Chipotle Guacamole Panic Could Benefit the Company

Guacapocalypse now? Guacapocalypse soon?

It turns out the answer is guacapocalypse never (or at least not for the foreseeable future) as Chipotle (NYSE: CMG  ) has taken steps to assure its customers it won't be running out of the popular avocado-based condiment.

Why would Chipotle fans panic?

In its annual report Chipotle included a paragraph that set off a wave of stories from a variety of media outlets as well as a social media explosion of panic. The paragraph -- if taken at face value with no context -- made it seem like there was an impending avocado shortage. It read:

"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 for the ingredients."

That sounds terrifying for people who become terrified when restaurants run out of their favorite food topping. But the warning is just an example of something that might affect sales -- not a prediction of things to come. It came in a section of the report filled with hypothetical scenarios that might impact the business.

In the same area of the report Chipotle offered a huge list of scenarios where business could be negatively affected, ranging from weather and road closures to difficulty hiring and competitors copy its menu. The report stopped short of offering warnings about the sky raining blood or zombies who prefer brains over burritos rising up, but nearly every other plausible reason that business could be affected was covered.

Still Chipotle has issued a statement

Though there was never a guacamole or a salsa shortage and the company was only writing about the theoretical possibility one could happen, its spokesperson, Chris Arnold, still took to Twitter to reassure guac lovers and salsa addicts.

"Good news for guacamole lovers: Chipotle says there's no 'guacapocalypse' looming," he retweeted from a post touting an NPR story on the subject.

"There is no looming 'guacapocalypse' and I wouldn't read too much into this," Arnold told NPR in an email.

And weather-related price volatility is just part of doing business when a company relies on fresh ingredients, he added. In an average day Chipotle uses 97,000 pounds of avocados. The company uses use 70 avocados to make a single batch of guacamole, according to its website.

"With regard to avocados, we saw similar issues in 2011 and incurred higher prices for the avocados we used, but never stopped serving guacamole," Arnold told NPR. "The sky is not falling."

Chipotle had a really good year

Lost in all of the guacsanity is that Chipotle had a tremendous year. Highlights of that include:

  • Revenue increased 17.7% to $3.21 billion
  • Comparable restaurant sales increased 5.6%
  • Restaurant level operating margin was 26.6%
  • Net income was $327.4 million, an increase of 17.8%
  • Diluted earnings per share was $10.47, an increase of 19.7%
  • Opened 185 new restaurants

Of course -- as was detailed in the risk section -- the company despite its success is vulnerable in all the ways that any restaurant chain is vulnerable. Not having guacamole for a short period might disappoint some customers, but it's not likely to have a major negative business impact.

But what if the unthinkable happened?

Chipotle does not break out guacamole sales on its earnings reports nor does it offer any info on how much guac is used as a topping versus how much is sold as side dish/appetizer. It's not possible to determine the exact business hit the company would take if it temporarily could not offer the item but there would be some negative economic impact. 

It's hard to imagine that people would forego their burritos, tacos, and bowls but checks might be lower were a guacapocalypse to ever occur.

Bad news might be good news for Chipotle

Chipotle has built its entire brand around the idea that is uses quality ingredients that are locally sourced when possible. The company uses the slogan "food with integrity," which it defines on is website site as "our commitment to finding the very best ingredients raised with respect for the animals, the farmers, and the environment."

When a company markets quality it can actually be a branding benefit to run out of something for short periods. It essentially tells the customers that you can trust Chipotle's food because if it can't get the right pork and chickens that meet its standards, it won't just substitute sub-standard offerings.

If an avocado shortage ever happened or Chipotle could not purchase the quality of avocados it requires, the company would communicate that to its customers. That might lead to some disappointed diners, but it would also demonstrate that food with integrity is not just a slogan. Chipotle actually practices what it preaches.

How you can profit
David Gardner recommended Chipotle to members of his Rule Breakers investing service in January 2007. Those who followed his recommendation have achieved 879% gains since then. David has proved adept at finding disruptive growth companies time and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2014, at 10:24 PM, mistacy wrote:

    Chipotle has had an impressive run over this last year.

    I am not an investor to buy when the stock price is high.

    But CMG seems to have a lot for itself,

    & might just keep going through a healthy growth.

    What do you guys think about buying some shares at this point?

    I will be honest & say that I haven't done my homework at this point yet.

    Usually I stay away from companies with stock price at their 52 week high.

  • Report this Comment On March 06, 2014, at 10:52 PM, mistacy wrote:

    For a long position (& large position)

    eg 3 years

    Who would you go with:

    CMG

    or

    V

    ?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2867461, ~/Articles/ArticleHandler.aspx, 10/22/2014 11:29:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement