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Healthy Chains?: Chipotle, Panera Starting to Go Organic and Natural

  • Healthy chains: Chipotle, Panera go organic and natural
    By Jeff Richgels
    The Capital Times - Madison, Wisconsin, Sept. 15, 2006
    Straight to the Source

Rich Owens and Brian Marks enjoy patronizing restaurants that embrace "good" agricultural practices.

But the food has to taste good.

Chipotle Mexican Grill met both criteria on a recent lunch trip with a group
of fellow students studying Vietnamese at UW-Madison.

Their choice, they said, was based on convenience, Chipotle's embrace of
what it calls "Food With Integrity," and - last but certainly not least -
taste.

HENRY A. KOSHOLLEK/THE CAPITAL TIMES

Ale Haesemeyer, manager of the Chipotle Mexican Grill on State Street,
displays two of the restaurant's dishes combining healthy ingredients with good taste.

"We were on campus and we all wanted something quick and we didn't want to eat trash," said Marks, here from the University of Arizona. "This isn't junk. With an animal that's fed a different diet you can tell the
difference."

Owens said he actually has visited a farm in Iowa that supplies Chipotle
with natural meat.

"It's good to know that this is free-range," said Owens, here from the
University of Georgia. "Even though Chipotle is owned by McDonald's, I'm
impressed with the social consciousness. And it's good."

"Taste is going to be No. 1," he added, "but I try to patronize companies
that are doing better."

Sales statistics indicate that Owens and Marks are part of a trend of
consumers embracing organic and natural foods in casual/fast casual dining, one of the few bright areas in that stagnant segment, according to a stock research report from CIBC World Markets earlier this year.
In 2005, Panera Bread led the segment - which excludes basic fast food
eateries like McDonald's and Subway - with $600 million in take-out sales,
followed by Whole Foods at $450 million, Applebee's at $431 million and
Chipotle at $315 million.

While Whole Foods isn't often thought of as a restaurant, it has been
drawing in hordes of customers hungry for its organic offerings - it leads
the industry with $2.64 million per store in 2005 (see accompanying story).

Panera and Chipotle, meanwhile, have been enjoying same-store sales growth well above the industry indexes for casual dining restaurants and
traditional fast food eateries, CIBC reported. And that can be attributed to their embrace of natural and organic offerings, CIBC said.

Panera serves only all-natural, antibiotic-free chicken, as well as organic
kids' meals, and Chipotle touts its Food With Integrity philosophy and
offerings.

"The natural/organic movement is a blind spot for most large chains in our view," CIBC said in its report. "The action call here, in our opinion, is to pay closer attention to Panera and Chipotle, the only two public chains that appear to understand this phenomenon and are capitalizing on it."

With taste still foremost in the minds of consumers such as Marks and Owens, it should come as no surprise that Chipotle's Food With Integrity started with a simple quest for better tasting Carnitas about five years ago.

"I sort of wish I could say it started with some great epiphany or really
keen market insight that said people are going to be paying more attention to what they eat and where it comes from and all of that," Chipotle spokesman Chris Arnold said. "In our case, it started with a menu item that wasn't selling very well, in part because it wasn't very good."

The company, Arnold added, came across an article about the farms of Niman ranch, a co-op of small farmers raising pigs "sort of the old-fashioned way - in open pastures or deeply bedded barns and fed a pure vegetarian diet and never given antibiotics or hormones."

That naturally raised pork tasted very good, Arnold said, and Chipotle also was intrigued by the story in contrast to the more standard, industrial hog farming method in the U.S.

"We decided we didn't want to be part of that (industrial farming) and
started buying from Niman," Arnold said.

Because of the higher cost of naturally raised pork, Chipotle raised the
price of its Carnitas by $1 - a fairly high percentage - when it switched
them to natural pork in 2002. But the company accompanied that with in-store information about what it was doing and why.

And sales jumped.

"I think what was happening is we had a lot of people who were trying it
because of the story and kept coming back to it because it was so good,"
Arnold said.

From that experience came the company's philosophy.

"When we started, everything we served was fresh - no frozen foods or dried herbs," he said. "But from the switch to the naturally raised pork we sort of had this epiphany that fresh isn't enough anymore. It's really just a starting point. That sort of set us on this mission to look at everything we use and try to find better ingredients - in all that that means. Better tasting. Better for the environment. Better for the farmers. And better for the animals themselves."

"And we started to call the idea Food With Integrity."

The traditional pork industry has worked to eliminate fat in order to be
"The Other White Meat," while naturally raised pigs develop more back fat to protect themselves from the elements, which creates more marbling in the meat and a much juicier and more moist piece of pork, Arnold said.

Today, about half the chicken and one-third of the beef Chipotle serves is natural. In addition, about one-fourth of its beans are organic.
In total, Chipotle serves about 15 million pounds of naturally raised meats annually, the most of any U.S. restaurant chain.

