Chipotle Mexican Grill (CMG) is exposed to three primary risks:
- price risk
- interest rate risk
- currency risk
Chipotle Mexican Grill, along with other players in the restaurant industry such as Panera Bread (PNRA) and Potbelly (PBPB), faces a constant pressure from price risk. It’s important to fully understand how these cost fluctuations are influenced. Most of the food ingredients are commodities, which are affected by weather, seasonality, and demand and supply. The company mitigates these cost fluctuations by engaging in forwards contracts ranging from one to 18 months with suppliers to supply the commodity at a fixed price in the future. However, the company states that it purchases the majority of its ingredients in the spot market.
As of June 30, the company had $730.6 million in investments, cash accounts—which are interest bearing—and insurance-related restricted trust accounts. The company also had $389.2 million in accounts with earnings credits and is classified as interest income. The combined weighted average rate for these investments is 0.33%. Restaurants and establishments with high financial leverage, such as those found in ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY) and the PowerShares Dynamic Food & Beverage ETF (PBJ), face a higher interest rate risk.
Currently, the majority of the company’s operations is in the U.S. so it does not face a huge risk from exchange rate fluctuations. As the company starts expanding internationally, this risk will become more prominent as we saw in the McDonald’s (MCD) company overview series.