Could a Srirachapocalype be on the Horizon?
The negative effects of climate change on jalapeno production in California could lead to a global shortage of Sriracha.
Sriracha, the invention of David Tran, has become a staple of the US hot sauce industry over the past decade. Tran, who migrated to the US after the Vietnam War, is the CEO of Huy Fong Foods which produces Sriracha along with the less popular Chili Garlic and Sambal Oelek sauces. Huy Fong sells more than 20 million bottles of Sriracha and realizes sales of over $60 million annually . In 2013, Huy Fong opened up a state-of-the-art 650,000 square foot manufacturing facility in Irwindale, California, doubling the company’s existing operations.
Despite the financial and commercial success of Sriracha, Tran has not once raised the wholesale price of the hot sauce since he began selling it in the 1980s . Huy Fong has only 10 distributors who have entirely managed the sale of Sriracha for the past decade. Perhaps most surprising is that Sriracha (which is made from red jalapenos, garlic, sugar, salt, vinegar, and xanthum gum) has had only one chili supplier, Underwood Ranches (located an hour away from the factory), for the past 30 years . This is quite a feat considering that during the 2013 harvest season, the company processed 100 million pounds of chilies !
While Sriracha hasn’t faced any issues so far, I find that the company is not well positioned to deal with any major issues in production, particularly those related to the supply and processing of chilies. Climate change is one major phenomenon for which the company has made no contingencies.
Effects of climate change are predicted to be especially severe in California, with expectations of prolonged droughts, increased temperature, and coastal flooding . Water supply is also anticipated to fall, which especially hurts agriculture given that 90% of the crops harvested in California are grown on farms that rely entirely on irrigation (Underwood Ranches relies on drip irrigation for its jalapeno production) . A bad harvest of red jalapenos in any one year could be disastrous for Huy Fong given that a year’s worth of Sriracha is produced entirely during the 10 week harvest period . Additionally, to ensure the quality of the hot sauce, chilies have to be processed within a day of being picked.
Another unintended consequence of climate change in the production of Sriracha is the inconsistency in quality and taste of the hot sauce. Warmer and drier weather leads to potent peppers which results in inconsistent tasting batches of hot sauce . Huy Fong even proclaims on its website that “our chili is grown naturally, therefore, we cannot control the spiciness, [color, or juiciness] of our product” .
In many ways Sriracha is a localized product similar to what Tabasco was pre-1965. In that year the McIlhenny family, which owns Tabasco, ran out of farm space in Avery Island and contracted production of Tabasco chilies to growers in the Cajun country. Today, peppers used in the production of Tabasco sauce are farmed in over 165 countries worldwide .
Given that it is essentially a one product company, Huy Fong needs to seriously reconsider its sourcing strategy to survive going forward. In 2017, Huy Fong already suffered a setback as it terminated its contract with Underwood Ranches and sued its supplier of 30 years for refusing to refund overpayments. The identity of a chili supplier for the next harvest season is unknown, but the company should consider the following as it revamps its supply chain:
- In the short term, farmers located across the US should be contracted to supply the company’s production needs. This helps diversify the risk of a particularly bad chili yield in one part of the US by allowing Huy Fong to source peppers from suppliers in other parts of the country. The company should target farms that employ machines and, thus, have a low cost of harvest.
- In the medium term, Huy Fong should contract farms in countries outside the US to supply a portion of the chili peppers. Countries like Mexico, where labor costs are low and weather conditions are beneficial to pepper farming, are ideal.
- Huy Fong should also consider expanding its production facilities outside of California in the medium term so that chili peppers from other parts of the US can be more accessible. By getting closer to the suppliers, the company will be able to reduce transport costs and waiting time.
The proposal above reflects a large disruption to Huy Fong’s supply chain and the following questions need to be considered for it to be successful: Can the company implement it while keeping wholesale prices constant? Can Sriracha be produced from chilies that are more than a day old (to account for the transport time from international farms) or can the recipe be altered to allow the company to do so (for instance, through the use of dried chilies)?
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Student comments on Could a Srirachapocalype be on the Horizon?
Thanks for writing about such an interesting company, hak! I am shocked that Huy Fong Foods still relies on one supplier for the key ingredient of their most popular product and that they make a years worth of product over a 10 week period each year. Talk about a ton of inventory! Single sourcing is a risky strategy in general (at my old job we had to have two or more suppliers unless there was a ridiculously good reason in which case we had to get sign offs from people really high up in the company and actively search for alternative suppliers though this might be due to the fact that the company I worked for was very large) and I would imagine this is particularly true in agriculture due to climate change and the nature of farming in general (crops being susceptible to so many natural factors).
I also think you bring up a good point about alternatives such as dry peppers or using peppers beyond just a day old or even perhaps finding similar peppers of a slightly different variety. I find it hard to believe that a 2 or 3 day old red jalapeno would taste much different from a 1 day old red jalapeno and if they were willing to use slightly older peppers they could diversify their suppliers a bit easier since jalapenos can be grown across the southern united states. I would also be surprised if many people could actually taste the difference between the sriracha made with current peppers vs. either an older pepper or a slightly different variety of pepper but that could just my cynicism talking!
I completely agree with your suggestions hak!
The recent forest fires in California wine country paints a grim picture for how environmental disasters can destroy livelihoods and entire businesses. It is difficult for agricultural businesses to diversify risks as they are mostly subjected to the mercy of mother nature. It will be interesting to see how more of such companies use technology to try and protect their precious harvests!
