The Exchanges

Q so you come up with this, this plant based menu. Um, and, and that's, that's one way that Kernel's gonna be different from like a typical fast food or casual restaurant. But I understand that you're also planning to operate these locations, these Kernel locations in a different way. Can you tell me a little bit about that? Like how is Kernel gonna be run differently than a typical restaurant?

A So the main difference is that it's a, it's based on a hub and spoke model. So one of the most difficult parts of making a great meal is the prep. And what we've decided to do at kernel is centralize the prep. So we do all of our preparation, all of the food prep in a central kitchen, and that will service a couple of handfuls of restaurants within a, Five to 10 minute bicycle ride. And we'll put this prepped food into totes and load the totes onto a wagon and pull them by bicycle to the restaurants every hour. So when the restaurant receives their tote, they load the prep food into the, into the system. When you guy want to order food at Colonel, you take out your device. And you go through our app or our web app and see the offerings and decide what you want and do the little double click and pay and, uh, agree upon a time to, to pick it up or have it delivered. And, uh, the system takes it from there. The system knows what time it needs to start cooking the food, what time it needs to start toasting the buns, uh, and, and then hands that to the second person Who puts that all together for you and then hands that off to a person who bundles and, and puts the, um, the items in a bag and places them in a cubby. And so where a typical fast casual restaurant might have, you know, a dozen folks at peak period, uh, Colonel would have three. Uh, when you come into the restaurant, yo…

AI assessment note: “So the main difference is that it's a, it's based on a hub and spoke model.”

Q What was it about the economic model that was so special?

A Well, it was very, very efficient. First of all, the, the investment cost was, was very low. And, you know, typical fast food at the time had to have room for a drive-through. They were usually freestanding. And so all of that required a sizable investment. With Chipotle, we were going into strip malls. Often in the inexpensive center units, not the more desirable end caps. This was early on. So the investment was very, very modest. And our production system or that our service format really was an assembly line. And as volumes increased, as we served more customers, you, you would get, uh, you know, a higher and higher margin, a higher contribution margin. And so The resulting returns on investment were extraordinary, and again, nothing like this in the, in the restaurant industry at the time.

AI assessment note: “First of all, the, the investment cost was, was very low.”

Q Was McDonald's ever saying to you, hey, look, you know, it doesn't make sense that you're buying, you know, these expensive I mean, look at our supply chain. Look how efficient it is. You know, you can save a lot of money. You can increase your profit margins, or do they just keep out of that?

A You know, they would ask questions, not dissimilar from the questions you asked, but, but they would see the results. So, you know, I remember when I put Naiman ranch pork on the menu, I had to increase the price of the carnitas burrito, and I think it increased by about a dollar or something. And so in the world of fast food, that was just not understood. I mean, gotta remember, this is the time when fast food had the, The 59, 79, 99 price point. I think that was at Taco Bell and the dollar value menu and things like this. Here, here I am raising the price of the carnitas burrito by a dollar. And after we did that, we started selling more carnitas burritos.

AI assessment note: “they would ask questions, not dissimilar from the questions you asked”

Q on Basically creating kitchens where a lot of the food is, is made by, by robots. How do you assess? I mean, you must have learned a lot about that process with kernel. Um, are you bullish on it? I mean, is that where things will, are, are ultimately going to be headed towards? Not everything made by robots, but a lot of things made by, you know, automated machines.

A So, you know, The robot arm did really two things. It, it picked from a rack, uh, the item that was being ordered and put it in the oven, and then when it was done, it took that item Out of the oven. So it was part of automating the process to help reduce the amount of, of labor, but it really wasn't about, um, the making of the food. You know, still in our central kitchen, we have knives and cutting boards and pots and pans, and we're really cooking. And so the, your question, will robots displace that? I mean, maybe someday, but certainly not Not anywhere in the near future. I think what we, we learned that it's polarizing. I mean, some people were fascinated with the robot arm. Other people said they want people making their food. At the end of the day, in pivoting from kernel to counter service, we learned that the, the human interaction is very, very important. And, and when a customer walks into a counter service, they're greeted There are people there who welcome the customer, who take care of the customer. Now, there are less people in a counter service than a traditional fast casual, and that's by design. And so, you know, the system to make these sandwiches has automation in it. It allows us to, you know, more efficiently manage the workflow, and ultimately, uh, it'll allow for a better economic model, which allows us to invest in higher quality ingredients, And, and …

AI assessment note: “will robots displace that? I mean, maybe someday, but certainly not Not anywhere in the near future.”

Q So what did you, I mean, during the pandemic, did you kind of hunker down and just start to think?

