Chipotle’s 2023 ESG Priorities with Laurie Schalow

On this episode of TD Cowen’s Restaurant Rendezvous Podcast Series, Laurie Schalow, Chipotle’s Chief Corporate Affairs and Food Safety Officer joins Andrew Charles, Restaurants Analyst, where they discuss the company’s 2022 Sustainability report and ESG priorities that are central to Chipotle’s culture.

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Transcript

Speaker 1: Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us, as we converse with the top minds who are influencing our global sectors.

Andrew Charles: I’m Andrew Charles TD Cowen’s Restaurant Analyst. Today, I’m pleased to host Laurie Schalow, Chipotle’s Chief Corporate Affairs Officer, to discuss Chipotle’s recently published Sustainability Report and ESG-focused strategy. Laurie, thank you so much for joining me today.

Laurie Schalow: Thank you, Andrew. Glad to be here.

Andrew Charles: Laurie, I wanted to start off high-level. What would you highlight as the key messages in your 2022 Sustainability Report for your ESG-focused constituents, and how those have changed versus your 2021 report?

Laurie Schalow: Well, our report is focused on three key areas. It’s people, food and animals, and the environment. And typically, we’ll set goals around each of those. And we do that consistently year after year. Some of our goals are longer term, 3, 5, 10-year goals, and then others are short-term goals that we hope to accomplish within the year. So it’s a nice blend of showing what we’re doing in the here and now and things that we can have an immediate impact on as well as some of the longer term, more difficult, challenging goals to accomplish. So we’re really proud of the report. I love the design and the look and the feel of it, but we also hope to be very transparent and share what analysts and investors as well as consumers and special interest groups are interested in.

Andrew Charles: Yeah, and I just add, I think it’s great that you basically doubled the content from last year, adding a lot more content, a lot more graphics, just really a user-friendly and really enjoyable read. And so I’d give you a lot of props for the improvements that you’ve made for a very strong 2020 report as well. And one thing that I think about is that Chipotle was one of the first restaurant companies to adopt ESG parameters in determining a portion of executive management’s incentive compensation. Can you talk about the 2023 ESG goals that management will be evaluated against?

Laurie Schalow:  Sure. We did assign three new goals this year, and they’re also focused on those three pillars. After accomplishing our goals last year, we wanted to make sure that we had quantitative and very meaningful targets that we were working on this year. So we have a goal for food and animals to purchase at least 37.5 million pounds of local produce for this year. Around our people, we want to make sure that we are maintaining a high level of retention rate among our diverse employees, as we do for both our RSCs, which is our restaurant support centers, as well as out in the field. And then from an environment perspective, we have a goal to reduce waste by 5% by the year of 2025. And so this year we have a goal to increase our composting in our restaurants, which helps us achieve that overall goal.

Andrew Charles: And really, that segues well to my next question, that as you guys balance near-term goals and long-term goals around ESG, how does the board determine annual ESG goals just given targets are based on multi-year ESG initiatives for several aspects?

Laurie Schalow: Yeah, it’s a process. So what’s interesting is this year we completed a new materiality assessment, and we hadn’t done one in about six years so it was an opportunity to do that. And the materiality assessment looks at all of our stakeholders and it compares it to what we as a business think is important to what all of our stakeholders believe is important, and it then helps guide our decision making on where we should be spending our efforts and where we should be setting our goals. So that was very helpful this year. But in terms of the short-term and the long-term goals, I think it’s important to have a balance of mix of both, and just like I mentioned with our waste goal. So we have an overall waste goal that was a five-year goal, but it’s also important to set short-term goals to make sure you’re tracking against that and being very transparent to report out on those goals. And that’s what our board likes to see and is directing us to do as well.

Andrew Charles: Super. Okay, let’s dig into the report a little bit. So we work with Truevalue Labs, which identifies customer welfare or restaurants’ nutrition and food transparency as the key considerations for ESG investors looking at the restaurant industry. Chipotle achieved the 2022 goal of purchasing more than 57 million pounds of organic transitional and/or locally grown ingredients. When we think about 2023 and beyond, how do you think about continuing your goal to expand organic and locally grown produce?

Laurie Schalow: Yeah, it’s very important to us. So we have about 3,200 restaurants today, and with our long-term goal to more than double those restaurants, we need more local farmers and local sourcing to help us provide those ingredients. Our Food with Integrity principles make it challenging for us to make sure that we have that supply. So investing in farmers and in next generation of farmers and local sourcing is very important and that’s why it is one of our goals that we’re tying to our executive compensation this year. We also have a new fund that we created, it’s called Cultivate Next, and it allows us to invest in companies who can help us achieve some of our goals, especially around ESG.

