Will Eating at Chipotle Get Too Expensive for Customers?

Chipotle's shares hit all-time highs after earnings were reported. However, could higher menu prices at Chipotle be too high for customers?

Feb 22, 2014 at 3:27PM

In the past five years alone, shares of Chipotle Mexican Grill (NYSE:CMG) soared more than 900%. Chipotle continues to dominate the burrito scene even though competitors Taco Bell, under Yum! Brands (NYSE:YUM), and Jack in the Box's (NASDAQ:JACK) Qdoba have also experienced solid sales, while some classic chains like McDonald's (NYSE:MCD) continue to struggle for growth.

Chipotle's fourth-quarter and full-year 2013 earnings recently pushed the stock more than 10% higher to new all-time highs. However, one of the big announcements during the conference call was the possibility of higher menu prices in the near future. Will eating at Chipotle get too expensive for customers?

Tmf Blog Network

Credit: Michael Carter

Chipotle's recent earnings
Fourth-quarter 2013 earnings defied the laws of gravity again, as Chipotle revealed revenue increased another 21% to $844 million. Net income increased 30% to nearly $80 million. Comp sales increased 9.3% for the quarter compared to a 5.6% jump for the entire year.

Chipotle credits increased traffic for the stellar fourth-quarter results and plans to add another 180-195 restaurants to its existing 1,550 locations in 2014.

A more expensive Chipotle
During the conference call, Chipotle execs mentioned the likelihood of a menu-price hike of between 3%-5%. The idea of a more expensive Chipotle menu has shareholders, analysts, and even customers unsure if the momentum can continue. One of the biggest fears is a decrease in customer traffic -- the key metric that has driven the company's valuation up for nearly a decade.

Prices for food overall have trended higher for the last several years as a result of higher beef prices due to bad weather for farming and the inflation of basic ingredients.

Chipotle's proposed price increase of 3%-5% is actually inconsequential when you analyze the big picture. Taco Bell increased many of its popular menu-item prices over the last decade by between 33%-72%. On the other hand, many of Qdoba's comparable-menu items would still be priced higher than Chipotle's offerings. 


By Xnatedawgx, via Wikimedia Commons

Furthermore, McDonald's recently introduced the new Dollar Menu and More in replacement of the famous Dollar Menu. Prices for longtime favorites like the McDouble, small fries, and Double Cheeseburger increased 19%, 19%, and 49%, respectively.

Why Chipotle gets a free pass
Chipotle has historically been the trendsetter. CFO John Hartung recently stated in a TV interview that the company doesn't believe in gimmicks, limited menu offerings, or modifying the menu on a regular basis. It builds relatively small restaurants with limited seating and small footprints and didn't release a national commercial until the 2012 Grammy Awards.

In 2013, Chipotle became the first quick-service chain to label the ingredients it uses that contain genetically modified organisms (GMOs). In doing so, it revealed that half of its 24 key ingredients contained GMOs. Today, just five of the 24 ingredients do. During the conference call, company officials stated plans to reduce that number to zero.

In addition to menu transparency, which has gained the trust of its loyal customers over the years, Chipotle also has three key assets that many of its competitors lack.

First, it has maintained a classic menu that rarely changes. Second, Chipotle's ordering times have decreased while competitors like McDonald's have seen their ordering times increase due to bloated menus that frequently change. Third, the company is transparent and allows customers to customize their orders as well as see the ingredients being used. 

The biggest misconception on the restaurant industry
Not all customers are trading up from cheaper fast-food options to eat at Chipotle. Many are actually trading down and using fast-casual options like Chipotle to avoid spending much more at full-service restaurants.

Visits to fast-casual restaurants were 8% higher in 2013 versus 2012. In contrast, the overall quick-service restaurant industry saw zero growth in traffic. Furthermore, spending at fast-casual restaurants increased 10% in 2013 -- five times the growth for the entire restaurant industry.

Tmf Blog Network

Credit: Michael Carter

Bottom line
Taco Bell has had eight straight quarters of comp-sales growth in the U.S. Similarly, Qdoba continues to grow in its own right as it becomes a larger part of Jack in the Box's overall portfolio. Mexican menu choices are far from saturated within the U.S.

Chipotle's single-lane assembly line ordering system hasn't changed much and probably won't. Popular locations will continue to have relatively long lines. Higher menu prices may turn out to be one of the quickest ways to deliver a bump in revenue and comp sales. This is because store traffic is unlikely to fall much. Even if it does, prices -- unlike Chipotle's business model comprised of food with integrity -- aren't set in stone.

Put your money where your mouth is
Do you still feel that Chipotle is too risky at their current share price?  There are still many other investment options to start researching today.  Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers