"Sorry, no carnitas!" Signs to this effect have been a thorn in the side of pork-loving Chipotle Mexican Grill (NYSE:CMG) fans for months now.
In January, during a routine supplier audit, the popular fast-casual Mexican chain discovered that one of its suppliers had violated its "Responsibly Raised" pork standards. Instead of sweeping the problem under the rug or substituting conventionally raised pork, Chipotle took the drastic step of removing its carnitas entree (shredded braised pork) from a third of its restaurants.
Three months later, there's no end in sight to the carnitas shortage. As a result, some Chipotle followers are starting to wonder whether the "carnitas crisis" represents a serious threat to the company's long-term growth. However, while finding ethically sourced ingredients can be a headache for Chipotle, it's still a viable long-term strategy.
Chipotle's carnitas problem
Last week, Bloomberg published a major piece detailing Chipotle's ongoing pork shortage. A company spokesperson interviewed for the article said Chipotle didn't know when things would get back to normal.
The gist of the article was that not many suppliers (especially meat suppliers) meet Chipotle's rigorous guidelines. In the case of pork, most pigs are kept in crates or crowded pens with hard floors and no outdoor access. Following Chipotle's guidelines by providing more space, deeply bedded pens, and (preferably) outdoor access is quite expensive. A constrained supply chain of ethically sourced ingredients could stunt Chipotle's growth.
Meanwhile, an article on TakePark piggy-backed (excuse the pun!) on Bloomberg's piece, beginning with the blaring headline: "Chipotle's Carnitas Recession Has Turned Into a Carnitas Depression."
Keeping it in context
It's true that there is a relatively small roster of suppliers that meet Chipotle's standards today. However, Chipotle is willing to pay a premium for ethically sourced food -- and crucially, it has been able to pass most of those costs along to its customers.
The growing demand for ethically raised food -- not just from Chipotle -- will encourage some farmers to change their production methods in order to serve Chipotle and other customers with similar standards. Chipotle has also taken an active role in encouraging its existing suppliers to grow along with the company.
The carnitas shortage is not proof that Chipotle's commitment to sourcing ethically raised food is impractical. Rather, it's a symptom of there not being much slack in the system yet. To put it a different way, finding ethically raised pork for 1,800 Chipotles wasn't really a problem until Chipotle suspended one of its main suppliers.
In the long run, it would be nice not to be so dependent on individual suppliers. But the fact that Chipotle can't replace a third of its ethically raised pork supply immediately -- or even within a few months -- doesn't mean it can't increase its ethical food supply by 15%-20% a year over the long run, in line with its growth.
One more thing
Aside from the fact that Chipotle should eventually be able to get its pork supplies back to normal, it's also worth noting that carnitas is a niche menu item for the chain. Only about 6% of Chipotle diners pick the carnitas option. Chicken and beef entrees are much more popular.
The actual impact on Chipotle's sales will probably be even smaller, since many customers will just order something else instead of pork. As a result, even an extended pork shortage shouldn't hurt Chipotle too much.
Adam Levine-Weinberg owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool 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.