Chipotle Mexican Grill Inc's decision to suspend purchases from a pork producer that ran afoul of its animal welfare rules could bolster its reputation with diners but threatens sales and profits this quarter.
The burrito chain's move caused a supply shortfall that is hitting about one-third of its roughly 1,800 U.S. restaurants. Chipotle shares fell 0.6 percent to $709.74 on the New York Stock Exchange on Wednesday.
Diners choose braised pork "carnitas" as the protein in about 7 percent of all burritos, tacos, bowls and salads sold at the chain, Miller Tabak + Co analyst Stephen Anderson said.
Anderson said the move should strengthen Chipotle's relationship with diners, many of whom like its "food with integrity" policy that focuses on using organic produce and antibiotic-free meats when those ingredients are available.
"It shines their halo, but it has the potential to affect first-quarter" results, said Anderson, who expects most Chipotle customers to switch to alternate proteins.
Citing the risk of lost sales, Anderson cut his first quarter per-share earnings forecast to a range of $3.84 to $3.87 from $3.93. He also lowered his growth forecast for sales at established restaurants to 10 to 10.3 percent from 11 percent.
The supply crisis underscores the clash between the U.S. agriculture industry, commodity traders, food companies and American consumers, who have become increasingly concerned about what happens to their food before it reaches their plates.
Chipotle made the decision Friday to cease buying pork from the unidentified supplier after one of its own auditors found "inconsistencies" with company standards requiring that pigs be raised with access to the outdoors or in deeply bedded barns.
Chipotle also bans the use of antibiotics, but that was not the issue in this case, spokesman Chris Arnold said. Arnold declined to name the producer.
Chipotle would not say how much pork it buys each year. It is not sure how long the shortages, which are largely confined to the eastern United States, will last.
Starting on Thursday, Niman Ranch, Chipotle's biggest pork supplier, will increase its shipments until further notice, said Jeff Tripician, an executive vice president for the farm.
"They will start receiving 15 to 20 percent more pork from us on Monday," he said, noting that the extra product will come from Niman reserves. "It won't solve their problem but it will help."
Finding additional supplies may be challenging for Chipotle, given that hog and beef herds in the United States have remained small, resulting in high prices for both organically- and conventionally-raised beef and pork.
While animal rights activists heralded Chipotle's decision to suspend the supplier that violated its rules, others were dismissive of supply chain squeeze having much impact on the broader food or farming sector.
"It sounds like the problem can be fixed as soon as they take the little pigs for a walk," said James Burns, president of Chicago-based JBS Trading Co, a commodities brokerage firm.
(Reporting by Lisa Baertlein in Los Angeles; Theopolis Waters, Tom Polansek and PJ Huffstutter in Chicago; and Sruthi Ramakrishnan in Bengaluru; Editing by Saumyadeb Chakrabarty and Grant McCool)