Chipotle’s Guacapocolypse

Climate change puts America’s favorite fast-casual restaurant’s mission – and famous guacamole – at risk.

Creating a “better” fast-food

In March 2014, amongst the many companies announcing their earnings, news came out that devastated me to my core – Chipotle, one of the only fast food places where you can get decent guacamole, may no longer sell my favorite food due to the rising price of avocados [1].  The executives of the company cited climate change (a.k.a. my new worst enemy) as the culprit.  While this “news” may have been blown out of proportion by the internet, it showed how climate change could impact one of America’s most popular fast casual restaurants.

Chipotle’s business model was built upon creating high-quality fast food using the best ingredients possible [2], under the mission of “food with integrity”.  This promise to customers led Chipotle to shift its sources of produce and meats towards sustainable, animal-welfare-oriented suppliers [3].  Not only did the Company wish to ensure the quality of its raw materials, it also pledged to work towards supply chain reform.  Following through on that promise, in 2015, Chipotle became the first national restaurant chain to completely remove genetically modified organisms (“GMOs”) from its supply chain [4].  They also worked to shorten the overall supply chain, which helped reduce environmental impact, by showing preference towards local famers [5].


The Start of the Guacapocolypse

Chipotle’s commitment to creating healthier food for their consumers is one of the reasons it has been so successful.  However, the stringent qualifications it places on its supply chain make it susceptible to the impacts of climate change.  There are two main impacts the company will face from climate change:

  • Decreasing yields from core crops: For example, avocados, the main ingredient in Chipotle’s famous guacamole which they use 97,000 pounds per day of, are expected to see yield decreases of 15-20% by 2020 (below) [6]. On a more short-term basis, the Company has seen significant increases in the price of beef due to droughts in 2014 and 2015 [7].

screen-shot-2016-11-03-at-6-49-12-pm

Source: Ann Parker, “Climate and Agriculture: Chnge Begets Change,” Lawrence Livemore National Laboratory (S&TR March 2007), https://str.llnl.gov/str/March07/pdfs/03_07.3.pdf, accessed November 2016.

  • Increasing prevalence of GMO acreage: As farmers look to technology to reduce the impact of highly variable weather caused by climate change, they are increasingly relying on GMOs [8].  Although total GMO acreage decreased in 2015, this is due to a decrease in overall acreage planted, not a reversal of the trend seen below [9].  Given Chipotle’s commitment to the removal of GMOs from their ingredients, the decrease in the amount of non-GMO land puts them at risk of facing increasing food prices.

picture1

Source: Clive James, ISAAA Brief 51-2015 (International Service for the Acquisition of Agri-Biotech Applications), p.1, http://www.isaaa.org/resources/publications/briefs/51/pptslides/default.asp


Defending the food supply chain

Despite causing panic by listing climate change as a risk in their 10-K, Chipotle isn’t backing off from their “food with integrity” mission.  In fact, they’ve taken some strong steps to combat the risks listed above:  First, they created the Cultivate Foundation in 2011 [10].  This foundation focuses on creating long-term change for Chipotle’s supply chain by promoting sustainable practices for its farmers.  By partnering with organizations such as Farm Aid, FamilyFarmed.org, and the Niman Ranch Scholarship, Chipotle is able to support small farmers as they institute sustainable farming practices, which is often difficult, especially with rising competition from corporate farms [11].  The foundation also encourages the use of pasture-based systems for animal production, which uses lower amounts of energy [12].  To further this mission, Chipotle gave $10 million to help local farmers in February 2016 [13].  The Company realized that its high standards are costly to comply with and donated this money to help offset the costs.

These efforts are noble, but they are primarily dependent upon monetary donations, not direct changes to the ecosystem.  In order to ensure the lasting availability of its supply chain, Chipotle needs to go directly to their partner farmers.  While some investors may want Chipotle to look for new, non-local suppliers or back off of their non-GMO approach, relying on current partnerships will help them invest in the long-term while maintaining their brand ethics.  In the near term, Chipotle should continue to help farmers invest in infrastructure that makes it easier for them to meet Chipotle’s high quality standards and mitigate the impacts of drought, given that much of the supply chain comes from California. Longer term, they should continue to partner with organizations that are invested in making farming more sustainable and less subject to the effects of climate change.  Doing this will ensure a more solid supply chain, maintain the brand ethos that drew its customers in, and, hopefully, avoid the next guacapocolypse.

