Chipotle’s ESG Priorities

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On this episode of Cowen Insights, Andrew Charles, Cowen’s Restaurants Analyst, caught up with Laurie Schalow, Chipotle’s Chief Corporate Affairs and Food Safety Officer, to discuss the company’s 2021 Sustainability Report Update and ESG priorities that are central to Chipotle’s culture. Press play to listen to the podcast.

Transcript

Speaker 1:

Welcome to 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, Cowen’s restaurant analyst. Following our recent Chipotle video highlighting the company’s digital drive through initiative, today we are joined by Laurie Schalow, Chipotle’s chief corporate affairs and food safety officer to discuss the company’s 2021 sustainability report and ESG priorities.

Andrew Charles:

Laurie, thanks so much for joining us today.

Laurie Schalow:

Oh, I’m glad to be here. Thank you.

Andrew Charles:

I’d love to start out and just ask you, what would you highlight as the key messages in your 2022 sustainability report for your ESG focus constituents?

Laurie Schalow:

Our sustainability report is broken into three areas, food and animals, people and the environment. I’d say one of our greatest assets is certainly our people and we focus a lot on that in our report this year and really it’s our people and their growth and development that are going to allow us to achieve our growth in hopefully getting to 7,000 restaurants in North America and not too long of a period of time here. So we have more restaurants, we have more opportunities to grow and develop our employees and so that’s important to us. And in fact, in our report, we published that last year, 19,000 of our individuals were promoted internally and 90% of our restaurant management teams were promoted internally as well. So that is a huge focus for us. It always has been and will be, but is something we definitely showcased in our report.

Andrew Charles:

Okay, great. We found it very noteworthy that not only senior management’s variable compensation tied to ESG goals, but the mix of performance based compensation tied to ESG increased from 10% in 2020 to 15% in 2021. What led to the board’s decision to increase this mix given Chipotle’s already been an industry trailblazer with ESG?

Laurie Schalow:

This is something I’m very passionate about. So we are a purpose driven brand. Our mission is to cultivate a better world. And so everything we do is rooted in that mission and ESG is also a very strategic part of who Chipotle is. And so it really just made sense for us to include that metric, to ensure that our leaders are setting the right example and for our employees also in fulfilling our mission. And to be honest, it’s mostly about transparency and accountability and I think that’s important. And the board agreed with us that increasing that percentage from 10 to 15% made a lot of sense for this year.

Andrew Charles:

Great. Thank you. Two part questions start off for you. What are the 2022 ESG goals that management will be evaluated against and how are annual goals determined giving you a multiyear ESG initiatives that you were executing against?

Laurie Schalow:

Yeah. When we were setting the ESG goals for that, for our leadership team, we looked at the three parts of our business that we focus on, which is the food people, animals, and the environment, and for food in animals, we want to increase our pounds of organic, local or regeneratively grown and raise food in our restaurants so going from 55 million pounds to 57 million pounds this year. And then for people, we really want to increase diversity amongst our internal pipeline of candidates for promotions into our salaried restaurant positions, as well as at our corporate offices. And we want to increase that above our current rate of 60% so that’s our people goal. And then lastly, for the environment we recently sent our SBTI goals around scope one, two, and three to reduce emissions by 50% by the year 2030. So to make sure that we’re showing progress in that area for the environment, our goal we set to reduce our scope one and two emissions by 5% for this year.

Andrew Charles:

That’s all great stuff. Okay, terrific. So maybe just delving down, we work with Truevalue Labs, which identifies customer welfare or restaurants, nutrition and food transparency as the key consideration for ESG investors, looking at the restaurant industry and what I thought was pretty interesting is that Chipotle saw a 30% increase in total produce purchased, which outpaced the 26% sales growth in 2021. Meanwhile, the amount of beef you purchased decline nearly 8% in 2021, despite the success of the awesome brisket promotion, which is my personal favorite. Am I wrong to think the mix of salads and plant-based offerings increased as a percent of your mix from 2020 to 2021?