"It's our hope that some day everything will fall under Food With
Integrity," Arnold said.

With the natural and organic industries booming, and the effort needed by farmers to meet the applicable standards, finding supplies is an issue,
Arnold said (see accompanying story).

The company finds its suppliers through networking and simple searching. It ensures practices are being met by setting protocols and auditing suppliers, Arnold said.

The supply limitations mean that the amount of natural meats used by
individual stores may vary, although the menu items are the same.
"All our naturally raised chicken is on the (east) side of the country
because that's where suppliers are," he said. "We don't freeze things so
it's harder to ship from Pennsylvania to California."

Arnold said he doesn't think Chipotle is hurt by the anti-chain feelings of
many natural and organic supporters. (McDonald's is in the process of
selling its ownership stake in Chipotle.)

"So many people in America have this love affair with small, independent
businesses and like to vilify big businesses of any kind," he said. "And I
don't think big is inherently bad. When a bigger business uses its size and buying power to make positive change I think that's a good thing.

"In some ways I think Chipotle is the anti-chain chain. We also try to run
our restaurants as individual neighborhood restaurants - they're not all the same and they don't really feel like chain restaurants."

Ale Haesemeyer, manager of the Chipotle on State Street, said she has heard anti-chain comments but adds that "once people eat here they realize it has much more of a feel of a local restaurant. We have customers who may eat here five times a week and we really build a relationship with them. They know us by name and we know them by name."

The local Chipotle restaurants serve only naturally raised chicken and pork, but not natural beef because there isn't an available supply, the company said.

"I think that some of our customers eat here because the food is great and they're not really aware that they're even consuming naturally raised
meats," said Haesemeyer, who has worked at the State Street store for four years. "We do have other customers who are more conscious of where their food comes from. To me, the most important thing is that the food is made fresh, that it's high quality and that it tastes great and looks great.

Secondary is the organic and naturally raised aspect." Panera, which has
four restaurants in the Madison area, switched to naturally raised chicken
last summer, choosing the farms of Bell & Evans and Fieldale, both of which have "rigorous standards for raising chickens on an all-natural,
antibiotic-free diet in a stress-free environment," Panera said.
John Walch, the Panera franchisee for southern Wisconsin and northern
Illinois, said Panera's move came in response to customer requests and also is the "right thing to do."

"We believe in baking fresh and making fresh and better and we're constantly looking for that," Walch said. "Obviously, it has to be commercially viable."

Customer reaction has been almost uniformly positive since the split, Walch said, adding that "we think the sales speak the best."

Panera recently eliminated trans fats from its menu, even dropping some
items that it couldn't get trans fat free, Walch said.

And the company has been adding natural and organic products where possible.

That includes a new kids meal program that features white whole grain bread, all natural old-fashioned peanut butter with no sugar or sodium added, a grilled cheese sandwich with organic American cheese, organic apple juice, organic white and chocolate milk, and organic yogurt.

Unlike Chipotle, Panera has standardized its ingredients across the country.

Like Chipotle and anyone else looking to get into organic and natural
products, supply is the major issue, Walch said.
Walch also said Madison has been a good market for natural and organic
offerings, but he said he couldn't say it was better than Rockford or
Milwaukee.

The Organic Trade Association enjoys any successes that encourage more acreage and organic production, said OTA spokeswoman Holly Givens, adding that the group only deals with organics, not natural products.

"High-end restaurants have been using organic products for quite a while," Givens said. "Where there's a gap is in the inexpensive, quick serve type of place, but obviously it's starting to move in there."
"Generally, business is responsive to what consumers want," Givens added.

"So if people out there are interested in having these kinds of products
there's no harm in asking nicely. And then when the choice is there
supporting it even if it costs a little more."
Panera's success proves that people are willing to pay a premium for
something they believe is better, even if "natural and organic" still isn't
mainstream, Walch said.

"There are those people who search for it and there are those people who appreciate it but may not go out of their way to do it," he said. "Most
people are at that latter stage."

Chipotle's Arnold said taste remains the ultimate factor for consumers.
"In the restaurant business, ultimately good food wins," he said. "I think
the vast majority of people who come to Chipotle still come because the food tastes great. And how and why the food tastes great is something they give very little thought to. Looking down the road as more people learn about what they eat and where it comes from people will be inclined to make smarter decisions."

But Arnold sees little evidence of other restaurant companies preparing to jump on the organic and natural bandwagon.

"Not very many people seem to be getting into it in a big and meaningful
way," he said. "Frankly it would probably help us if more of them did. The
more people that want to buy better ingredients the more the supply will
shift that way to keep pace with demand."

Panera's Walch is more certain that the momentum will build.
"We sometimes say we feel like we have a big target on our back when we do these things," he said. "We do think that we will be followed. And we're always concerned about competition. But we think we have a really good head start and there's a huge learning curve."

E-mail: jrichgels@madison.com
Published: September 15, 2006
Copyright 2006 The Capital Times

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