Word count (excluding citations): 711

Sources:

[1] Amrita Jayakumar, “Don’t panic. Chipotle’s guacamole isn’t going anywhere (for now),” March 5, 2014,  https://www.washingtonpost.com/news/wonk/wp/2014/03/05/dont-panic-chipotles-guacamole-isnt-going-anywhere-for-now/, accessed November 2016.

[2] Chipotle Mexican Grill, “Company,” http://www.chipotle.com/company, accessed November 2016.

[3] Chipotle Mexican Grill, “Food with Integrity,” https://chipotle.com/food-with-integrity, accessed November 2016.

[4] “Chipotle Becomes the First National Restaurant Company to Use Only Non-GMO Ingredients,” press release, April 27, 2015, on Chipotle website, http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-newsArticle&ID=2040322, accessed November 2016.

[5] Chipotle Mexican Grill, “Local Grower Support,” https://chipotle.com/localgrowersupport, accessed November 2016.

[6] Ann Parker, “Climate and Agriculture: Chnge Begets Change,” Lawrence Livemore National Laboratory (S&TR March 2007), https://str.llnl.gov/str/March07/pdfs/03_07.3.pdf, accessed November 2016.

[7] Chipotle Mexican Grill, 2015 annual report, p.18, http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjI5NzQ3fENoaWxkSUQ9MzMyODA4fFR5cGU9MQ==&t=1.

[8] Gene J. Koprowski, “GM farmers, acres growing globally,” Agri-View, April 9, 2015, http://www.agriview.com/news/crop/gm-farmers-acres-growing-globally/article_5e8e016f-076a-547c-8a91-5b109babe0ea.html, accessed November 2016.

[9] Clive James, ISAAA Brief 51-2015 (International Service for the Acquisition of Agri-Biotech Applications), p.1, http://www.isaaa.org/resources/publications/briefs/51/pptslides/default.asp

[10] Cultivate Foundation, “About,” https://www.cultivatefoundation.org/about, accessed November 2016.

[11] Cultivate Foundation, “Issues: Family Farms,” https://www.cultivatefoundation.org/issues/family-farms, accessed November 2016.

[12] Ann Perry, “Putting Dairy Cows Out to Pasture: An Environmental Plus,” Agricultural Business Magazine, May/June 2011, https://agresearchmag.ars.usda.gov/2011/may/cows, accessed November 2016.

[13] “Chipotle Commits $10 Million to Help Local Farmers,” press release, February 8, 2016, on Chipotle website, http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-newsArticle&ID=2136570, accessed November 2016.

 

 

 

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9 thoughts on “Chipotle’s Guacapocolypse

  1. With many fast casual and fast food restaurants accused of greenwashing (claiming sustainability but failing on execution), I’m so thrilled to see Chipotle lead the charge in this industry. The piece of this argument that was most striking to me was Chipotle’s work with local farmers and the positive side effects these partnerships can have on Chipotle’s long-term raw material supply chain viability. I wholeheartedly agree that investing in small-scale farmer infrastructure to protect against climate change vulnerabilities in the growing and transportation process is critical in this situation. I also firmly supply Katherine’s perspective that deeper engagement with these farmers, instead of pursuing larger-scale non-GMO farms, is the best possible way to achieve Chipotle’s ideal outcome: preserving their core customer value proposition of delivering high quality ingredients at affordable prices to the mass market. To further push this discussion, I’d like to open the discourse to include the specific ways we feel farmer engagement will be the most effective. Will Chipotle be most effective educating farmers about the impacts of climate change and arming them with knowledge? Or would physically investing in farm infrastructure and distribution channels have a greater impact? Or would investing in new climate change resistant variances of the avocado crop sustain Chipotle’s raw materials input and sustain the avocado farming industry? I believe we’re looking at a highly complex problem that might involve all, some, or none of these engagement possibilities. I look forward to following Chipotle’s next steps in the space and how they measure their impact on both the production and consumer levels.

