Fast-food restaurants almost never run out of a menu staple. But in the fast-casual world that's not always the case, as focusing on quality sometimes means that items will go out of stock.
In this clip from the Industry Focus: Consumer Goods podcast, Vincent Shen and Asit Sharma talk about why Chipotle Mexican Grill (NYSE:CMG) had a shortage of carnitas last year, how it dealt with the issue, and what it says about the company. Then they compare this to how the company is handling current health concerns.
In both cases, the company responded decisively to the unexpected, but the results have been different.
A transcript follows the video.
This podcast was recorded on May 24, 2016.
Vincent Shen: You mentioned the carnitas, for example, coming from those two U.K. suppliers. Funny enough, Sarah Priestley, who joined me in the editorial bureau recently on the TechCon team, she's heard of Tulip. They're a major meat (pork and beef) supplier in that region. She's heard of them, quite famous in her home country. And from my understanding, some of that, this was also tied, when Chipotle connected with these suppliers across the Atlantic, to the shortage that happened in early 2015.
So part of the company's efforts, especially around animal welfare, they send auditors out to their suppliers to make sure that they're essentially adhering to the policies that the company's put in place. They found some issues with those standards, like, as you mentioned with the hormones as well.
And when they cut those ties, they lost supply to about 1/3 of their restaurants. You can see how I feel committed the company is to their mission statement in this case, when they're willing to go that far, with the added cost of course, of bringing those ingredients across an ocean to resupply. I think a lot of the Karro Foods, or even the Tulip went to, for example, locations in Florida to bolster their carnitas supply there.
Asit Sharma: Yeah. This is case of whammy and double whammy, because a company like Chipotle can take a whammy. What I mean by that is it worked for Chipotle to get out in front of that shortage and to put up signs in their restaurants saying, "Hey, we've got a carnitas shortage. You may not see the carnitas for a while," and customers really responded to that. Instead of going away and going to a competitor, they were willing to wait. It reinforced the image that we have a Chipotle being interested in sustainability, interested in socially conscious food, and willing to stand by those values.
But then the double whammy came in late 2015, where suddenly the costs to procure and prep food, to make it safe, really increased. That became a double whammy. In incurred cost in the first wave, that worked out for them, they were actually able to raise beef prices in 2015, to raise pork prices. So what then ensued was an unexpected wave of safety violations, of people getting sick, bad publicity, and now the company posted -- as many of our listeners know -- a $26 million loss in the first quarter of this year.
So if Chipotle is going to really appeal to its core customer, it's going to have to spend more millions, and it's willing to do that. We've seen that despite everything, the company is still enforcing those small suppliers to incur more cost. And as you and I were chatting about, Vince, they have this $10 million program to help defray some of those costs for the smaller suppliers.