Laurie Schalow:

It’s a really good question and I enjoy thinking about this because beef has been relatively stable. It’s had up and down or in the early pandemic, we actually saw an increase in beef purchases and we think people were, it was comfort food, right? Maybe treating themselves a little bit and then it settled off. And certainly there’s been pricing and supply chain challenges with beef. But to your point about increase in produce, when I went and looked at those numbers, it actually was mostly driven by other factors, not so much salad, but think about, we had cauliflower rice last year. So we used 8.5 million pounds of cauliflower last year that we didn’t use the prior year. Guacamole, so avocados were up. I think it’s a factor of other items of produce that are driving that versus people choosing salads, or maybe even some plant-based products over our beef purchases.

Andrew Charles:

Got it. That’s helpful. You saw the mix of Chipotle’s produce purchases for local and organic produce stay pretty flat from 2020 to 2021, at about 10 to 11% on the local side and 3% on the organic side. And I recognize that avocados represent about a third of produce needs and can’t be sourced locally outside of Southern California but curious to know what’s a reasonable level that local and organic can account for within long term produce purchases?

Laurie Schalow:

Yeah. I think there certainly are challenges, right? Like you pointed out with avocados on not being grown locally to our restaurants, but it will always be a strategic priority for us, our food with integrity principles and to source locally, wherever we can. So we have spent more than $400 million in food premiums over the last two years to buy responsibly sourced and humanely raised ingredients. And we also invest in local farmers and growers to meet our standards so that we can source from them. And if you think about the growth that we have ahead of us, in terms of restaurants, we need more local farmers and growers. So I think we’ll continue to focus in that area. I don’t, you’re right. At some point we’ll probably reach a maximum, but I think every year we’re going to continue to push ourselves to increase that number just a little bit higher.

Andrew Charles:

And Laura, that’s a great segue way to my next question that you mentioned earlier, the goal to purchase more than 57 million pounds of organic and or locally grown produce in 2022 is praiseworthy, but looks like a pretty low level, just relative to 55 million pounds purchased in 2021. Is there anything that’s just near term challenges to continue your goal to expand organic and locally grown produce in the near term?

Laurie Schalow:

Yes. Thank you for noting that it’s 2 million, it seems like a small number and it is relative, but it’s realistic because in order for us to partner with suppliers, they have to meet our food with integrity standards and our food safety standards. And a lot of times we’re vetting out new partners, they may not be able to meet those standards. So we again do want to invest in them, help them get set up so they can meet the standards and we can purchase from them. But especially if you think about farming industry, right. Over the last five years, the US agriculture has lost 40 times more farmers than it gained so that it continues to be a huge challenge for us and one that we are backing with everything we’re doing across our marketing and our promotions, because we want people to know that the future of farming is at risk.

Laurie Schalow:

It is very difficult for farmers these days. And so, we’re supporting them with a 5 million dollar commitment over five years to help the next generation of farmers. We do grants and scholarships and other promotions. We’re partnering with the National Young Farmers Coalition and we’re trying to actually advocate for policy change in the 2023 farm bill. And that would allow better access to land for farmers because that is what we’re hearing from them is one of their biggest challenges. Land is quite expensive and a lot of developers would like to take up that land and build versus having farming. And it’s critical to what we want to continue to do to provide that local sourcing. And so we’re huge supporters of farmers and hope that others will support us in that initiative as well.

Andrew Charles:

That’s a great overview. Thank you. And just my last question, just on the food side, one of the goals laid out in the prior years report was to develop a plant-based protein, which you did with plant-based chorizo and LTO at the start of 2022. Can you talk about the learnings from the plant-based chorizo and your aptitude to do another plant-based protein in the future beyond sofritas?

Laurie Schalow:

Yeah, I was talking to our chefs and developing a vegan product that is uniquely Chipotle was certainly a challenge for them because of our food with integrity principles, right? We use no artificial flavors, colors, preservatives, greens, glutens or soy in the product. It was quite a challenge for them, but I think they did an amazing job and our customers told us the same thing. It was very successful for us when we had it on the menu and we will continue to explore other [inaudible 00:09:04]. I will say that we have sofritas on our menu year round so we do offer that as well as other vegetarian options, but certainly something we’re going to continue to work on.

Andrew Charles:

Great. And I’ll just end the food conversation that it was killer to put sofritas on quesadillas for those, if it ever comes back.

Laurie Schalow:

Yes.