 One really good example that is going to help us with this local sourcing is the investment we’ve recently done in Local Line, which brings technology to the smaller farmers, local farmers, and allows them to make sure that all of the crop that they’re harvesting can be utilized locally by using technology to let everybody know what the supply and demand is. So we’re trying to really look at ways that can help us make sure that we can maintain that local sourcing that’s going to be absolutely critical to us as we continue to grow.

Andrew Charles: Very well said. Shifting gears, in early 2022, you ran a plant-based chorizo limited time offering that complimented soy-based Sofritas. What would you need to see to innovate other plant-based offerings, recognizing that you guys do it in a far more natural way relative to lab-grown products?

Laurie Schalow: We’ve had Sofritas on the menu for a long time and we have looked at different options for consumers, and there certainly is a demand and we’d like to also help move consumers more to plant-based options, even if it is a 50/50 split that they might want on their menu or a Meatless Monday type option. So our culinary team and our chef continue to work on both enhancing our current Sofritas offering as well as looking at others. And I mentioned the Cultivate Next Fund, another company that we are investing in is called Meati, which allows us to also explore and see what we can do with that product and perhaps put that on the menu down the road. So it is something we’re going to continue to look at, explore and hopefully provide some options for consumers down the road.

Andrew Charles:  That’s great. And I definitely want to talk about Meati later on in the conversation. But first, and this is virtually the opposite to my last question, the amount of beef purchased increased 20% last year, far outpacing the increase in chicken and pork. What drove this, considering 2021 included a successful and my personal favorite menu item of brisket?

Laurie Schalow:   One is growth. So we did open more restaurants, but you’re right that steak outpaced chicken, which is our number one seller, and pork. And I think the main reason for that was we had a limited time offering with Garlic Guajillo Steak, which was very popular for us. So I think that’s the reason we saw that main increase. It was just incredible product.

Andrew Charles:             Got it. And just my last one on customer welfare. You kicked kicked off 2023 with seven new Lifestyle Bowls and an AR lens Snapchat campaign on January to promote wellness and drive engagement with younger consumers. Can you talk about your learnings from launching the new lineups in digital engagement, and what is your aptitude to do something similar in the future?

Laurie Schalow:One of our insights around our Lifestyle Bowls that we started several years ago, tied to January when everyone is very health-conscious, is that consumers don’t really want to diet. And diets are fads, they might work for short term, but what we found in research and the insight is especially among millennials and Gen Z consumers, that they really want to have a lifestyle choice that is going to taste great, be convenient, fit within what they’re doing. So they enjoy going out with friends or ordering Chipotle, and so let’s have some options that are easily compiled for them. So these Lifestyle Bowls are in the main menu, you don’t have to think about which ingredients should I add or delete? How many calories does this contain? Is it a vegan bowl for me? So we have these Lifestyle Bowls that are already pre-configured and you can easily just click on it and you know exactly how it’s fitting within your lifestyle.

  Instead of labeling bowls like Whole30 and things like that, we’ve instead made them lifestyle-oriented. So you might have seen Balanced Macros or a Veggie Full Bowl, a Wholesome Bowl, High Protein Bowl, for our athletes, love that one. So what we’ve done is pre-configured these bowls. You can quickly order them and they fit within your lifestyle, and you don’t feel like you’re sacrificing or having to give anything up. So those have worked really well for us, consumers really love that option.

Andrew Charles:  Yes. And for someone who’s done Whole30 before, I can attest that there’s very little options out there, especially at restaurants. So it’s a big win obviously to have something to delicious that you can eat during that time. I want to turn now to labor practices, which Truevalue identifies as the second most important ESG consideration in the restaurant industry. I was pleased to see that last year you achieved a 90% rate of internal promotion for salary managers, up nicely from 77% in 2021 and in excess of your 70% target. Looking ahead, do you anticipate 90% will be a sustainable level?

Laurie Schalow: We do. I know that’s very high, but again, when you think about the growth that we have in front of us, we need our current employees to want to and to continue to grow with us. So as we open 250 plus restaurants this year, we need to promote 250 individuals into management roles. So we absolutely think that we can maintain that high level of internal promotions mainly because of our high growth.

Andrew Charles: Very good. I wanted to also talk about the always on employee listening program launching in 2023. Can you talk a little bit about this and how it differs from the prior program in place, as well as the solutions you’re looking to achieve with this?

Laurie Schalow:  Sure. And this is about the way that we get feedback from our employees. So in the past, and a lot of companies do an annual culture survey, if you will call it, a pulse survey, where, at a snapshot in time, they’ll blanket send a survey out to all employees to understand how they’re feeling against different metrics that you want to evaluate on. What we are shifting to is instead of just doing it at one time of the year, the employee may be brand new, may have been here for 15 years, we want to make that more time-based so that we touch base with employees maybe at 30 and 60 days in and then again at six months and their annual anniversary.

