with our desire to provide great food at reasonable prices. If our focus resonates with consumers, it should improve our sourcing flexibility, although we would expect that these
ingredients and other raw materials will remain more expensive than commodity-priced equivalents for some time to come.
Looking Out For Customers: Quality Control
We've designed our food safety and quality assurance programs to maintain high standards for our food and food preparation procedures. Our quality assurance
manager performs comprehensive store and supplier audits based upon the potential food safety risk of each food. We regularly inspect our suppliers to ensure that the ingredients we buy conform to our
quality standards and that the prices we pay are competitive. We also rely on recipes, specifications and protocols to ensure that our food is the best quality possible when served, including a
physical examination of ingredients when they arrive at our stores and "mystery shopper" visits to each store at least once each monthsometimes twice, depending on the particular market.
Area managers visit and evaluate each store for which they're responsible once every three months and regional training consultants visit and evaluate each certified training store every six months.
We also train our employees to pay detailed attention to food quality at every stage of the food preparation cycle, and have developed a daily checklist that our employees use to assess the freshness
and quality of food supplies delivered to the stores where they work. Finally, we encourage our customers to communicate with us about our food quality so that we can identify and resolve problems or
concerns as quickly as possible.
Where We Get Our Ingredients: Provisions and Supplies
Close Relationships With Vendors. Maintaining high-quality levels in our stores depends in part on our ability to
acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We purchase from various suppliers, carefully selected based on quality and their
understanding of our brand, and we seek to develop mutually beneficial long-term relationships with them. We work closely with our suppliers and use a mix of forward, fixed and formula
pricing protocols, although we do not have long-term supply contracts or guaranteed purchase amounts. See "Management's Discussion and Analysis of Financial Condition and Results of
OperationsHow We Spend Money" for additional information about our purchasing arrangements. We've tried to increase, where necessary, the number of suppliers for our ingredients, which we
believe can help mitigate pricing volatility, and we follow industry news, trade issues, weather, crises and other world events that may affect supply prices.
We do not purchase raw materials directly from farmers or other suppliers. Instead, we train suppliers to purchase ingredients and other supplies for us based upon our specifications and
to negotiate the terms of purchase with raw materials suppliers on our behalf. We estimate that we have 50 key food suppliers for our meats, beans, tortillas, seasonings, dairy products, salsas,
produce, packaging and beverages. Purchases made from our ten largest suppliers in 2004 and the first nine months of 2005 represented about 25% of our revenue, with purchases from our largest supplier
representing 5% of revenue.
Distribution Arrangements. We deliver ingredients and other supplies to our stores from 16 regional distribution centers. As
a subsidiary of McDonald's, we've relied on its distribution network. Of our 16 distribution centers, 13 serve McDonald's and its subsidiaries exclusively, while the other three have customers other
than McDonald's. Although this network is comprised of independent distribution centers, we anticipate that we may need to replace some of them as we become more independent from McDonald's.
Relationship With McDonald's. We also benefit from our relationship with McDonald's when we buy supplies or distribution or
other services. Our relationship gives us substantial credibility with our suppliers, and we can use McDonald's knowledge of purchasing and supply chain management to negotiate lower prices. For
example, McDonald's relationship with Coca-Cola has helped us contain our beverage costs, and we've historically had access to the McDonald's distribution network. We also use many of the