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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