Money

Here’s how you can cash in on the hottest fast-food trend since the burger hit the bun

By: Mark Borden
[ Updated: Jul 14, 2008 - 5:28:22 PM ]

Steve Ells never set out to be a fast-food mogul. He wanted to be a chef. But one night in 1992, he found himself looking for a cheap way to fill his gut after a grueling shift at Stars, the upscale San Francisco restaurant where he was working as a line cook. Ells wandered over to the Mission District, and there in the fluorescent glare of a seedy taqueria, the 27-year-old smelled more than rice and beans: He smelled money. As the old man behind the counter was assembling his burrito, Ells had an epiphany. What if he opened a taco place that used fresh, healthy ingredients—the kind of ingredients he was working with at Stars? 

He knew nothing about business, having majored in art history at the University of Colorado before training as a chef at the Culinary Institute of America. Undaunted, he moved back to his hometown of Denver, where his normally supportive dad didn’t initially share his son’s vision. “He was skeptical,” says Ells. “Starting a burrito joint after working in one of the country’s top restaurants didn’t make sense to him.” Nevertheless, Papa Ells eventually fronted him the $85,000 start-up cash, and in 1993, the chef opened a compact, 850-square-foot restaurant just down the street from his alma mater in Boulder, Colorado. 

Today that one little college restaurant has spawned more than 500 franchises, and at 41, Ells’ net worth is more than $68 million. In January, the Denver-based company went public and doubled its $22 offering price to close at $44 a share. According to market-information giant Thomson Financial, the IPO was the best opening gain by a U.S.-based company in 5 years. Fueled by the money it raised in the market, the company is on a growth tear, with plans to open 90 new locations this year, and Chipotle’s CEO envisions a  future where thousands of his restaurants pepper the country. 

Like many a successful entrepreneur, Ells created a great product, but he was also in the right place at the right time. Once a regional specialty, taquerias have exploded into a national phenomenon. In the process, they have set the stage for a full-blown theater of culinary combat—a war that the average investor can join. (See Put Your Money Where Your Mouth Is.) McDonald’s, Wendy’s, and Jack in the Box—all desperate to expand beyond the bun and tap into the browning of America—have invested in this genre of fast food, called fresh Mex. McDonald’s has a stake in Chipotle; Wendy’s owns Baja Fresh, a California chain with more than 250 locations; and Jack in the Box owns Qdoba, yet another fresh-Mex brand, with roughly 280 restaurants in 40 states.

The conglomerates’ hunger to turn queso into pesos says a lot about how the country’s dining habits are changing. People are increasingly tight on time and willing to buy convenience. “As people age, the fast-food model doesn’t work. It’s just less acceptable to eat a Double Whopper,” says Baja Fresh chief marketing officer Mark Chmiel. The nouvelle taquerias allow consumers to build healthier meals from food that is fresh and grilled, and doesn’t come in a combo with supersize fries.

Ells is committed to delivering what he calls “food that is fast, but not fast food.” Since 2003, some of Chipotle’s pork has come from the Niman Ranch, based in Northern California (the same purveyor that New York’s Daniel restaurant uses). Half of Chipotle’s chicken (and one-third of its beef) is also naturally raised. “Our mission is to feed the masses,” he says. “Unfortunately, what’s available to the masses is highly processed. ”

Ells may remain a chef in his heart, but he could never have become a national tastemaker until he found his Daddy Warbucks in a clown named Ronald. Buying 90 percent of Chipotle in 1998 was also a shrewd move for McDonald’s. After spinning off the company in the IPO, McDonald’s is still a majority shareholder, sitting on a stake worth about $3.2 billion, but plans to divest itself of the company by the end of the year. From an investment standpoint, fresh Mex was a perfect vehicle for the Golden Arches to break into a booming style of restaurants called fast casual. This hybrid between fast food (McDonald’s) and casual restaurants (Cheesecake Factory) consists of players like Pei Wei (owned by P.F. Chang’s), Cosi, Panera, and of course, the fresh-Mex segment. According to the National Restaurant Association, fast casual is estimated to be a $7 billion market. Compared with the roughly 5 percent growth rate for casual restaurants, fast casual is hitting double-digit growth at 12 percent, and analysts predict it will become a $100 billion market by 2015.