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Chipotle Mexican Grill Inc. (CMG - Analyst Report) recently achieved the goal of sourcing its entire sour cream requirement from pasture-raised dairy cows. Along with sour cream, 65% of cheese usage is also procured from pasture-raised cattle. Under this method, the cows are not administered hormones externally, taken to open pastures everyday and are raised on vegetarian diet.

Chipotle has always been committed to serve organic and locally produced ingredients. Its ‘Food With Integrity’ program focuses on a higher mix of naturally raised pork, chicken and beef, and organic produce. Chipotle also aims to source more organic beans grown by means of conservation tillage. It is the only national restaurant company to use fresh produce since 2008.

However, to ensure smooth supply to its more than 1,250 restaurants nationwide, Chipotle works within each region of the country, thereby creating jobs in farming communities around the country.

On the flip side, such stringency in ingredient sourcing is costing Chipotle more in an already inflationary U.S. market. The Denver-based company expects food cost to creep up in the next few quarters due to steeper prices of avocados, beef and dairy.

Avocado costs are expected to increase as these will be sourced from California. The dairy costs are also expected to increase as sour cream as well as a high percentage of cheese are being produced from the milk of the cows that are pasture-raised.

Sourcing locally grown food by restaurateurs is gradually witnessing an uptrend as customers are becoming more health conscious. While this is providing a competitive advantage in terms of quality to Chipotle, many others are finding the standard tough in the restaurant industry.

Moreover, using higher quality premium ingredients remains justified for Chipotle as it caters to the relatively higher income strata. This was one of the reasons why Chipotle was largely unruffled by the economic downturn. However, Chipotle now seeks to make its offerings available among all income level consumers.

Chipotle which competes with the likes of McDonald's Corp. (MCD - Analyst Report) and Yum! Brands Inc. (YUM - Analyst Report) currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral rating on the stock.

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