Chipotle – Benchmarking Standards in the Fast Food Industry

If you need to find a benchmark in the fast food industry for driving supply chain principles while maintaining high standards, look no further than Chipotle. Food Business News reports how Chipotle chooses to look beyond local sourcing of its ingredients to the land down under to purchase as much grass fed, free range beef as possible.

This article was written in July 2014. CMG’s stock price was being sold at $600/share. Nine months after this article was written, the stock reached its highest share price at $726/share in February and is currently at $683/share. Clearly the stock holders are agreeing with Chipotle’s management. What is better than a $7 burrito that has locally sourced or free range ingredients in it?

When choosing to source from half way across the globe, Chipotle now faces new risks they have not previously encountered. These risks include those associated with long distance transportation such as piracy and the threat of natural disasters. While these risks may not be posed every day, they could be devastating to a supply chain when they occur. Should a storm occur causing the transportation to reroute, the company would acquire costs for higher quality freight to ensure the beef or other ingredients stay fresh. Chipotle made the decision to take these risks versus succumb to more of their beef coming from the “normal” farms that inject antibiotics and added hormones into their cattle.

There have been occasions that Chipotle has needed to source “normal” beef to keep up with demand. The nation's beef supply is at a 60-year low and demand continues to rise. A great decision on Chipotle’s management’s part was to communicate to their customers when the beef is not up to their usual standard.

Chipotle’s commitment to high quality ingredients is not without its challenges.  Higher quality beef has resulted in raising the price of their menu items. What happened next was unbelievable

“Higher costs for such ingredients such as beef, cheese and avocados drove a nationwide menu price increase at Chipotle during the quarter, but that did not discourage customers from visiting the chain. An increase in traffic helped push revenues over $1 billion in the quarter, a first in the company’s history.

Though the average increase was 6.25% to 6.5%, the increase varied by market and by menu item,” said Monty Moran, co-chief executive officer. “So, for example, because of the significant recent inflation in beef and the expectation that beef prices will remain elevated for the foreseeable future, steak prices were raised by about 9%, on average, while chicken prices were only raised about 5%. We expected some customers would trade down from steak to chicken as a result of the higher steak premium, and we have, in fact, seen some customers shift from steak to chicken. Aside from the slight shift from steak to chicken, our customers have generally responded well so far, but it is early and we will continue to watch for resistance in terms of fewer customer visits, as well as customers trading down.””

There is something to take away from this article and about Chipotle’s standards in general. There is a market for locally grown and/or free range/grass fed beef. You do not have to be the cheapest option for the consumer, just the tastiest.

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