Chipotle has a new crisis looming
Trump has proposed a 20% tariff on goods from Mexico as a way to help pay for a wall along the US-Mexico border.
The tariff proposal, which the Trump administration walked back saying it was just one option being considered, could make goods from Mexico more expensive. That could pose a huge problem for restaurant chains like Chipotle that heavily rely on Mexican imports.
An avocado price increase in particular would be a huge challenge for Chipotle, which goes through more than 99 million pounds of avocados each year - and during some months, sources them exclusively from Mexico.
By Kalinowski's estimate, Chipotle may get as many as 70 million pounds of avocados from Mexico annually.
"Our belief is that the company generally obtains about 70-90% of its avocados from Mexico, all of its limes, the majority of its jalapenos, less than half of its tomatoes, and small amounts of other items (e.g., cilantro)," Kalinowski wrote in a note published Tuesday. "In other words, should a 20% tariff be enacted for goods imported from Mexico, Chipotle likely would bear the biggest brunt of this potential impact on food costs compared to the other companies we cover."
If a border tax is enacted, it's likely that restaurant chains would be forced to increase menu prices to offset the higher cost of goods - and protect profit margins - by passing it on to customers.
But Chipotle doesn't have much flexibility to pass on extra costs to customers when the company is still trying to recover from a months-long E. coli outbreak that sent its sales tumbling.
Revenue declined 14.8% to $1 billion in the third quarter and same-store sales, or sales at stores open at least a year, dropped 21.9%. Net income for the quarter was $7.8 million, a decrease from $144.9 million for the period last year. The company reports fourth quarter earnings on Thursday.
Chipotle declined to comment on how the proposed tax could affect the company, saying that at this point it's "purely speculative."
"There are a host of variables that can impact upon food costs (weather, supply and demand, and public policy decisions, among others)," Chipotle spokesman Chris Arnold said. "If any events impact our food costs in material ways, we'll make that information available in a timely fashion, but we're not going to speculate about what any of these events might mean."