Wake up, babe, a new economic indicator just dropped. Well, kind of. Some food industry CFOs are talking about avocados—and it’s worth unpacking why.
To understand why this particular metric matters, you have to start with the big picture. All eyes are on consumer spending habits right now, as US consumers have surprisingly kept spending amid inflation and hiked interest rates.
That’s helped to stave off recession fears, but now, with federal student loan payments restarting in October, it’s unclear if consumer spending will stay as high as it has so far.
Economists stress that the wider impact of student loan payments won’t be enough to tip the economy into a recession. Still, retailers are expected to take a hit, especially those that cater to young people or a middle-to-low-income consumer base.
So when a CFO at a company that falls into that exact Venn diagram—in this case, Chipotle’s Jack Hartung—starts talking about avocados, price hikes, and student loans, you listen.
Though younger customers tend to be a “sweet spot” for Chipotle, he’s not worried that consumer spending will tighten considerably when student loan payments restart. “We’re talking about a $9 burrito,” he told the Wall Street Journal. “To the extent that folks have to cut back somewhere, I don’t expect it to be the $9 burrito.”
But that’s not to say that burritos will stay $9 forever. Hartung says he’s considering potential price hikes as costs rise. Net inflation for ingredients hit around 2.5% for the quarter, according to Hartung. The big exception? Avocados. When they were removed from the equation, net ingredients inflation was around 5%, he added. Food, beverage, and packaging costs were down for Chipotle, in part due to lower avocado costs and past price increases.
News built for finance pros
CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.
Avocado pricing varies seasonally, as well as by region, so it’s not like it’s some magical elixir. And what’s happening here is easy to trace: Since 2022, the US has faced an overabundance of avocados. That’s brought prices down, easing the strain on cash-strapped consumers and some food companies in the process.
Last year, Richard Kottmeyer, FTI Consulting’s managing director of food, agriculture and beverage, told CNN that avocados were the “green lining to the storm clouds of food inflation.” But for a volatile category like produce, no one expects the boom times to last. “The avocado benefit we’re seeing right now is likely to be cyclical,” Chipotle’s Hartung told the WSJ.
Still, some other companies have spotlighted the same temporary avocado benefit this earnings season. In an earnings call tied to its strong report, First Watch Restaurant Group CFO Mel Hope noted that “costs benefited from deflation of 470 basis points across our market basket, which was significantly more favorable than we had anticipated,” adding that “the biggest movers were decreases in our pork and avocado costs.”
More than anything, though, uncertainty is the name of the game. Sprouts Farmers Market CEO Jack Sinclair said in the company’s latest earnings call that they’d continue watching avocados closely. “In volatile categories like avocados, you’re seeing some pretty dramatic changes in that where the pricing changes, and you see a pretty immediate change in unit volume,” he said. “There’s always been volatility in produce.”
Remember the old adage: One avocado does not make a $9 burrito.