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Chipotle Guacamole Panic Could Benefit the Company

By Daniel B. Kline – Mar 6, 2014 at 5:55PM

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Multiple news reports that Chipotle might run out of guacamole sparked a panic big enough that the company had to respond.

Guacapocalypse now? Guacapocalypse soon?

It turns out the answer is guacapocalypse never (or at least not for the foreseeable future) as Chipotle (CMG 2.16%) 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.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. 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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