After years of touting naturally raised meat, Chipotle Mexican Grill Inc. (CMG:US) is considering changing its standards to allow beef treated with antibiotics into its restaurants amid a supply shortage.
The burrito seller is evaluating using meat from cattle treated with antibiotics because of an illness, which currently isn’t permitted to be sold in its restaurants, Chris Arnold, a spokesman for Denver-based Chipotle, said in an e-mail. The company still wouldn’t use beef from animals that had been given antibiotics to prevent disease and promote weight gain, he said.
“Many experts, including some of our ranchers, believe that animals should be allowed to be treated if they are ill and remain in the herd,” Co-Chief Executive Officer Steve Ells said today in an e-mailed statement. “We are certainly willing to consider this change, but we are continuing to evaluate what’s best for our customers, our suppliers and the animals.”
The possible change in Chipotle’s practices comes as U.S. beef production is projected to plunge to a 21-year low next year, threatening higher costs (CMG:US) and making it tougher for the restaurant chain to get enough meat to fill customers’ burritos.
While Arnold said the motivation for the potential change wouldn’t be to increase its supply of steak, Chipotle hasn’t been able to get enough naturally raised beef to meet customer demand. This year, about 80 percent to 85 percent of the beef sold at Chipotle’s more than 1,500 stores has been naturally raised, compared with almost 100 percent last year, Arnold said.
“Every year we need 20 to 25 percent more of everything than we did the year before, and the beef supply isn’t keeping up as well,” he said.
For that reason, Chipotle is trying to find new cattle suppliers and also is considering using different cuts of meat for its steak and barbacoa shredded beef burritos, he said. The chain also sells naturally raised grilled steak in rice bowls and salads at its new Asian-themed store, ShopHouse.
If Chipotle allows sick animals treated with antibiotics to remain in its supply chain, it will increase the amount of beef available to the company, said John Nalivka, a former U.S. Department of Agriculture economist and president of commodity researcher Sterling Marketing Inc. in Vale, Oregon.
“That opens up their supply quite a bit,” he said. Chipotle will be able to buy cattle outside the USDA’s Never Ever 3 program, which says cattle may never be given antibiotics, growth promotants or fed anything with animal byproducts.
“That’s really the piece that will add the greatest supply if you take that stipulation away,” said Nalivka, who says supply is dwindling.
Some Chipotle diners may be worried if the company decides to sell beef treated with antibiotics, said Bryan Elliott, an analyst at Raymond James Financial Inc.
“There would seem to be a risk that a portion of their customer base would be concerned about this,” he said. “And a portion of that portion could be very upset.”
Ells, who founded Chipotle two decades ago, in 1999 began buying naturally raised pork to start the chain’s Food With Integrity program, according to the company’s website. In 2009, Ells spoke to the U.S. Congress to support a bill designed to limit antibiotic use in farm animals. Chipotle, which doesn’t spend much money on marketing relative to other dining chains, has created short films to educate Americans about industrial farming and hosted festivals with organic snacks and local food and drink purveyors.
The U.S. Food and Drug Administration has recently stepped in to reduce the use of antibiotics in farming to ensure that drugs used to treat illnesses such as pneumonia and skin infections remain effective. Last year, the agency said farmers must have a prescription to get antibiotics for their livestock and the drugs can only be given when medically necessary.
Chipotle’s focus on selling idealism and naturally raised fare has largely paid off. Its shares (CMG:US) increased 39 percent in the past 12 months, compared with a 21 percent gain for the Standard & Poor’s 500 Index. Chipotle rose 0.8 percent to $406.34 at the close in New York.
While the chain expands -- sales (CMG:US) have more than doubled to $2.73 billion during the four years up to 2012 -- it’s had trouble getting enough naturally raised food.
“We’ve had real challenges from a supply standpoint with our meats, steak in particular,” Ells said during a conference call on July 18. “There’s a different supply and demand formula that’s going on right now. The supply just seems to be tight right now.”
That’s because cattle ranchers haven’t yet recovered from last year’s drought that made it more expensive for farmers to feed animals. Production in the U.S. will decline 5.5 percent in 2014, retreating for the fourth straight year, according to USDA data. The herd on July 1 was the smallest for that date since at least 1973, according to the average of four analyst estimates compiled by Bloomberg.
Fred Wacker, owner of Cross Four Ranch in Miles City, Montana, and a beef supplier to Chipotle and Whole Foods Market Inc. (WFM:US), says sick cattle that are given antibiotics are taken out of the naturally raised program at his farm. He wouldn’t do anything differently if Chipotle changes its standards.
“That doesn’t change anything for me,” he said. “We’re on never-ever, guaranteed all natural -- I would like them to keep on the path that they were to use all the straight natural that they can.”
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