Chipotle's carnitas woes linger, showing paucity of premium pigs

Chipotle Mexican Grill Inc. is still struggling to keep popular menu items from disappearing.

The Mexican-food chain stopped selling carnitas burritos at hundreds of its restaurants in January because it dropped one of its pork vendors, and it's still not fully stocked again. The company also has run low on its premium supplies of beef and chicken over the past year, forcing it to offer alternatives at some locations. And social media is rife with posts from customers complaining that their local Chipotle is missing one item or another.

While Chipotle remains popular with both consumers and investors, the company is a victim of its own growth and ingredient guidelines, which prevent it from using most of the nation's fast-food suppliers. It's also facing an increasingly crowded market for natural and humanely grown livestock. As chains ranging from Dunkin' Donuts to Kroger Co. adopt similar standards, there may be less to go around.

"We don't know for sure when we'll be fully supplied again," Chris Arnold, a spokesman for Chipotle, said in an interview. "For many years, we've been operating in a system where the primary food supply doesn't meet our standards."

The company hasn't stabilized its pork supply more than two months after removing the ingredient from about 600 U.S. restaurants, about a third of its total. Signs have appeared in Chipotles across America warning that there are no carnitas - the shredded pork shoulder that goes into burritos, tacos and salad bowls. Before that, the Denver-based company warned that it may have to stop selling guacamole or salsa because of ingredient costs, scaring some customers.

No Antibiotics

Chipotle has built its reputation on a stringent set of food standards. The meat it serves is free of antibiotics and added hormones. When it comes to pork, the animals must have access to the outdoors or deeply bedded barns - ones with plenty of straw to sleep on. The trouble is, pigs raised that way account for a tiny fraction of what's produced in the U.S. So Chipotle has to go on a farm-by-farm search for more pork.

At the same time, the company is looking to open as many as 205 new restaurants this year, bringing its total to about 2,000. It may have to reconsider its expansion plans if it can't find a long-term solution to the pork supply woes, said Asit Sharma, an analyst at the Motley Fool in Raleigh, North Carolina.

That challenges a thesis embraced by Chipotle management and investors, who have seen the stock more than double over the past two years. They believe "growth will be supported by store expansion and customers' seeming indifference to price increases," Sharma said. "The company may be forced to slow its store growth if it can't evolve new relationships with 'sustainable' suppliers quickly enough."

Pig Supplier

Chipotle expects to record a $2 million charge this quarter related to the pork it pulled from restaurants and distribution centers. The situation stemmed from its discovery that an unidentified supplier wasn't housing pigs the correct way. Niman Ranch, Chipotle's top pork supplier, has boosted shipments in the aftermath of the suspension, but it hasn't been enough to close the gap, Arnold said.

You might think pig farmers would be clamoring to supply Chipotle with pork, but it's a daunting task. It takes four times as long to care for the pigs, and the barns can be twice as expensive, said Chuck Wirtz, an Iowa farmer. He knows from experience: Wirtz has spent seven years raising antibiotic-free pigs that roam outdoors and sleep in deeply bedded barns.

Difficult Market

Wirtz, who raises both premium and conventional pigs, initially built an upgraded barn for a customer that wanted to sell premium hogs, but the deal collapsed before the animals had eaten their first bushel of feed. The customer didn't think there was a market for the higher-priced pork, he said. Wirtz, who has sold to Niman Ranch since 2008, expects to make a profit on his premium hogs for the first time this year.

"We as farmers have always responded to what the market wants," Wirtz said. "There are added costs to raise pigs that way. And up until recently, the market has not been willing to pay for that."

The top pork processors in the U.S. make up 70 percent of domestic production and mostly don't meet Chipotle's specifications. Smithfield Foods Inc., the biggest hog and pork producer in the world, said it stopped producing antibiotic-free pork "due to low market demand at a price point that sufficiently compensated producers for increased costs." Smithfield also doesn't produce organic pork or products from free-range hogs. But it is phasing out gestation crates, which have drawn criticism for confining pregnant sows.

Making Changes

The other large suppliers have a mix of approaches. Cargill Inc. sells antibiotic-free pork and is in the process of eliminating gestation crates as well, said spokesman Mike Martin. Still, its hogs don't have access to the outdoors or deeply bedded barns.

Tyson Foods Inc. doesn't offer antibiotic-free pork, and its hogs also don't go outside. As customers request changes, though, the company "will continue to work to meet those needs," spokesman Worth Sparkman said.

Against this backdrop of scant supply, restaurant chains and supermarkets are pledging to use more humanely treated livestock. But they're struggling to set clear timetables for the move.

Kroger, the nation's largest grocery chain, informed suppliers in 2012 that it would phase out gestation-crate pork. It said the change would take "many years."

Dunkin' Brands Group Inc., meanwhile, announced last week that it will switch to gestation-crate-free pork and cage-free eggs. The pork transition will happen within seven years in the U.S., the company said, without setting a goal for its international locations.

McDonald's Chicken

McDonald's Corp. made its own food pledge last month, saying it would no longer serve chicken raised with certain antibiotics. But the switch will be gradual. The burger chain expects the new policy to be adopted over the next two years.

"You can't change these things overnight," said Steve Meyer, president of Paragon Economics, a firm that analyzes agriculture markets. "It takes time."

Chipotle typically uses pork shoulder for its carnitas. While it has experimented with other parts of the pig in recent months, it hasn't "found a balance we can work with yet," Arnold said. The company also has been talking to potential new suppliers, but there have been snags in the discussions. They won't commit to raising their pig standards unless there's a buyer for the premium pork that Chipotle doesn't want, Arnold said.

Price Increases?

Price is another obstacle. Using pork loin would be significantly more expensive than pork shoulder, Arnold said. While Chipotle customers are seen as less price-sensitive than diners at McDonald's or Taco Bell, there may be limits to how much they're willing to pay for a burrito.

Chipotle also ran short of chicken and beef in 2014, leading it to substitute conventionally raised meat at times. The items are more central to its business than carnitas, making it difficult to forgo them altogether. Still, the company put up signs in its restaurants informing customers that they were eating conventional meat.

Continued shortages increase the likelihood Chipotle will have to raise prices again. The company boosted prices 6.3 percent last year, citing supply constraints. Customers didn't seem to mind. They continued ordering steak and barbacoa burritos, and comparable-store sales rose more than 16 percent in the fourth quarter.

Value Perception

Chipotle has said that last year's price increase wasn't enough to cover its current beef costs. That raises a question, said Peter Saleh, an analyst at Telsey Advisory Group, a research and consulting firm. How much higher can prices go before restaurant traffic drops off?

Even with the previous price hikes, customers feel like they're getting a good value at Chipotle, he said. The company is still cheaper than some other fast-casual Mexican chains, such as Qdoba, Moe's Southwest Grill and Baja Fresh, Telsey research shows. Losing that edge would be damaging.

"That's the one thing they're trying to avoid," Saleh said. "They've grabbed a lot of market share by keeping their prices relatively low."

Chipotle's Arnold, though, doesn't see a crisis looming. The company has been coping with the supply challenges for years, and it hasn't stopped growing.

"We keep making it work," he said.