Geopolitics = dancing avocado
Supply factors that go beyond your ingredient's tiered pricing
“There were avocados in front, and in bins at every checkout, and a man in an avocado suit.” said Rex, who didn’t get a picture. (I sent him to Costco for one thing and he returned 2 hours and $314 later.)
Avocados are cheap. Everything else costs more.
Opportunistically low cost ingredients can be a shot in the arm for any business. Especially when demand remains robust, like year-around guacamole demand.
Chipotle sells a lot of guacamole, and has not increased menu prices in over 9 months, in which time avocado wholesale prices have decreased ~70%. The chain reported better than expected first quarter margins despite other rising costs such as labor and other food inflation, mostly due to cheap avocados and increasing revenues.
But for sure avocado prices will not hold and neither will Chipotle’s stock price — the chain already anticipates shifting sourcing from Mexico to California later this year. Chipotle may have to raise prices at that time, and who knows what that will do to demand. Restaurants and D2C brands can take price pretty easily, but it’s a lot harder for retail CPG brands.
If you source an ingredient from a specific growing region/season, pay attention to the factors that affect price.
It’s not just supply and demand — geopolitics will enter the fray. Avocados provide a good example of why an oversupply has wound up in the US:
Europe has significant food inflation, so when avocado prices got high earlier this year, the demand went down in that market
China is still dealing with pandemic-related shutdowns, port congestion and closures
The war in Ukraine has hurt exports and shipments of avocados into and around Europe
These are temporary issues. Just like last February when the US briefly suspended imports from Michoacan and avocado prices surged. Then a few months later Texas implemented heightened border inspections of trucks carrying commodities from Mexico, which delayed avocado shipments to the US, causing a further run-up in prices.
At every stage of business, be sure to project historical average costs into your P&L, not today’s cost. And be sure to include a margin cushion depending on supply risk factors. Go beyond your ingredient distributor to understand these factors. Talk to commodity brokers, processors, and growers to get their take on the market outlook.
All my best,