{"id":10363,"date":"2016-11-04T00:33:07","date_gmt":"2016-11-04T04:33:07","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/climate-change-not-even-your-burrito-is-safe\/"},"modified":"2016-11-04T00:33:07","modified_gmt":"2016-11-04T04:33:07","slug":"climate-change-not-even-your-burrito-is-safe","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/climate-change-not-even-your-burrito-is-safe\/","title":{"rendered":"Climate Change: Not Even Your Burrito is Safe"},"content":{"rendered":"

Chipotle and climate change <\/em><\/strong><\/span><\/h2>\n

\u00a0<\/em><\/strong>Chipotle is a fast-casual restaurant chain that serves \u201ca focused menu of burritos, tacos, burrito bowls\u2026and salads, made using fresh ingredients.\u201d[i]<\/a> The Chipotle business model relies on the crop and livestock production of its suppliers for its ingredients and as such is affected by fluctuations in the food supply and related prices. Because \u201cclimate change could make it more difficult to grow crops, raise animals, and catch fish in the same ways and same places as we have done in the past,\u201d Chipotle could have a challenging time maintaining a steady supply of its necessary ingredients at reasonable prices. As noted by the EPA, \u201cprojected increases in temperatures, changes in precipitation patterns, changes in extreme weather events, and reductions in water availability may all result in reduced agricultural productivity.\u201d Additionally, \u201cincreases in the frequency and severity [of] extreme weather events can also interrupt food delivery, and resulting spikes in food prices after extreme events are expected to be more frequent in the future.\u201d[ii]<\/a><\/p>\n

For Chipotle, managing food supply fluctuations due to climate change is complicated by their \u201ccommitment to organic, local, and sustainable farming practices.\u201d Chipotle\u2019s farmers are \u201csmaller and more concentrated than the markets for commodity food products, meaning Chipotle buys from producers that are less able to survive bad farming conditions without raising prices.\u201d[iii]<\/a> Analysts caution that \u201ca rapid increase in the price of key commodities would affect future earnings growth, especially with the company\u2019s inability to fully hedge many of its organic ingredients.\u201d[iv]<\/a><\/p>\n

Chipotle\u2019s approach to mitigating climate change risk<\/em><\/strong><\/span><\/h2>\n

Chipotle recognizes the risks climate change could have on its business model and is taking steps to protect itself from variability in food prices. There are two main approaches that Chipotle is taking to mitigate negative climate change effects. \u00a0The first is working \u201cclosely with [their] suppliers [to] use a mix of forward pricing protocols under which [they] agree with [their] supplier on fixed prices for deliveries at some time in the future.\u201d Unfortunately, they have not been able to secure longer term pricing contracts from all their suppliers, so \u201ca majority of the dollar value of goods purchased by [Chipotle] is effectively at spot prices,\u201d leaving them vulnerable to fluctuations. Chipotle has \u201ctried to increase, where necessary, the number of suppliers for [their] ingredients, which [they] believe can help mitigate pricing volatility,\u201d[v]<\/a> however they can\u2019t diversify away all pricing risk using this strategy.<\/p>\n

The second approach Chipotle is considering is removing certain ingredients or menu items from its offering if prices increase too significantly. As stated in their annual report \u201cin 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.\u201d These ingredient suspensions would no doubt disrupt normal operations at their roughly 2,000 locations and Chipotle is acutely aware that \u201cany such changes to [the] available menu may negatively impact [their] restaurant traffic and comparable restaurant sales, and could also have an adverse impact on [their] brand.\u201d[vi]<\/a><\/p>\n

A potential path forward<\/em><\/strong><\/span><\/h2>\n

Chipotle has taken the steps to prepare its business for the effects of climate change by recognizing that the threat is serious and by attempting to secure longer term ingredient pricing contracts. However, these actions are not sufficient to ensure the business model isn\u2019t significantly disrupted in the future due to climate change. Removing items from the menu because of supply limitations or price increases hurts brand loyalty and should be actively avoided if possible. Instead, Chipotle should be working upstream in its supply chain with farmers to develop more sustainable farming practices so those farms won\u2019t be as affected by climate change in the future. Specifically, Chipotle should work with farms \u201cto reduce water use in agriculture and to prepare for the threat of extreme weather events and the possibility of flooding.\u201d[vii]<\/a> These tactics, when combined with what they are already doing, will be a more robust defense again the negative effects of climate change on the Chipotle business model.<\/p>\n

(798 Words)<\/p>\n

 <\/p>\n

[i]<\/a> Chipotle, 2015 Annual Report, p. 3, [http:\/\/phx.corporate-ir.net\/External.File?item=UGFyZW50SUQ9NjI5NzQ3fENoaWxkSUQ9MzMyODA4fFR5cGU9MQ==&t=1], accessed November 2016.<\/p>\n

[ii]<\/a> \u201cClimate Impacts on Agriculture and Food Supply,\u201d EPA.gov, October 6, 2016, accessed November 2, 2016, https:\/\/www.epa.gov\/climate-impacts\/climate-impacts-agriculture-and-food-supply.<\/p>\n

[iii]<\/a> \u201cChipotle Warns It Might Stop Serving Guacamole If Climate Change Gets Worse,\u201d ThinkProgress.com, March 4, 2014, accessed November 1, 2016, https:\/\/thinkprogress.org\/chipotle-warns-it-might-stop-serving-guacamole-if-climate-change-gets-worse-d797f64a932c#.c20jyzcvd.<\/p>\n

[iv]<\/a> David Palmer, \u201cChipotle Mexican Grill, Inc.,\u201d RBC Capital Markets, October 26, 2016, p. 7, via CapIQ, accessed October 2016.<\/p>\n

[v]<\/a> Chipotle, 2015 Annual Report, p. 38, [http:\/\/phx.corporate-ir.net\/External.File?item=UGFyZW50SUQ9NjI5NzQ3fENoaWxkSUQ9MzMyODA4fFR5cGU9MQ==&t=1], accessed November 2016.<\/p>\n

[vi]<\/a> Chipotle, 2015 Annual Report, p. 16, [http:\/\/phx.corporate-ir.net\/External.File?item=UGFyZW50SUQ9NjI5NzQ3fENoaWxkSUQ9MzMyODA4fFR5cGU9MQ==&t=1], accessed November 2016.<\/p>\n

[vii]<\/a> Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar, and Amram Migdal, \u201cClimate Change in 2016: Implications for Business,\u201d HBS No. 317-032 (Boston: 性视界 Business School Publishing, 2016), http:\/\/hbsp.harvard.edu, accessed November 2016.<\/p>\n","protected":false},"excerpt":{"rendered":"

Chipotle takes steps to shield its business from the effects of climate change. <\/p>\n","protected":false},"author":2144,"featured_media":10411,"comment_status":"open","ping_status":"closed","template":"","categories":[28,245,1218,32],"class_list":["post-10363","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-agriculture","category-chipotle","category-climate-change","category-fast-casual"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/climate-change-challenge-2016\/","yoast_head":"\nClimate Change: Not Even Your Burrito is Safe - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/climate-change-not-even-your-burrito-is-safe\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Climate Change: Not Even Your Burrito is Safe - 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