Written by HWANG, Johnson and WONG, Anson
Chipotle Mexican Grill operates Mexican grill restaurants, which serves burritos, tacos, burrito bowls, and salads, made using fresh ingredients. As of 2016, Chipotle operates roughly 2,200 restaurants in the United States and 29 international restaurants. In its 2016 annual report, Chipotle stated that “changes in food and supply costs could adversely affect the results of its operations” (Relations, 2016). Specifically, drought conditions in parts of the United States resulted in significant increases in beef prices during 2014 and 2015. Further, increasing weather volatility or other long-term changes in global weather patterns, including changes associated with global climate change could have a negative impact on the price or the availability of Chipotle’s ingredients (Pasha, 2016).
In 2014, Chipotle warned that it may need to stop serving guacamole because of climate change (Isidore, 2014). The Scientists at the Lawrence Livermore National Laboratory ran studies in 2006 to assess the potential impact of changing temperatures and precipitation on various crops in California, like the avocados that make up guacamole (Chamlee, 2016) and found that if temperature increases between 2-4 degrees Celsius could lead to a 40% drop in avocado crop yields, which is the main ingredient of guacamole. In 2015, the United States indeed saw a decrease in avocado crop yield, and this trend led to a 46% increase in avocado prices (Chamlee, 2016). If the trend of global warming continues, it is not difficult to imagine that one day, avocados will be so expensive that restaurants like Chipotle will stop using it in its operation. The negative impact of having to suspend popular menu items are huge for a company like Chipotle because it may significantly reduce restaurant foot traffic and comparable restaurant sales, and brand damage.
In the short term, Chipotle does not plan to raise prices on its avocado-based menu items. Complicating matters is if the Trump administration follows through on implementing an import tax on Mexican goods means even higher avocado. Chipotle, therefore, has to prepare for a reality in which a case of avocado costs $105 a case or more, up from normal prices of $22 a case (Svaldi, 2016).
Considering this, Chipotle has mainly two options. The first option is to pass increased costs to the customer. The second option is to source avocados from other countries, domestically or internationally.
To pass the costs to the end customer, the key issues that Chipotle has to evaluate is 1) customer’s loyalty and willingness to pay and 2) how the company can demonstrate increased value to the end customers. The easiest and perhaps most convenient option for Chipotle here is to reduce the size per each serving of item, which in effect is an indirect increase in price. Chipotle will have to weigh whether the company will face customer backlash from this option.
On the other hand, Chipotle can source avocados from other countries. Mexico is the currently largest producer in the world with approximately 1.5 million tons, larger than the next five producers combined (Infobase Ltd, 2016). In thinking about the new procurement strategy, Chipotle would have to be aware of the increase in logistics cost, quality and stability of the avocado supply, and politically implication of doing business in different countries. Alternatively, Chipotle can even help cultivate the domestic production of avocados by working with domestic farmers to increase harvest yields or volume.
In this blog, we have touched briefly on the key issues that Chipotle should consider in the new operating environment because of climate change and legislation change. For Chipotle lovers, your favorite menu item is not going away…just yet.
References:
Chamlee, V. (2016). “What Do Skyrocketing Avocado Prices Mean for the Nation’s Guacamole Supply?
Isidore, C. (2014). Retrieved from http://money.cnn.com/2014/03/05/news/companies/global-warming-chipotle-guacamole/
Pasha. (2016). Retrieved from https://rctom.hbs.org/submission/say-it-aint-so-chipotle-how-climate-change-may-harm-guacamole-at-the-burrito-giant/
Relations, C. I. (2016). Retrieved from http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-reportsAnnual
relations, c. i. (2016). Chipotle. Retrieved from Investor Relations : http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-reportsAnnual
Svaldi, A. (2016) “Chipotle promises to keep the guacamole flowing despite severe avocado shortage”. Retrieved from https:// http://www.denverpost.com/2016/10/28/chipotle-avacado-shortage-guacamole/
Compare Infobase Ltd (2016) Retrieved from https://www.mapsofworld.com/world-top-ten/avocado-producing-countries.html
Share with Ville!! 😉
Hahaha, I thought exactly the same!
Agree that climate change has adverse impact on not only food but flower industry as well. I think it will be a prudent approach for Chipotle to partner directly with Farmers (cutting the middle man) to have long term contracts for producing avocado and other ingredients used in its recipe. The risk of lower crop can be compensated by buying a agroinsurance
I love the topic and will be personally adversely affected if rising prices of Chipotle guacamole is passed on to customers or if this phenomenon leads to a reduction in portion sizes 🙂 It seems, though, that there could be an interesting business opportunity associated with growing avocados in greenhouses in the United States, potentially leveraging learnings from Chinese indoor agricultural developments. Such innovations will generally serve to counteract the negative effects of climate change on crop yields, for example.
Very interesting blog on the impact of climate change on the sourcing of their ingredients.
However, Chipotle is also a very interesting case study for another aspect: In 2013 they added environmental-friendly tofu to their product portfolio – which they had not changed in years – and it turned out to be a huge success. As we wrote in our blog on Beyond Meat it seems that some consumers would be willing to switch (occasionally) to more environmental-friendly meat-substitutes. Hence I am wondering if they have thought/are planning to add additional products to their portfolio. Would be interesting to find out…
I wonder to what extent having to change the price of guacamole would really impact the operations of Chipotle. Guac is an additional topping that is probably one of the high-margin add-ons. While it tastes great, I don’t think customers would go to another type of restaurant simply because Chipotle and its competitors can’t afford to sell guac at a reasonable price anymore.
As a frequent customer of Chipotle myself, I understand how important it is for Chipotle to keep guacamole on the menu. Living in California for the past ten years, I’ve seen avocado prices fluctuate up and down and more recently, it’s become popular to add onto many different local dishes. I don’t think Chipotle will get rid of guac on the menu anytime soon. Based on the case we read for POM, it seems to have other critical problems so changing the menu to not include guac will only add on to its many challenges.
By reading many posts around food related companies, I realized how much of an impact climate changes have on our diet. If we don’t take action, it looks like the future generation may not be able to enjoy some food that existed in our lifetime.
It is certainly interesting to observe how dependent on a single ingredient a business model can be. As avocado prices keep on fluctuating because of climate change, I wonder if Chipotle has considered substituting its traditional guac with other dips or sauces. It would certainly be the right time for the company to start screening the market and asking consumers about it!
I can’t imagine eating my Chipotle burrito without guac. I agree with Lindsay that Chipotle should start to consider greenhouse farming as an option for their avocado supply. Charging the additional cost to customers will definitely impact their sales.