Chipotle crisis and the future of pricing in supply chains

Chipotle logo.

One hundred and twenty sick Boston College students, fresh on the heels of a nine-state E. Coli 026 outbreak and just months after separate incidents with norovirus in California and salmonella in Minnesota, might cause customers to flee from Mexican fast-food chain Chipotle.

Ironically, the root cause of the problem is thought to be supply chain complexity tied to its “food with integrity” mission. Nowhere, however, in any of the press coverage or in a casual review of the menu is there evidence of significant premiums in pricing.

There is an old saying that may apply here: you get what you pay for.

Fresh, local and hormone-free should cost more

Chipotle’s stock has been hammered in response to this news, indicating that investors worry about whether consumers will forgive these food safety failures. A bigger worry should be how the company’s margins will fare as the food supply chain is reinforced with a raft of new quality control procedures being implemented now.

Founder and co-CEO Steve Ells is quoted in the company’s 4 December press release saying: “When I opened the first Chipotle 22 years ago, I offered a focused menu of just a few things made with fresh ingredients and prepared using classic cooking techniques.” His commitment is admirable, but his supply chain almost certainly faces an impossible task unless consumers help by paying significantly more for better food.

A reality of food supply chains is that elimination of variability in sourcing and production is essential to achieving low costs while maintaining quality. Chipotle, by avoiding the industrial food supply chain as a matter of principle, ends up needing to accommodate massive variability in its supply base.

Local, sustainable farming sounds great in a marketing pitch and may even taste better, but it absolutely increases the burden on procurement. It also necessarily eschews the productivity gains that come from genetically engineered plants and monoculture industrial farming. Add to this a commitment to ethical treatment of animals bound for slaughter and the supply chain equation simply cannot sustain margins without consumers doing their bit.

Supply chain visibility at the point of demand

Sustainable products have a chequered history in the mass market. Clorox famously bet on green products nearly a decade ago and found shoppers largely unenthusiastic. Many other CPG companies have experienced the same dynamic, with corporate commitments obliging the supply chain to do its part for the planet while giving consumers a free ride.

Unilever, P&G, Coca-Cola and PepsiCo, for example, have all made massive investments in sustainable supply chains, but none has attempted to justify price increases in return. Shoppers are not being trained to know or care where their products come from. This needs to change.

One of the most compelling promises of the increasingly internet-of-things-enabled smart supply chain is dramatically better visibility into a product’s lineage. SCM World research has found visibility beyond the first tier of suppliers is still pretty terrible. With this degree of obscurity, is it any wonder that consumers default to price-based buying?

Infographic showing the percentage of respondents with "good" visibility of potential risks at each level.

Consumer tastes do appear to be moving away from the mass-market middle, as evidenced by the persistent weakness in classically centrist retailers like Sears and Tesco. Deep-discount retailers like Aldi and Costco make low prices a virtue, but compromise on selection and/or quality to get there.

Premium brands like Starbucks, Whole Foods and Burberry trumpet superior supply sources and/or production processes with loads of great branding but no real proof. In either case, the transaction depends on trust, which is fine until the brand promise comes into question.

Imagine point-of-sale technology (RFID, for instance) that tells the consumer exactly what they’re getting at the moment they buy it. Those who care will have a real-time reason to pay extra for the sourcing story they prefer.

Chipotle is obviously ready to do the work necessary to deliver on “food with integrity”. If consumers can be shown precisely what this means in terms of cost to serve, they will vote with their wallets for what they want, including sustainable local farmers or happier pigs.

Complexity costs, but maybe it’s worthwhile. Pricing needs to change to deal with this reality.

Author Kevin O'Marah

Chief Content Officer, SCM World

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