to learn how to cook, learn how to run a business, learn how to lead people. If we do a great job with that, the future only gets brighter. So we're in great shape from with people standpoint. But that's something that I'll always worry about. Are we are we hiring and developing the
right if you don't want to be losing people. If we lose people, then we might have to resort to franchising. And it's hard to follow a purpose during tough times like during a pandemic. It's hard to invest in things like food and people you win margins or under pressure. When you own your own restaurants, you can make those investors. How do you see your role as CFO changing in the next ten years? Safe to say it's changed a lot in the past ten years. How about the next
ten it has? You know, I think it'll just evolve with the challenges. I mean again, I'm I'm already fortunate that I've been able to get involved in real estate
and supply chain. I spend time in a restaurant, spend time and suppliers, um, you know, spend time international as well, So I always I already get to spend a lot of time in a lot of these areas I think UM in terms of evolution, UM, it's probably more a matter of the folks on my team, some of which are new the fole in last few years, some of which have done with us for a long time, to help them rise up so they can take on bigger
responsibility and we become a bigger company. Everybody in the company will need to step up and take on bigger responsibility, so my main goal will be to make sure that they're ready to take those on. What's the skill set that you think every CFO should be acquiring in this environment? I think being digital savvy UM is probably the most
important thing. Trying to stay you know, keep up or even stay ahead of where technology is going, not just in the next five year, has been next center fifteen years. That's the most critical for See. What's the best advice for the future that you'd give to somebody, a person who just got promoted to CFO today, I would say, be really really curious, UM, try to learn as much as you can about every part of the business. Every CFO knows how to read financial statements and go through
what a CFO is supposed to do. But I think what you have to do is put those aside at some point, go spend time in your business. In our case, spend time in restaurants, spend time with suppliers. I think, get to know how other people within the business, what their challenges are, what their opportunities are, um what really makes the customer care about your brand or your business. And I think the more you do that, when you go back to the spreadsheets, you're going to be thinking
about things from a different sample. Your priorities might change a little bit right, and it might change how you make investments to make sure that the customer experience is better next time rather than the margin is better. I mean, if you invest in the customer in a way where they become loyal to your customer, the margins will come heartfelt and hands on. Jack hard Tongue has put Chipotle in position to go forward by always making sure the business goes back to the start and stays true to
its roots. That's what makes him Chippotle's chief future officer. I'm Carol Masser. This is Bloomberg