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Chipotle looks overseas for new pork supplier

Chipotle looks overseas for new pork supplier

Absence of pork from 40 percent of restaurants impacts 2Q sales, traffic

Chipotle Mexican Grill Inc. has looked overseas for a new pork supplier that will allow the fast-casual chain to bring carnitas back to all of its restaurants by the end of the year, the company said Tuesday.

In a call with analysts discussing second-quarter earnings, Steve Ells, Chipotle founder, chairman and co-CEO, said the company has signed with Karro Food Group, a supplier based in the northern English county of Yorkshire, to provide the chain with humanely and sustainably raised pork.

Pork is still missing from about 40 percent of Chipotle’s 1,878 restaurants, after the company suspended a supplier in January that it said didn’t meet the chain’s animal welfare standards.

The return of carnitas is expected to help lift Chipotle’s lower-than-expected same-store sales, which disappointed Wall Street on Tuesday.

Chipotle’s same-store sales for the second quarter ended June 30 rose 4.3 percent and included a slight decline in traffic. Analysts expected same-store sales to increase around 5.9 percent.

Menu price hikes contributed 4 percent of the second-quarter same-store sales increase. The remaining 0.3 percent was largely a result of a positive menu mix shift resulting from increased catering sales, sides and recently reformulated kids’ meal options, which offset a 0.3-percent decline in traffic, the company said.

Negative traffic is an anomaly for Chipotle, which has reported consistently positive same-store sales for more than a decade, largely on traffic growth.

Both sales and traffic were positive so far in July, company officials said.

Net income rose 27 percent.

Ells said he was optimistic that the return of pork would keep the Denver-based chain on track to keep same-store sales in the low- to mid-single-digit range for the year, as previously projected.

While it has long been the company’s preference to source domestically, Ells said more than 95 percent of pork raised in the U.S. does not meet Chipotle’s standards, so the company was forced to go overseas, as it has in the past with beef, which Chipotle has sourced from Australia.

The pork from Karro Foods “meets or exceeds all of our animal welfare standards, including that this pork comes from pigs that are born on pastures and raised in deeply bedded barns,” Ells said.

The pork, however, is not entirely antibiotic free.

Ells noted that Karro allows antibiotic use under veterinary supervision as needed, but not subtherapeutically to promote growth.

Ells said consumers have applauded the chain’s decision to go without pork rather than lower its standards.

Meanwhile, because of high beef costs, earlier this month Chipotle increased menu prices about 4 percent, specifically for its steak and barbacoa, or about 30 cents per entrée. Beef entrée prices, however, will not increase in restaurants that are still without pork, Chipotle chief financial officer Jack Hartung said.

“We held off in those markets as we want to avoid the unintended consequence of having customers trade from carnitas to steak or barbacoa and then be forced to pay more for their meal,” he said.

Once pork returns to those restaurants, the price hike for beef will go into effect there as well, he noted.

While Chipotle’s food costs fell slightly, due to lower dairy and avocado costs, labor pricing rose 80 basis points during the quarter, more than it has “in a very long time,” Hartung said.

The labor increase was mostly due to inefficiencies created as the chain implements a new workforce scheduling system, Hartung said.

Hourly labor rates also increased, along with improved benefits like more sick time and vacation, and tuition reimbursement for hourly employees.

Dramatic minimum wage increases in some markets also contributed to higher labor costs.

In San Francisco, a minimum wage increase to more than $12 per hour has contributed to a 30-percent increase in the cost of doing business there, Hartung said.

Reinventing the tortilla

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Menu prices in the market, however, increased only about 4 percent higher than most Chipotle units, and were still less than other competitors in the area, he said.

As a result, Chipotle recently increased menu prices by 10 percent at the 10 restaurants in San Francisco, and by 7 percent at the 74 restaurants in the surrounding Bay Area.

So far, there has been no consumer pushback against the price increases in San Francisco, Hartung said. He added that Chipotle still has room to raise prices further, although that is unlikely to happen twice in a 12-month period.

But other markets may see menu prices rise.

“We’ll take a similar approach when the overall costs of doing business in a market are escalating, on a case-by-case basis,” Hartung said. “But just because the minimum wage is increasing in a market doesn’t mean we’re going to raise prices.”

In Maryland, where the minimum wage recently increased to more than $10 per hour, Chipotle does not plan to raise prices, he said.

Also during the quarter, Chipotle completed its phase-out of genetically modified ingredients.

“Chipotle is the only national chain where you can eat anything on the menu without worrying about GMOs,” Ells said.

Chipotle also expects to scale up tests of new artisanal tortillas this fall. The company has been working with Washington State University’s Bread Lab to develop a tortilla with only five “real whole” ingredients: flour, water, starter, vegetable oil and salt. Since the starter is made from only flour and water, the recipe really only has four ingredients, Ells noted.

The process has required Chipotle to reinvent the way tortillas are produced at scale.

“It’s quite a challenge because one has to account for variables like moisture in the flour, humidity in the bakery, strength of the starter, etc.,” Ells said.

Tortillas made commercially typically mitigate those factors with additives and preservatives, he said. Chipotle, however, is increasingly emphasizing its “Food With Integrity” positioning by removing artificial additives typically used in processed foods.

Ultimately, less processed food tastes better, Ells said.

“We know that skilled bakers can make better tasting tortillas, more similar to homemade tortillas, than we currently get at commercial scale,” he said.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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