Climate Change: Not Even Your Burrito is Safe
Chipotle takes steps to shield its business from the effects of climate change.
Chipotle and climate change
Chipotle is a fast-casual restaurant chain that serves “a focused menu of burritos, tacos, burrito bowls…and salads, made using fresh ingredients.”[i] The Chipotle business model relies on the crop and livestock production of its suppliers for its ingredients and as such is affected by fluctuations in the food supply and related prices. Because “climate change could make it more difficult to grow crops, raise animals, and catch fish in the same ways and same places as we have done in the past,” Chipotle could have a challenging time maintaining a steady supply of its necessary ingredients at reasonable prices. As noted by the EPA, “projected increases in temperatures, changes in precipitation patterns, changes in extreme weather events, and reductions in water availability may all result in reduced agricultural productivity.” Additionally, “increases in the frequency and severity [of] extreme weather events can also interrupt food delivery, and resulting spikes in food prices after extreme events are expected to be more frequent in the future.”[ii]
For Chipotle, managing food supply fluctuations due to climate change is complicated by their “commitment to organic, local, and sustainable farming practices.” Chipotle’s farmers are “smaller and more concentrated than the markets for commodity food products, meaning Chipotle buys from producers that are less able to survive bad farming conditions without raising prices.”[iii] Analysts caution that “a rapid increase in the price of key commodities would affect future earnings growth, especially with the company’s inability to fully hedge many of its organic ingredients.”[iv]
Chipotle’s approach to mitigating climate change risk
Chipotle recognizes the risks climate change could have on its business model and is taking steps to protect itself from variability in food prices. There are two main approaches that Chipotle is taking to mitigate negative climate change effects. The first is working “closely with [their] suppliers [to] use a mix of forward pricing protocols under which [they] agree with [their] supplier on fixed prices for deliveries at some time in the future.” Unfortunately, they have not been able to secure longer term pricing contracts from all their suppliers, so “a majority of the dollar value of goods purchased by [Chipotle] is effectively at spot prices,” leaving them vulnerable to fluctuations. Chipotle has “tried to increase, where necessary, the number of suppliers for [their] ingredients, which [they] believe can help mitigate pricing volatility,”[v] however they can’t diversify away all pricing risk using this strategy.
The second approach Chipotle is considering is removing certain ingredients or menu items from its offering if prices increase too significantly. As stated in their annual report “in the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than paying the increased cost.” These ingredient suspensions would no doubt disrupt normal operations at their roughly 2,000 locations and Chipotle is acutely aware that “any such changes to [the] available menu may negatively impact [their] restaurant traffic and comparable restaurant sales, and could also have an adverse impact on [their] brand.”[vi]
A potential path forward
Chipotle has taken the steps to prepare its business for the effects of climate change by recognizing that the threat is serious and by attempting to secure longer term ingredient pricing contracts. However, these actions are not sufficient to ensure the business model isn’t significantly disrupted in the future due to climate change. Removing items from the menu because of supply limitations or price increases hurts brand loyalty and should be actively avoided if possible. Instead, Chipotle should be working upstream in its supply chain with farmers to develop more sustainable farming practices so those farms won’t be as affected by climate change in the future. Specifically, Chipotle should work with farms “to reduce water use in agriculture and to prepare for the threat of extreme weather events and the possibility of flooding.”[vii] These tactics, when combined with what they are already doing, will be a more robust defense again the negative effects of climate change on the Chipotle business model.
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[i] Chipotle, 2015 Annual Report, p. 3, [http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjI5NzQ3fENoaWxkSUQ9MzMyODA4fFR5cGU9MQ==&t=1], accessed November 2016.
[ii] “Climate Impacts on Agriculture and Food Supply,” EPA.gov, October 6, 2016, accessed November 2, 2016, https://www.epa.gov/climate-impacts/climate-impacts-agriculture-and-food-supply.
[iii] “Chipotle Warns It Might Stop Serving Guacamole If Climate Change Gets Worse,” ThinkProgress.com, March 4, 2014, accessed November 1, 2016, https://thinkprogress.org/chipotle-warns-it-might-stop-serving-guacamole-if-climate-change-gets-worse-d797f64a932c#.c20jyzcvd.
[iv] David Palmer, “Chipotle Mexican Grill, Inc.,” RBC Capital Markets, October 26, 2016, p. 7, via CapIQ, accessed October 2016.
[v] Chipotle, 2015 Annual Report, p. 38, [http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjI5NzQ3fENoaWxkSUQ9MzMyODA4fFR5cGU9MQ==&t=1], accessed November 2016.
[vi] Chipotle, 2015 Annual Report, p. 16, [http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjI5NzQ3fENoaWxkSUQ9MzMyODA4fFR5cGU9MQ==&t=1], accessed November 2016.
[vii] Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar, and Amram Migdal, “Climate Change in 2016: Implications for Business,” HBS No. 317-032 (Boston: Harvard Business School Publishing, 2016), http://hbsp.harvard.edu, accessed November 2016.
I agree with you that the initiatives that Chipotle is currently taking are not enough to support its supply chain. Something worth mentioning is that they have a strong recycling program in place (https://chipotle.com/recycle) that they can leverage when educating their suppliers on the sustainability standards they will require for them in the future.
Thanks, Alejandra! That’s a very interesting program and would definitely be good for them to mention when working with their suppliers.
Alexandra, I agree it’s somewhat shocking that Chipotle would be willing to suspend core menu items (no salsa or guac??) due to pricing fluctuations in their supply chain. One thing that really surprised me about your piece is Chipotle’s apparently limited power with their suppliers. If it’s true that they are using relatively small-scale, concentrated suppliers, I would think that Chipotle, with it’s ~2,000+ locations, would be a critical customer, and they’d have significant negotiating power. Do you know why it is that Chipotle’s suppliers are able to get away with saying no to long-term contracts?
As an avid consumer of Chipotle this article was very interesting to me. I certainly remember the guacamole scare that ensued after Chipotle made that disclosure. Locking in future prices is clearly beneficial to the business, but I agree that this is not enough in the long run. Chipotle launched the Chipotle Cultivate Foundation in 2011 with a goal to provide resources to farmers working to improve sustainability in their operations. I would be interested to learn more about the scale of this foundation, it seems that it may be more of a marketing effort than an actual commitment to robust changes to their supply chain.
Great post, Alexandra! I think Chipotle is being smart by focusing on pricing contracts and and being flexible with their menu. But like you, I think that they should be doing more to ensure a more sustainable business model long-term. Some thoughts below:
First, what do you think about Chipotle owning and operating its own sustainable farms? This way they can learn and develop sustainable farming techniques for their key inputs which they can then share with their farmers. As long as their farmers have exclusive contracts to supply to only Chipotle, this would give them a significant competitive advantage.
Second, do you think Chipotle should start diversifying its menu more? Part of the appeal of Chipotle has been their limited menu which makes the ordering process easy and quick. However, that means they are highly dependent on just a few key ingredients. When they remove something from their menu (or keep it on their menu and absorb the pricing hit), they pay a substantial cost. If Chipotle were to make more offerings available on their menu, this could potentially help them deal with pricing shocks in the near and mid-term.
Lastly, I’m curious how much Chipotle is investing in developing “alternatives” to traditional proteins like chicken, beef, etc. They recently introduced their “sofritas” offering which is shredded tofu but tastes and feels like meat. Should Chipotle continue to develop these types of offerings? I imagine this would help them move away from being dependent on just the traditional ingredients most of their competitors are highly exposed to (thus creating an “edge” if prices continue to rise).