Andrew Charles:

Great. Let’s turn to labor practices, which Truevalue identifies as the second most important ESG consideration restaurant industry. We started off the conversation that you guys target over 70% of salaried manager promotions to be filled by current promotions. And I’m pleased that you guys exceeded this at 77% in 2021. I was curious, what’s the bottleneck to getting this closer to 90% or a hundred percent as I realized that’s a bit unrealistic, but maybe talk a little bit more about the bottleneck around how you can continue to get above target.

Laurie Schalow:

Right. With 77% of our apprentices and our general managers were promoted from within last year, which we’re very proud of, but obviously would love to get that higher as you pointed out. And so with our long term goal of more than doubling our footprint here in north America, we absolutely need more internal promotions, something we’re very focused on. So, we offer benefits that we have seen lead to retention such as our debt-free degrees and other programs.

Laurie Schalow:

And we know that employees who participate in debt-free degrees, our education programs for example, the retention rate is three and a half times as high as those who do not. So that’s critical for us, right, if they can stay with us and grow with us. We need them in order to build and open more restaurants so we think that’s critically important. And so I think just natural, right, as we’re opening more restaurants will have more individuals to promote. I think there’s also always a healthy percentage of external hires, right? I think it’s good to have some outside, some fresh thinking as well. So not sure what that ultimate mix is, but I think you’ll continue to see that number go up this year.

Andrew Charles:

Laurie, you touched on before some of the benefits that Chipotle offers to crew members. And one thing I think is pretty unique is the quarterly bonuses that are paid to eligible crew members. And wondering if you could talk a little bit about this. I mean, it certainly differentiated in the restaurant industry and was curious, what are the metrics evaluated as part of that bonus?

Laurie Schalow:

Our crew bonus program, we know it is very unique in the industry and quite proud of that as well. And so we offer hourly employees the opportunity to earn up to an extra month’s pay each year by participating. And basically it allows all of our hourly employees in a restaurant, if they meet certain criteria, which are focused around our sales, food safety, cash flow, and throughput, if they meet those criteria that are set every year, then they can earn that bonus. So it’s a nice incentive. It’s also a nice retention play as they work towards those goals.

Andrew Charles:

Before we wrap, I want to touch on environmental factors that stood out to me. The big environmental goal is to reduce greenhouse gas emissions by 50% by 2030, a very ambitious target. What are the key initiatives to really achieving this?

Laurie Schalow:

Yeah, we set our science based targets at the end of last year and that 50% reduction by 2030 across scope one, two and three. And before we set that, we wanted to make sure that we had a path forward to achieve that because it’s an ambitious goal. And while others are setting net zero, we wanted to make sure again, that we could deliver on the 50% before we’d get to a net zero goal. So what we did is we created an internal climate steering committee and we looked at the four most carbon intensive functions within our business and we set up, we have working groups around those four areas. For us, it’s our restaurants, transportation and warehousing, food supply chain and waste and packaging.

Laurie Schalow:

And so we have these teams who are dedicated and focused to working on initiatives and working with our partners and supply chain so that we can get those reductions across scope one, two and three. And in fact, just to keep ourselves on track and to hold ourselves accountable, we set a goal this year to decrease our scope one and two emissions, as I mentioned, by 5% by the end of the year.

Andrew Charles:

And the last question I have for you today is that your prior report aligned with GRI standards, but there was no reference to this in your 2021 report. Do you guys aspire to align with GRI or SASB reporting standards either later in 2022 or 2023?

Laurie Schalow:

We do. In the past, we have our full report so every other year we published a full report and then it’s an update the odd year so this was an update report. Our full reporting is to GRI standards, however, based on shareholder feedback and on industry trends, to be honest, we’re looking at TCFD reporting, which is the task force for climate related financial disclosures. I say that with caution, because with the SEC climate disclosure rules that they’re proposing, we’re looking to see how that’s going to come out and if that will be in connection to GRI, TCFD or some other form of reporting, but we absolutely will stay committed to doing some type of more in depth reporting going forward.

Andrew Charles:

Super. No, I think that transparency is great and so needed right now. Laurie, thank you so much for joining us today. It was great catching up with you guys and your sustainability report and your ESG priorities, something obviously so intrinsic with the Chipotle brand.

Laurie Schalow:

Thank you. Always happy to talk about it. Appreciate you having me on.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of Cowen Insights.


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