This was a very interesting article and I totally agree that this is a very concerning problem! In the short term, I agree with you that Huy Fong needs to find new suppliers to source their peppers and diversify the risk they created by having one supplier. However, in the longer term, I think that climate change is an issue that we are going to continue to see have negative impacts all over the world. Therefore, I would suggest instead of focusing on contracting outside of the US, Huy Fong should focus on working with suppliers that are beginning to utilize vertical farming. It might even make sense for Huy Fong to build their own vertical farm because of the ideal conditions that vertical farms are able to create. Here is a quick article: http://www.bbc.com/future/story/20170405-how-vertical-farming-reinvents-agriculture
Thank you for the article, hak! It is interesting to see that even a simple supply chain (one product, one supplier, one buyer) faces challenges. I’m looking forward to seeing what happens to Sriracha over the coming years, as they change their chili supplier.
@hak, thanks for a great article!
As I was reading, I was also thinking about how there are a variety of other sriracha brands available on the market, many of them being private label. I wonder if the supply chain limitations based on Huy Fong Foods’ operational decisions has allowed this proliferation to occur. I also looked more into the plant in California. Apparently there have been a number of complaints about it by its California neighbors because of its smell (http://www.latimes.com/local/lanow/la-me-sriracha-may-move-ln-20140416-story.html). Pretty wild, right? Maybe there will be a Srirachapocalypse after all!
First off, we cannot ever change the recipe of Sriracha. Outside of the taco, this sauce is the single most important food revolution since sliced bread. That said, I agree that the lone supplier of peppers is unusually dangerous and unprotected from climate change risk in the future. My concern with utilizing multiple unaffiliated producers is that Tran may lose the cost savings he gains from the volume of his orders to his producer. One potential solution might be to work to create a pepper co-op in which multiple producers pool harvests each year and split the profits regardless. This would protect each of them and Sriracha from an environmental shortage while allowing the company to potentially maintain volume savings.
Thank you @hak for sharing such a “hot” topic, and highlighting the risks that climate change, as well as the operational choice to rely on one supplier, are causing for Huy Fong. You present excellent operational choices in terms of expanding the mix of suppliers from different geographies, creating production facilities that are closer to supply, and experimenting with the inputs to the recipe. It’s particularly that we typically discuss modifying a product to satisfy consumer preferences; yet in this case, the product may have to be modified instead to account for operational constraints. I don’t know where I would be without srirach,a but I’m confident Huy Fong will create something that tastes amazing if he needs to modify it!
Great job! I’m a Sriracha enthusiast and have been enjoying it all this time without knowing any of the interesting background on the business. I’m shocked by the lack of preparation of Huy Fong in the face of climate change, but also shocked that their supply chain has such concentrated dependencies on counterparties. Sriracha should take the advice above in a hurry and diversify their supplier base and their manufacturing. It would be wise for Sriracha management to take note of Tabasco’s transformation as a case study if it wants to continue to play a role in the face of climate change and other unknown shocks to its feeble supply chain.
Thanks Hak for an interesting read! I am a coffee lover but also a Sriracha lover as well.
I agree with all of the options you have mentioned, and in addition to that, (despite the strong disagreement from Kamau) I would still consider the possibility of exploring different recipe of the sauce. What we all want to avoid is having zero Sriracha during global outbreak of jalapeno epidemic, and I believe it can be avoided by start sourcing and using different types of hot pepper (slowly), while doing best to keep the taste consistent. We might even discover more tastier recipe with different mix of hot peppers too! Just like the taste of Coca-Cola evolved since 1887, I’m sure Sriracha’s flavor can be further improved. I would say, it is narrow-minded to simply state changing the taste or the recipe is compromising the quality.
First Avacados, and now Sriracha? Climate change is definitely not a good thing for the consumer.
On a serious note, thank you for surfacing this interesting case study on the effects of climate change. For me, it highlighted that when I personally consider the impacts of climate change, I think primarily of rising water levels, more severe weather patterns, and hotter temperatures in general. I never considered the impact of climate change on our food supply. Combined with the fact that population growth will continue to outpace our food supply, the potential negative impact of climate change on our food supply cannot be overstated.
I do wonder, however, if there is another side to this argument. As climate gets warmer, does that turn previously un-farmable land warmer to the extent that they now would be arable? If so, to what extent does global warming / climate change actually help increase food production. Coming back to Sriracha specifically, I agree that their first priority must be to find another supplier, and diversify their supply base (both in terms of which farms they work with and where they are located) to ensure that there is no Sriracha production disruption.
Thanks for this post – I never knew that Sriracha depended on a single pepper supplier! I find climate change compounds an existing concern: the single pepper supplier. Regardless of any macroeconomic trends, this is a dangerous position to be in for Huy Fung Foods as that relationship could sour or fall apart for a variety of reasons. In fact, this overreliance on a single supplier along with never increasing wholesale prices (not even to match inflation) made me wonder a bit more about the founder himself. After reading the Quartz article you cited, Tran seems to “run the company with his eyes closed” – he doesn’t even know where Sriracha or sold or that it is a major ingredient in sushi . For him Sriracha seems to be a passion project that has turned into a multi-million dollar company. Therefore, while I personally agree 100% with your suggestions, I’m not sure that Tran would be willing to engage in the more complex supply chain alternatives you mention. Instead, I think he would respond to the emotional pull of wanting to deliver upon his customer promise and help more people enjoy their food. I would recommend he find another local chilli farm he trusts, ideally two to three, and work on building another relationship with them to continue to supply. Although risky and not aligned with our TOM principles, I believe this is more aligned with the CEO / Founder’s values and how he wants to run his business. Longer term, I would do more research into how to use peppers more than a day after they are picked without compromising quality so that he can find another trusted supplier in another geography to limit risk exposure. Finally, I would recommend that he hires someone more profit oriented so he can grow the business to its full potential & then they can be more willing to diversify the supply chain.