When a small supplier gets picked up by retail giant Wal-Mart, it can launch the company's sales into the stratosphere. Small farmers feel the same way when they're able to supply produce to Chipotle Mexican Grill (NYSE:CMG). Although the amount Chipotle receives from any one farm is negligible, it can make a huge difference for the farm. But because of the food quality scandals Chipotle suffered last year, it has implemented quality checks along the way -- processes that will create substantial expenses for the small farmers.
In this clip from the Industry Focus: Consumer Goods podcast, Vincent Shen and Asit Sharma dive into Chipotle's local grower support initiative. Listen in to find out how much of Chipotle's produce is actually locally sourced, why Chipotle's new safety rules are hurting small farms, and how Chiptole's initiative is helping small farms work under the new rules.
A transcript follows the video.
This podcast was recorded on May 24, 2016.
Vincent Shen: Yes. That $10 million if I recall, it was the local grower support initiative. That's money it seems that the company understands basically that ... Keeping in mind that actually for their produce, I think in 2015, about 10% or 12% of their produce was actually considered locally sourced. Still just a smaller portion, a pretty small portion of the ingredients that they bring into the restaurant. But even then, at their scale and size, it makes it really hard for some of these smaller growers to adhere to the very strict new safety standards that they've set after the scandal outbreaks last year.
With those added costs, with the DNA testing, and testing before the crops could even be harvested. Basically, can you tell us a little bit more about the $10 million? Maybe a little bit how they're spending it, about education, the assistance, and things along those lines?
Asit Sharma: Yeah. You mentioned the testing in the field, and that's something that's important for these small suppliers, because now they have this process of high-resolution testing. It sounds really fancy. It sounds like you're taking some kind of highly sophisticated instruments and going into the field, but what high resolution really means is that, if you've got a sample size of stuff you're testing in the field of small farmers' crops, you're going to test more of a small sample. Whatever the sample size is, you're going to test more of it. I sometimes wonder, is there any product left after you put high resolution testing through a small supplier? But that's exactly what that is, and that's labor-intensive, actually.
If you think of a small farmer who wants to grow into a midsize farm, the opportunity to do business with Chipotle is awesome, but if you've got these unexpected labor costs where you're paying somebody to physically go out, and not just someone who's maybe not related to the food industry, but a person with qualifications, or maybe an internal person that you had to train, that's a high cost. Consider the margins on a crop like cilantro -- they're not very high. It's a business where you scale, you try to sell more and more each year, and you're making on volume.
This is something of a setback to any small supplier who wants to conduct business with Chipotle. These programs should help in making the testing more efficient. I think they're setting aside actually some money to defray some of the cost of people being in the field to test these ingredients.
Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.