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.
[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.