A So it was in the winter. So I was in Colorado and I was skiing a lot, um, but also reading and spending time with friends and, and family. And, you know, one of the things that I read was Bill Gates, um, how to avoid a climate disaster. And, um, what struck me was this scientific consensus that if we don't address The amount of greenhouse gases were emitting and, and bring them down to zero by 20 50 that we, we go over the tipping point and, and whether you believe, you know, those are exactly the numbers. I think conceptually it's right that we have, you know, we have a long way to go to, to, to reduce our greenhouse gases, uh, so that we're not affecting negatively our, our planet. And I thought, well, what, what could I do about it? And I, I come to understand that, you know, 25 or 30% or so of the greenhouse gases that we emit come from what we eat, and, and the vast majority of that comes from animal sources. So I thought, well, what if, what if I started a, a plant-based restaurant? Might that help? And, of course, if I start a plant-based restaurant, that's really not going to move the needle. But I thought, well, what if it's a, Chain the size of Chipotle. Might that help? And still probably not. These are, these are big, you know, big problems that we have. And, and so I thought, well, what if everybody copied this restaurant like they, they copied the Chipotle model? …

AI assessment note: “I was in Colorado and I was skiing a lot, um, but also reading”

Q What was your description to him? What was it going to be?

A Well, I, I, you know, I described the food. I, I described the service format. I said, I said, first of all, you know, it's going to be an open kitchen and we're going to be grilling meats and cooking whole beans and mashing avocados for guacamole and grating the cheese and dicing the tomatoes and jalapenos and onions and chopping fresh herbs like cilantro and oregano. And, and, you know, he, he, he seemed very excited about the The prospect. And so, uh, he said, well, give me, give me about a week. I'll, I'll identify, you know, a few potential real estate sites and we'll go on a tour. And, uh, we, we saw a, um, a Dolly Madison ice cream store. This was the first site we saw, uh, near the university of Denver campus. It was 850 square feet. It was in terrible condition. It needed a lot of work. I think the rent was 800 dollars a month or something like this.

AI assessment note: “it's going to be an open kitchen and we're going to be grilling meats”

Q Yeah, because you guys did things like source your meat from a specific ranch farm. Like, you found this ranch that had free-range pigs, and you, you went with them, right?

A Right. I was reading a, uh, quarterly magazine called The Art of Eating, and this particular issue that I was reading was about Uh, Nyman Ranch and the pork farms in Thornton, Iowa. And at the time I was reading this, I was, uh, thinking about changing the recipe for our carnitas. And so, uh, as I was reading this article, I was learning about, you know, you know, the way they, they raise their pigs, which I guess is, was much different than the typical way that, that pigs are raised in the United States. The vast majority of pork, uh, is raised in confinement. So if you contrast that with, with what I saw at, at Nyman Ranch, uh, I mean, it's just, it's such a stark contrast. So after sampling their pork, I decided that I wanted to switch all of my supply to, to Nyman Ranch. Took about a year to get there, but eventually we did.

AI assessment note: “I decided that I wanted to switch all of my supply to, to Nyman Ranch.”

Q What was he like? I mean, cause you, I, I, I mean, I've, I've read a little bit about him in, like, Mario Batali worked for him. Tons of really famous chefs. Anthony Bourdain, like, produced a documentary about him. What, what was he like to work for?

A It's hard to describe, really, what he's like. I will say that he's an amazing visionary, and quite a perfectionist, and so it was high pressure, for sure, and, uh, it was super, super stressful, um, really, really hard work, but you would put your dishes up, and, and all the cooks would put their dishes up, and, and Jeremiah would come along and, and taste, and, you know, it was, it was, uh, it ranged from, you know, a nod, like, you know, good job, to, Picking up the plate and throwing it in the trash, which was, you know, you know, really traumatic, but I loved it. I really did. And, um, and I'm, I'm lucky to have been able to work there.

AI assessment note: “ranged from, you know, a nod... to, Picking up the plate and throwing it in the trash”

Q Yeah, Steve, any, any final thoughts or advice for John?

A Yeah, I, I like, I like that, uh, the idea of, of finding people you can, uh, partner with to help promote the brand. You know, obvious is, is, uh, partnering with restaurants, getting well-known chefs to feature your wine, you know, maybe inviting them out to the property, uh, hosting them for dinners and, and, uh, events, and, um, Helping them understand your story and they can in turn share your story with their diners. You know, I often notice that when there is a story behind the wine and especially a personality and maybe a family legacy, people tend to perk up. I think wine tends to be a very, uh, sort of personal, uh, uh, experience for folks. And, and I think that avoiding traditional kinds of marketing, uh, probably makes it more authentic. And, uh, and more desirable.

AI assessment note: “finding people you can, uh, partner with to help promote the brand.”

Q You stepped down, um, officially. It was announced right as the pandemic was unfolding in March of 2020 as executive chairman. And when you stepped down, did you have a sense of what you wanted to do next? Did you kind of have an idea in your mind of what, where you would go?

