Chipotle Avocados
May 5th, 2014
ECO 100: Principles of economics
Assignment 1
Chipotle Isn't That Worried About the Avocado Supply
Dr. Emmanuel Obi
The mere prospect of a guacamole apocalypse at Chipotle Mexican Grill (CMG), flagged by the company in financial documents as one potential risk associated with climate change, was enough to trigger a minor online panic attack. If weather-related conditions make certain ingredients more expensive or harder to source, Chipotle said it “may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas.”
But the recent commotion, the chain said, is much ado about nothing. Asked if the guac threat is real, Chipotle spokeswoman Danielle Winslow said in an e-mail: …show more content…
“I wouldn’t read too much into this. It’s routine ‘risk factor’ disclosure,” the sort of thing public companies are required to disclose to investors. An ordinary increase in avocado prices hasn’t been enough to stop service in the past. “We saw similar issues in 2011 and incurred higher prices for the avocados we used,” Winslow noted, “but never stopped serving guacamole.” The chain increased menu prices that year. (Vanessa Wong, Bloomberg Business Week - companies and industries 04-17-2014)
In fact, company officials seem to issue deliver warnings recurrently concerning avocado-related issues. “Avocado prices continue to remain high,” Jack Hartung, Chipotle’s chief financial offer, explained during a January earnings call, “and are expected to remain elevated throughout 2014.” He pointed to increasing demand and lower supplies from drought-plagued California.
Fairly typical stuff, and investors don’t appear to be particularly worried. “Chipotle seems to have more than adequate pricing power,” said Sharon Zackfia, an analyst at William Blair, in an e-mail.
Consumers may be mainly anxious about guacamole, but avocados are barely the only ingredient that could come under pressure.
Chipotle distinguished in its filing that it also anticipates prices of beef, dairy, and chicken to be high in 2014. The chain’s “sustainably raised” food belief generally puts it in a tougher position than fast-food competitors. Chipotle already deals with failures to source enough sustainably raised beef to meet demand and accepted shifting to “conventionally raised beef or chicken due to supply shortages” in its recent risk factor filing.
Avocados may be getting pricier, but there’s much more to a burrito than just the guac.
Chipotle customers, you were warned.
Earlier this year the company noted rising prices for many of its most important ingredients—avocados at first, followed by beef and cheese. Now executives have announced that burrito prices will rise, too, for the first time in three years. The average increase will be in the mid-single digits, according to Chipotle’s (CMG) leaders, and will go into effect over the next several months.
Chief Financial Officer John Hartung was more specific about the cost of ingredients during an earnings call on Thursday, saying the price of steak has increased 25 percent in the past three months. Cheese prices could rise 10 percent this year, and so could pork prices. The dreaded avocado shortage, brought on by the drought in California, could result in a 30 percent drop in
production
Overall, Chipotle’s food costs stood at 34.5 of revenue the past three months, an increase of 150 basis points. Revenue was $904.2 million for the quarter, surpassing analysts’ estimates, and the company issued a bullish sales-growth forecast.
In my conclusion, I agree with the author, if either burrito prices increase, or the production of avocado decreases, the sales revenue will continue to grow.
RESOURCES http://www.businessweek.com/articles/2014-04-17/burrito-alert-chipotle-is-raising-prices http://www.businessweek.com/articles/2014-03-06/how-does-chipotle-not-do-sustainability-reporting-already-it-hasnt-needed-to http://www.businessweek.com/articles/2014-03-05/stop-the-chipotle-guacamole-panic-the-avocado-supply-is-just-fine http://thinkprogress.org/climate/2014/03/04/3360731/chipotle-guacamole-crisis/
ECO 100: Principles of economics
Assignment 1
Chipotle Isn't That Worried About the Avocado Supply
Dr. Emmanuel Obi
The mere prospect of a guacamole apocalypse at Chipotle Mexican Grill (CMG), flagged by the company in financial documents as one potential risk associated with climate change, was enough to trigger a minor online panic attack. If weather-related conditions make certain ingredients more expensive or harder to source, Chipotle said it “may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas.”
But the recent commotion, the chain said, is much ado about nothing. Asked if the guac threat is real, Chipotle spokeswoman Danielle Winslow said in an e-mail: …show more content…
“I wouldn’t read too much into this. It’s routine ‘risk factor’ disclosure,” the sort of thing public companies are required to disclose to investors. An ordinary increase in avocado prices hasn’t been enough to stop service in the past. “We saw similar issues in 2011 and incurred higher prices for the avocados we used,” Winslow noted, “but never stopped serving guacamole.” The chain increased menu prices that year. (Vanessa Wong, Bloomberg Business Week - companies and industries 04-17-2014)
In fact, company officials seem to issue deliver warnings recurrently concerning avocado-related issues. “Avocado prices continue to remain high,” Jack Hartung, Chipotle’s chief financial offer, explained during a January earnings call, “and are expected to remain elevated throughout 2014.” He pointed to increasing demand and lower supplies from drought-plagued California.
Fairly typical stuff, and investors don’t appear to be particularly worried. “Chipotle seems to have more than adequate pricing power,” said Sharon Zackfia, an analyst at William Blair, in an e-mail.
Consumers may be mainly anxious about guacamole, but avocados are barely the only ingredient that could come under pressure.
Chipotle distinguished in its filing that it also anticipates prices of beef, dairy, and chicken to be high in 2014. The chain’s “sustainably raised” food belief generally puts it in a tougher position than fast-food competitors. Chipotle already deals with failures to source enough sustainably raised beef to meet demand and accepted shifting to “conventionally raised beef or chicken due to supply shortages” in its recent risk factor filing.
Avocados may be getting pricier, but there’s much more to a burrito than just the guac.
Chipotle customers, you were warned.
Earlier this year the company noted rising prices for many of its most important ingredients—avocados at first, followed by beef and cheese. Now executives have announced that burrito prices will rise, too, for the first time in three years. The average increase will be in the mid-single digits, according to Chipotle’s (CMG) leaders, and will go into effect over the next several months.
Chief Financial Officer John Hartung was more specific about the cost of ingredients during an earnings call on Thursday, saying the price of steak has increased 25 percent in the past three months. Cheese prices could rise 10 percent this year, and so could pork prices. The dreaded avocado shortage, brought on by the drought in California, could result in a 30 percent drop in
production
Overall, Chipotle’s food costs stood at 34.5 of revenue the past three months, an increase of 150 basis points. Revenue was $904.2 million for the quarter, surpassing analysts’ estimates, and the company issued a bullish sales-growth forecast.
In my conclusion, I agree with the author, if either burrito prices increase, or the production of avocado decreases, the sales revenue will continue to grow.
RESOURCES http://www.businessweek.com/articles/2014-04-17/burrito-alert-chipotle-is-raising-prices http://www.businessweek.com/articles/2014-03-06/how-does-chipotle-not-do-sustainability-reporting-already-it-hasnt-needed-to http://www.businessweek.com/articles/2014-03-05/stop-the-chipotle-guacamole-panic-the-avocado-supply-is-just-fine http://thinkprogress.org/climate/2014/03/04/3360731/chipotle-guacamole-crisis/