Chipotle Mexican Grill, Inc. Shows How to Do GMO-Free Right

The casual-dining chain proves it's profitable to offer all-natural foods.

Apr 21, 2014 at 12:32PM

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Lost amid the swirl of attention showered on Chipotle Mexican Grill's (NYSE:CMG) first price hike in three years is the news that the leader in fast-casual dining concepts will be completely GMO-free by year's end.

Although the goal is not new and the company has received a lot of traction from its publicly stated views that locally farmed organic produce is a centerpiece of its mission to bring fresh ingredients to the table, that the Mexican-flavored restaurant can achieve this end and receive customer support in the form of higher sales and greater traffic proves it's a winning strategy others can emulate..

In its just-released quarterly earnings, Chipotle recorded a 24% increase in revenues as same-store sales surged 13.4%, generating a 12% increase in earnings per share. While its comps were up against a relatively easy year-ago figure (same-store sales were just 1% higher in the first quarter of 2013) and its per-share profits were below consensus estimates, the sales number was well ahead of the 9.3% gain recorded in the previous quarter, and the profit numbers were affected by rising food costs, hence the price increase the chain is planning.

In contrast, General Mills (NYSE:GIS) seemed to cynically remove GMOs from its Cheerios cereal. It said it had no plans to remove them from its other brands and its CEO declared the results were pretty much what he expected as sales didn't move the needle. Heck, according to him, even his customers don't care about GMOs!

While it's probably too short of a time period for General Mills to determine whether going GMO-free is working for its cereal, is it really a surprise its customers haven't responded? On one hand, you have Chipotle living and breathing the belief that natural, wholesome ingredients are best for its customers; on the other, a company trying to gain from the "halo effect" by doing what's expedient because it's trendy.

Certainly, Chipotle's decision to go GMO-free has increased its costs internally as genetically-altered foods tend to be cheaper, but higher costs for beef, avocados, and cheese are pushing its expenses higher, too. Yet there may not be a premium much longer for organic ingredients like corn because of the growing global backlash against the GMO versions.

Some 90% of corn these days is genetically modified, and even though the Agriculture Department hasn't found any increase in yields in GM crops over the 15 years they've been in existence, their proliferation is spreading. But countries like China have increasingly been rejecting corn shipments because they contain traits that haven't been approved, and that's led to losses incurred by corn farmers, who have to lower prices to sell China-bound corn elsewhere. As a result, the USDA estimates farmers will plant 4% less corn this year than they did in 2013, meaning corn futures prices are on the rise.

Chipotle has rejected the concept that the world can't be fed without GMOs, and the response by its customers shows they approve of its Food With Integrity message. While its stock dipped following the price hike announcement as investors wondered how the increase would impact sales, as the restaurant notes its customers don't eat at its restaurants for price but rather the experience, it's earned "permission" from them to raise prices. Moreover, it's not increasing them as much as it could -- "We've still got room," the CFO said -- which suggests the gains in traffic and average ticket will offset any potential losses incurred by sticker shock.

Chipotle Mexican Grill will likely lose a few additional points of margin because it's not raising prices as high as it could (and perhaps should), and this past quarter it said its restaurant-level operating margin fell 40 basis points to 25.9% from last year. Yet management's shown it's willing to look beyond just the current quarter or two for what's best for the long-term growth of the chain, which is a trail being blazed that other companies would be wise to take notice and follow.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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