The Undeniable Power of Guacamole

There has been a rather amazing amount of news in the past 24 hours regarding Chipotle Mexican Grill (NYSE: CMG  ) and a potential avocado shortage that could possibly take their awesome guacamole off the menu for a period of time. Like Kermit the Frog said, "It's not easy being green."

No guac for you!
It's funny to me how things like sustainable farming and global warming have been rather mundane topics of discussion for years now. But when you start talking about the threat of no more Chipotle guacamole, that's when stuff gets real. Hey, I get it. I love the stuff as much as the next Fool.

The thing is, though, while I guess it makes a good headline, this is nothing really new. We have always known that Chipotle's supply chain at this stage of its life faces greater risk of being constrained because management has proven time and time again that it isn't going to cut corners on the quality of ingredients. As a shareholder and a Chipotle loyalist, I'm down with that.

History repeats itself
In the short run, sure, consumers should at least be concerned to the extent that they want their guacamole. But we've seen this kind of thing play out before with tomatoes, for example. Tomato shortages in the past have forced everything from sandwich shops to Italian restaurants to cut back on or completely eliminate tomatoes from their menus. Loyalists tend to be more understanding when things like this happen because we know it's temporary.

Indulge me for just a moment. Let us journey back in time to Chipotle's 2010 10-K and take a look at a few passages: 

As a result of ongoing supply challenges, we had to suspend serving naturally raised chicken in certain markets beginning in the second quarter of 2010. We expect additional supplies of naturally raised chicken to become available during 2011.

We do, however, face challenges associated with pursuing Food With Integrity. For example, current economic conditions have led to natural chicken and steak supply shortages... We also understand that we'll continue to be at the forefront of this trend and must balance our interest in advancing Food With Integrity with our desire to provide great food at reasonable prices. If we are able to continue growing while focusing on Food With Integrity our sourcing flexibility should improve over time, though we expect that most of these ingredients and other raw materials will remain more expensive than commodity-priced equivalents.

Alternatively, 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 one or more of our salsas, rather than paying the increased cost for the ingredients. Any such changes to our available menu may negatively impact our restaurant traffic and comparable restaurant sales. [emphasis added]

Investing is all about the future
Like I said, this is nothing new. Supply chain concerns are part of the package with Chipotle. It's what you deal with when you put ingredients before profits. Furthermore, given that the business generates gobs and gobs of free cash flow and has more than $500 million in cash and equivalents on the balance sheet with no debt, I expect management to invest more in its supply chain as time goes on in order to mitigate issues like this in the future. 

So, investors and Chipotle fanatics, don't let the guacamole shortage headlines get your burritos in a bunch. If anything, take solace in knowing that your company stands for something and is working hard on your behalf to serve up delicious "Food With Integrity" with a bigger goal in mind. And if it takes the threat of a steak burrito sans guacamole in the short term to keep things like sustainable farming and global warming at the forefront of our minds, well, I'll survive.

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Comments from our Foolish Readers

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  • Report this Comment On March 06, 2014, at 12:21 PM, TMFLomax wrote:

    Great piece Jason, and right on target. A Fool pointed this news out to me last night and I couldn't remember if climate change threats were disclosed by Chipotle in risk factors routinely over many years and meant to look back, and that was a key.

    Your point is absolutely true, the area it focuses on in sourcing food is more difficult in terms of supply. It just is. It's always a risk, and not just for Chipotle on a more mainstream basis.

    The thing that jumps out at me the "newsy" part, and unless I missed something it looks like "climate change" IS a new term in its risk factors in this 10-K (it did have "weather," for any food company that affects supply).

    I think that for investors, SEC risk factors are one of the greatest ways to get a feel for what companies could face in the future, but like your article, it's an "if," (and it may be a "when" and definitely can be a "right now" significant issue) but in a lot of cases it isn't a "right now" issue.

    Another thing that's interesting: SEC filings increasingly viewed as information resources not only for investors (an awesome tool for research) but other organizations as well.

    As I was saying to one of our Fools on a discussion board post last night, our guacamole is safe! This isn't something that *will* happen even if it is something to think about. (And companies' ability to envision and disclose risks, even simply potential ones, is about vision as well. I view that as good management.)

    Alyce (the SEC filings geek in me does get a little worked up about stuff like this ;))

  • Report this Comment On March 06, 2014, at 2:17 PM, TMFJMo wrote:

    Thanks Alyce! And you're right, I didn't find climate change in that 2010 report.

  • Report this Comment On March 07, 2014, at 6:40 PM, cmalek wrote:

    "Climate change" will be the new excuse for not having better YOY results.

  • Report this Comment On March 08, 2014, at 4:30 AM, Redifreddy wrote:

    Kudos to CMG for their action. For Fools with no knowledge of the major growing region for avocado produce in the winter -- go to Mexico and ask for the same location the Mexican Drug Cartels are fighting for turf. Often, dead citizens are found there. Maybe folks should think about the power they could have to boycott the avocados? Noooo, Americans are too selfish, Right? Lets advocate CMG (and McDonalds and the rest of FF) buy their produce in USA or the home country!

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