Editors' pick: Originally published Jan. 27.
Updated from 2:09 p.m.
The 20% tax on imports from Mexico floated on Thursday by the Trump team to pay for a border wall would have a big impact on prices for a range of agricultural goods, chief among them being the avocados Chipotle uses in its trademark guacamole. About 93% of Hass avocados sold in the U.S. come from Mexico, according to the Hass Avocado Board. Just last week alone, the board estimated Mexico sent 53 million pounds of avocados to the U.S., significantly topping imports from other key growers such as the Dominican Republic and Chile.
Chipotle likely also would be walloped by an increase in the price of tomatoes as roughly 71% of tomatoes sold in the U.S. come from Mexico, according to the U.S. Department of Agriculture.
Chipotle's guacamole operation is no joke. The company uses, on average, 97,000 pounds of avocados every day to make its guac (which costs $1.95 for customers). That adds up to 35.4 million pounds of avocados every year. Chipotle estimated that every $10 per case price movement up or down in avocados will impact its earnings by a whopping 17 cents a share.
If Trump gets his way, Chipotle could be put in a rather tough spot. Either the company eats the cost of higher avocados and watches profit get whacked, or it passes along the higher prices to customers and watches them stop ordering guacamole (which will also hurt profit and the overall dining experience). It's indeed a lose-lose.
Unfortunately for the struggling Chipotle, even without Trump's Great Wall Tax, the next several months could prove rough when it comes to avocados.
Avocado supply declined during the summer because of drought conditions in important growing regions like California, which sent prices higher. Chipotle said it paid an average of $30 per case for avocados during the the first half of 2016, but saw it skyrocket to $80 a case by late October. As a result, it expected food costs to remain elevated for the fourth quarter, with some relief beginning early this year.
Adding insult to injury here is that Chipotle sells two of the most popular Mexican beers -- Corona and Modelo -- in its stores. Constellation (STZ) - Get Constellation Brands, Inc. Class A Report , maker of Corona and Modelo beers, both brewed in Mexico, sold $3.44 billion worth of beer in the U.S. in 2016, according to the company's latest annual report. Should the beer maker be slapped with a 20% border tax, it would likely move fast to hike prices to customers such as Chipotle. And similar to avocados, Chipotle would probably be forced to raise prices on the beer it sells. Consumers may decide to trade down to cheaper soda or hell, even ask for free water with their dinner.
The minor good news for Chipotle is that the border tax with Mexico isn't a sure thing. White House press secretary, Sean Spicer, moved to temper Trump's remarks on Thursday, saying the plan was only "one idea" that may work to finance the wall.
Shares of Chipotle finished 0.5% lower at $416.60 on Friday's session.
And to think, Chipotle investors thought they only had to deal with continued poor sales and the involvement of activist investor Bill Ackman this year.
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