A I didn't. Um, you know, I remember, well, I remember a few times these, these, uh, sort of big transitions in my life, uh, after college deciding to go to cooking school, uh, I said, dad, I want to go to cooking school. He said, well, are you going to be a chef? Do you, um, I said, no, I just, I'm really interested in cooking. I, I think, I, I think I'd have a lot of fun. I think I'd learn a lot. He said, ah, maybe that's risky. Maybe, maybe decide what you want to do first. I remember, uh, working at STARS, uh, and, and, and, and telling my dad, hey, I'm gonna leave. I'm gonna go start this, uh, this burrito place. Uh, I'm gonna move back to Colorado and do it. He's like, well, tell me, what the, what does the plan look like? I said, I don't really know yet. I just, I just have this hunch. And, and so, you know, I'm not afraid to, uh, try new things without sort of having a full plan in place. The change changes. Just felt like it was going to be right. I knew that I needed to do something different. I just didn't know what.

AI assessment note: “I didn't.”

Q know, I here in California, the line to In-N-Out Burger From 11 a.m. to two a.m. is always long. There's always people there, you know, and, and five guys, burger joints, taco places, Chipotle, you know, probably the vast majority of people eat at Chipotle are still ordering the, the meat proteins. Why do you think that a, a vegan concept like this is going to appeal in, in scale?

A So Guy, I'm, I'm not, uh, I don't adhere to a plant-based diet. I still eat meat. I still eat fish. But I've noticed over the years, uh, I eat less and less meat. And when I find really great plant-based options, I find myself drawn to them. And I notice a lot of people are Acting in a similar way. And I think people choose more plant-based options for a number of reasons. Some people understand that there's an environmental implication. Some people care about animal welfare issues. Other, other people think that, uh, plant-based menus offer, you know, a better health. And for me, it's probably all of those things personally. And I think, and I think I'm not alone. I think people will eat more plant-based diets and, and, and make that part of their life if there are better options. And if we, and if we offer something that's really compelling, that's really delicious, that's, that's something that you want to eat often, I think this could be a wildly successful business.

AI assessment note: “people will eat more plant-based diets and, and, and make that part of their life if there are better options.”

Q I mean, do you, is, is it mean anything? I mean, because I would think, I would be incredibly proud of that, you know, that, that you grow this thing to such a huge place in, in that period of time.

A So, again, I've always, so when I, before I started the first restaurant, I, I used to tell people that I wanted to show that just because food is served fast doesn't mean it has to be a typical fast food experience. And that evolved to Saying that I want to change the way Americans think about and eat fast food. And I, I remember when I started saying that we weren't very big, that, that sounded like a big audacious goal. Um, but, but the basic idea behind our purpose is that, you know, food that's raised right should be people's everyday food. And as I see others who have open restaurants, That are based on the Chipotle model. You know, I'm, I'm very excited about that. That's, that's what, that's what drives us.

AI assessment note: “I'm, I'm very excited about that. That's, that's what, that's what drives us.”

Q Yeah. All right. Important question. A big question. Um, Steve Ellis, I want to bring you in, uh, before we answer the question, you, do you have any, any questions yourself for John?

A So, um, one thing I think is, is, is interesting. There's an interesting parallel, and that is, you know, you, um, are marketing something now that, that doesn't have as much demand as it once did. Um, but with Chipotle, there really wasn't a demand for what we were offering. What we were offering was very different from typical fast food. Uh, the price point was Much higher. I mean, back in 1993, think about fast food menus. Uh, Taco Bell's menu, uh, was categorized by 59, 79, and 99 cent items. McDonald's had a dollar menu. Um, things were bundled and, and named by number. You ordered a number one, and if you wanted to, you know, make it big, you said supersize it. And then along comes Chipotle. I mean, we had to really Teach people that they had choices, and they had to work with the, with the servers behind the counter to get their item. I mean, even something as basic as, Where to go when they walked in the restaurant. I mean, remember in a fast food restaurant, the first thing you did was walk to the cash register. We asked people to, to walk first to the, to the food offerings. And so we had to lead customers one by one. The way I differentiated and built the business was by developing these one-on-one relationships with our customers. And By the time I retired, 27 years later, I think we had well over a million customers a day. So you'd think about, do you really build …

AI assessment note: “There's an interesting parallel, and that is, you know, you, um, are marketing something”

Q So did you ever, so did you ever think maybe they're right, maybe this isn't the right name?

A Chipotle was not an easy place. I remember customers coming in, they'd have to say, well, what is that place? Chipotle, Chipotle, all kinds of, all kinds of pronunciations. I've heard it all. And then you had to walk up to the counter and actually sort of build your burrito. And, and this was, this was confusing to a lot of people. They said, well, what do you have? And I said, well, can we have all these things here? There's burritos and In, in the burrito, I can put rice and beans and meats and salsas. And I mean, you look, you think about it now and it just seems so obvious how you, you would use Chipotle, but in the early days, it was a very novel experience. It was also a novel experience to have an open kitchen so close to the customer. I mean, the grill was just a few feet away from customers. And so they were really, they were really involved in the production that was You know, the cooking and the, and the service.

AI assessment note: “all kinds of pronunciations. I've heard it all. And then you had to walk”