The company’s stock is down 6% this week.
This week, Chipotle faced yet another health-related scare that could affect the way the restaurant chain does business. The company’s shares dropped 6% after an analyst questioned the impact that African swine fever could have on its supply chain.
African swine fever is quickly moving through pig farms in Asia and this could significantly impact the global pork output. BMO Capital Market analyst Andrew Strelzik is concerned that this could affect Chipotle’s profit margins.
How will the disease affect Chipotle?
According to Strelzik, if enough pigs are affected by the disease, Chipotle will be unable to meet consumer demand for pork. The analysts downgraded the company and lowered its price target to $620 per share.
Chipotle disputed this analysis, arguing that pork only makes up 2% of the restaurant’s food costs. Plus, a spokesperson for Chipotle said that the company uses higher-quality pork which is less likely to be affected by the disease.
Things have been going pretty well for Chipotle over the past year. The company has done a good job of recovering from the E. coli outbreak that hit the restaurant in 2015. The company struggled for years with falling stock prices until bringing in CEO Brian Niccol.
Since then, the company has made a number of positive moves, including updating its menu, expanding its online ordering options, and launching a new marketing initiative. It’s feasible that the swine fever could cut into the company’s profit margins but it’s unlikely to be significant.
African swine fever spreads quickly and millions of animals have already died from the disease. This could pose a short-term problem for Chipotle but it won’t last.
Managing food costs and supply issues is something every restaurant has to deal with. Even if Chipotle has to raise prices at some point or temporarily remove pork from its menu, this won’t affect the company’s long-term outlook.
Plus, Chipotle already dealt with a major health crisis during the E. coli outbreak. This could have permanently damaged the company’s reputation but instead, Chipotle’s stock is up more than 60% year-to-date. So it’s likely these concerns are overblown and the company will manage just fine.