    1. pperonto – I agree that it is refreshing to see Chipotle staying true to its values despite being a public company facing tremendous shareholder pressure.[1] On the topic of what else can be done, I wonder if Chipotle, as the 15th largest restaurant in the US,[2] could do more to raise consumer awareness of its impending guacamole cliff through in-store publicity campaigns or even by raising the price on its guac and allocating a greater portion of the guac revenue proceeds toward supporting farmers. While such a move is likely to face immense customer backlash, I do believe that Chipotle is one of the best positioned companies to pursue such a campaign since it is only second to Taco Bell as a high-volume avocado user (unless McDonald’s plans to venture into this territory). While such a publicity effort might be not actually be feasible, I do bring it up as food for thought because I am fearful that a lack of consumer education will exacerbate the issue long-term by shielding customers at the expense of punishing farmers. Without visibility to the gravity of the issue, I doubt consumers would fully appreciate just how dire the situation could become. Perhaps we are not yet at the cliff, but the cliff is clearly just around the corner.

      [1] http://www.reuters.com/article/us-chipotle-ackman-exclusive-idUSKCN12S00I
      [2] https://www.bloomberg.com/gadfly/articles/2016-01-13/chipotle-s-e-coli-scare-competitors-grab-market-share

  2. A world without guacamole is not a world in which I want to live.

    I do worry to what extent Chipotle has shot itself in the food with the recent E. coli scandals. Its stock price is way, way down from its all-time high [1], so they probably don’t have the clout that they used to. Three years ago, I think they could’ve forced changes with a lot of their suppliers because their growth was so substantial, and because they were the gold-standard in the industry. But that’s not the case anymore.

    The reality is that it’s going to be tough for them to focus on so many different initiatives — being green, not having GMOs, etc. — if growth is a concern. I honestly think they should’ve taken the opportunity that came from their recent stock price dip to move away from some of that and instead focus on “quality” as an open-ended idea without specific tactics.

    But if they do want to focus on tactics, it needs to be just one or two. Maybe water usage in avocado production is one of those two things. But they need to act quickly, because they’re influence is falling rapidly.

    P.S. I eat at Chipotle a solid three times a week, so this comes from a place of love.

    ————–

    [1] http://finance.yahoo.com/chart/CMG#eyJtdWx0aUNvbG9yTGluZSI6ZmFsc2UsImJvbGxpbmdlclVwcGVyQ29sb3IiOiIjZTIwMDgxIiwiYm9sbGluZ2VyTG93ZXJDb2xvciI6IiM5NTUyZmYiLCJtZmlMaW5lQ29sb3IiOiIjNDVlM2ZmIiwibWFjZERpdmVyZ2VuY2VDb2xvciI6IiNmZjdiMTIiLCJtYWNkTWFjZENvbG9yIjoiIzc4N2Q4MiIsIm1hY2RTaWduYWxDb2xvciI6IiMwMDAwMDAiLCJyc2lMaW5lQ29sb3IiOiIjZmZiNzAwIiwic3RvY2hLTGluZUNvbG9yIjoiI2ZmYjcwMCIsInN0b2NoRExpbmVDb2xvciI6IiM0NWUzZmYiLCJyYW5nZSI6IjV5In0%3D

    1. I had Chipotle for dinner last night and lunch today to prepare for this comment (and subsequently won’t need to eat another meal for at least 5 days).

      I agree with Ben’s point in being concerned about the companies ability to make so many changes after such a difficult stretch. Given the data around the safety of GMOs, I think the company should shelve that goal for the time being and focus on procuring high quality ingredients (like avocados) and partnering with farmers (and preferably local when possible) to insure that supply is reliable. Hopefully in relaxing their GMO standards, they will be able to reduce the volatility in supply by diversifying their sources of ingredients.

