Chipotle on fire

by Monica Watrous
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In January, Chipotle pulled pork carnitas from a third of restaurants following a supplier issue.

DENVER — No pork? No problem for customers of Chipotle Mexican Grill, who applauded the fast-casual restaurant’s recent decision to temporarily pull carnitas from the menu at about a third of US locations. The burrito chain made the move following a routine audit that revealed a supplier was not complying with the company’s animal-welfare standards.

“While we could have chosen to replace this supply of pork from conventionally raised pigs, we decided not to because most conventionally raised pigs are subjected to conditions that we find unacceptable,” said Steve Ells, chairman and co-CEO of Chipotle, during a Feb. 3 conference call with financial analysts. “Customers are applauding our commitment to our vision, thanking us for standing on principle, commending us for taking action against the inhumane treatment of animals, and congratulating us for standing by our business values.”

Then again, Chipotle customers didn’t balk at menu price increases to offset higher food costs last year, either. More customers visited the chain in 2014, driving strong double-digit growth in revenue during the fourth quarter and fiscal year.

For the year ended Dec. 31, 2014, Chipotle recorded net income of $445,374,000, equal to $14.35 per share on the common stock, marking a 36 percent increase over the prior year’s income of $327,438,000, or $10.58 per share. Revenue for the year advanced 28 percent to $4,108,269,000, which compared with $3,214,591,000 for fiscal 2013.

Net income for the fourth quarter soared to $121,234,000, equal to $3.91 per share, up 52 percent from $79,622,000, or $2.57 per share, for the comparable period. Fourth-quarter revenue totaled $1,069,811,000, an increase of 27 percent over $844,147,000 for the prior-year quarter.

Comparable restaurant sales climbed 16 percent for the fourth quarter and 17 percent for the year, driven by higher traffic as well as the benefit of a nationwide price increase taken last summer. The chain expanded with 60 new restaurants for the quarter and 192 for the year for a total of 1,783 units.

“While those results would be strong for a company of any size, I think they are particularly impressive considering how we now have nearly 1,800 restaurants averaging nearly $2.5 million each,” Ells said. “Quite simply, I do not think that we would be able to deliver these results without such compelling and relevant vision.

“We have made it our mission to change the way people think about and eat fast food, and we have created an extraordinary food and people culture.”

For the year ahead, Chipotle management expects to open 190 to 205 new restaurants and to achieve low- to mid-single digit comparable restaurant sales increases. The company also expects an estimated effective tax rate of 39 percent, excluding federal work opportunity and R&D credits, which have not been renewed for 2015.

In January, Chipotle announced the decision to pull the pork product after an inspection of an undisclosed supplier exposed some inconsistencies in the chain’s animal welfare protocol. Per Chipotle’s standards, suppliers must raise pigs with access to the outdoors or in deeply bedded barns to improve their comfort. The standards also prohibit the use of antibiotics.

While the action may bear a negative impact on sales in the short term, Chipotle could foster more consumer trust and loyalty in the long run, said Elizabeth Friend, senior food service analyst for Euromonitor International.

“Rather than following the usual protocol when it comes to supplier issues — getting caught, pulling product, apologizing and making changes to prevent the issue happening again — Chipotle got ahead of the problem, taking control and preventing any fallout before it could begin,” Friend noted. “While I am sure US consumers have missed their carnitas, the incident also did a lot to back up Chipotle’s claim that the quality of their food really is held to the level they’ve promised.

“Within the realm of fast-casual food, this strategy could do a lot to further separate Chipotle from its more traditional competitors."

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