So the length of time that they’ve been with the company versus when we’re doing an annual survey. Too early to tell yet, but we do believe that that’s going to give us much better data and insights into how are employees feeling, how are they feeling about the leadership of the company, the culture of the company, and where we can focus to get better to make that experience for them just that more meaningful.

Andrew Charles: That’s great. Definitely look forward to talking about some of the insights that you guys pick up as you have details to share on that. My last question around your labor practices, if you could talk about the quarterly bonuses that are paid to eligible crew members. This is a bit differentiated in the restaurant industry and I was curious, what are the metrics evaluated as part of that bonus?

Laurie Schalow:  Yes. We started this bonus back in 2019. And it is unique, but we wanted to find a way to allow our hourly employees to also take advantage of bonuses, which are typically only available to salaried or general managers in our restaurants. And so the hourly crew members have an opportunity to earn up to a month’s salary by achieving these bonuses. So again, they’re done quarterly and they’re based on different metrics around certainly our cash flow, food safety, our speed of service, or we call throughput. And if they achieve those every quarter, then they can achieve a one-week salary bonus and then that can add up to a whole month by the end of the year. So that has been really powerful for us.

Andrew Charles:  Absolutely. Let’s transition now over to environmental factors. Your big environmental goal is to reduce greenhouse gas emissions by 50% by 2030, a very ambitious target. One of the key initiatives includes an all-new electric restaurant design that works to maximize energy efficiency. Can you talk about the strategy to scale that to other restaurants as well within the targeted 7,000 locations, as well as anything else you’d point to that’s going to help you achieve your target?

Laurie Schalow: Sure. So we recently just opened three restaurants that are all-electric and our goal is to just like we put anything through a stage gate process here at Chipotle, is to evaluate that over the coming months and determine what elements of that completely electric restaurant make sense to put into all of our future new restaurant openings. So we’re going to continue to open several more, probably about 100 of these electric restaurants with the different components so we can evaluate that. What it’s doing though is helping us achieve our overall goal that we talked about, which is a 50% reduction in our Scope 1, 2, and 3 emissions by the year of 2030. So this is very important to us that at the restaurant level we need to understand, so small changes or big changes, whether it’s putting solar panels on the roof, having EV charging stations, having all-electric equipment and grills, HVAC, monitoring, many, many different components that go into this restaurant, which ones are going to give us the biggest impact that we should be rolling out nationwide.

So I think you’re going to see a lot more of those elements pop up in all of our new restaurants, and we’ll actually go back and retrofit some of our restaurants with those elements as well.

Andrew Charles: Great. And before we wrap, wanted to come back to Meati and learn more about how your investments in Meati as well as Hyphen, the new automated technology, as well will contribute to your long-term ESG story.

Laurie Schalow: Yeah, it’s been great partnerships so far. The Cultivate Next Fund, we are constantly looking at partners that will help us achieve our overall mission to cultivate a better world. And so part of that is looking at ESG partners that can help us achieve our goals, also looking at food and agriculture, which we talked a little bit about, that’ll help us with local sourcing, also to support our farmers. Some of the things we’re looking at will help our farmers to either be more efficient, certainly have more cost-effective and more sustainable practices on the farms, which long term will help them as well. Hyphen has been an incredible partnership for us, that that’s going to allow us to automate, and we call it cobiotics, some of our operations in the restaurant to help our employees. So we’ve been looking at what is it that employees wish they didn’t have to do. They want to focus more on the culinary and the customer service aspect of some of their roles.

So things like Hyphen, which can automate some of the process of putting together our bowls and salads and things like that, are going to be very helpful with for us in the future. So we’re super excited about those partnerships and definitely have more to come.

Andrew Charles:  Laurie, I had to Google, cobiotics is not a word that I’ve heard before. It doesn’t look like a word that’s been used before, and so I think you guys definitely need to coin that because that is absolutely where the direction of restaurant automation is heading, for sure.

Laurie Schalow:   Right. The whole point is it’s not just about robotics and it’s not just about the consumer, it’s about how do they work together symbiotically within the restaurant.

Andrew Charles:     That’s terrific. And my very last question, because I don’t think it would be an interview with a Chipotle executive if I didn’t ask this question, what is your go-to Chipotle?

Laurie Schalow: Oh, my go-to, I have two, but I’ll tell you my go-to one that I probably eat more often is chicken bowl with brown rice, our salsa, our corn salsa, a little bit of sour cream and a little bit of cheese on top and always guac and chips on the side.

Andrew Charles:  Excellent. Well, we look forward to the Chipotle apps showing the Laurie Schalow Bowl. I think that’s one that’s definitely going to be very popular, I think, with guests. And so Laurie Schalow, Chipotle Chief Corporate Affairs Officer, thank you so much for joining me today.

Laurie Schalow: Thank you so much, Andrew.

Speaker 1: Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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