  3. I wholeheartedly agree with Ben’s points above. I may not visit Chipotle 3 times a week, but I am certainly no stranger to the establishment. And, as any other true Californian would, I would love to defend the availability of the product (guacamole was invented and perfected in California, and unfortunately bastardized in Texas – e.g. its use in the abominable goop you call queso).

    Therefore, I would like to echo that Chipotle should take advantage of its current difficulties to relax its restrictions on GMOs. There is a massive, and uneducated, divergence of the American population and scientific community over the apparent ‘danger’ posed by GMOs. 9/10 doctors believe GMOs are safe to eat vs. 5/10 American adults. That’s comparable to saying that although 9/10 dentists say to floss, 5/10 members of the public would debunk the thought as hooey! If the American public was enticed to visit Chipotle based on their superstitious fears over the GMO boogey-man, then I believe the promotion of non-GMOs was a savvy business move. However, if this savvy and unnecessary marketing ploy jeopardizes the holy guac – I say bully for GMOs.

    http://www.webmd.com/food-recipes/features/truth-about-gmos#1

    1. Pat –

      I completely agree that there is huge dissonance between the scientific community and the American public on the health “risks” of GMOs. As you pointed out, many reports have highlighted that there GMOs pose no greater health risk than non-GMOs.

      However, I don’t think the problem would be resolved by Chipotle opening up its procurement to GMO avocados, as this is an industry-wide challenge that goes beyond GMO vs. non-GMO. Driven by drought in a grower’s strike in Mexico, the U.S.’s total imports of avocados have fallen, across the board, from 35-45 million avocados / week to 8.5 million / week. [1]

      So, there’s no guarantee that Chipotle would be able to address the quantity shortage and price pressure of avocados by expanding to GMO suppliers. However, there is a significant downside to doing so: The company would signal to shareholders that it has opted to compromise one of its fundamental values (whether it’s valid or not), because the company is financially desperate. After all, part of the company’s differentiating position is that it was the first national restaurant to cook only with non-GMO ingredients.[2] By abandoning this position, Chipotle faces a downside of losing trust among shareholders and losing customers that is far higher than an uncertain improvement in short-term prices of avocados.

      [1] http://fortune.com/2016/10/25/chipotle-avocado-shortage/
      [2] https://chipotle.com/ingredient-statement

    2. Sorry, Pat, I’m gonna side with Ryan on this issue. In a time when consumer trends are moving towards more organic, healthier and more natural sources of food, there is merit for Chipotle to defend its non-GMO stance. After all, I believe if a marketing study were conducted, we will find that one of the main reasons customers opt for Chipotle is because of what it stands for, including non-GM food source. [1] It reminds me of the MOD Pizza case we did in LEAD, sales were boosted by customers who believed in and were attracted to the mission of the company (and in the case of Chipotle, they even have a quality product as a solid base to start with). I would in fact encourage Chipotle to run a contrast ad (taking a leaf from the recent MKT case) and explain to the public the potential dangers of GM food, which led to 19 out of 28 EU countries opting-out of growing GM crops and many countries implementing an outright ban. [2]

      [1] Scott SE, Inbar Y, Rozin P (May 2016). “Evidence for Absolute Moral Opposition to Genetically Modified Food in the United States”. Perspectives on Psychological Science.
      [2] “Majority of EU nations seek opt-out from growing GM crops” [http://www.reuters.com/article/eu-gmo-opt-out-idUSL6N0M01F620151004]

  4. I agree with the comments above. Chipotle’s brand emphasizes “food with integrity,” and it needs to defend its non-GMO stance. The issue is that the company held itself accountable to certain high standards, and it hasn’t been able to meet them. It’s a crucial time for the company to take a more public stance on its sustainability efforts rather than focusing on offering free burritos. The company should consider publishing a Sustainability Report to market some of the efforts mentioned above in Katherine’s post. Additionally, I think the company should create an independent committee to focus on its food and sustainability practices.

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