Chipotle Plans to Raise Prices

Rising food costs is part of the justification for the chain's first increase in three years.

Apr 18, 2014 at 9:36AM

Want your favorite burrito, bowl, or taco from Chipotle (NYSE:CMG)? Starting in a few weeks it will cost you a little more.

The popular Mexican chain told the Associated Press it plans to raise price for the first time in three years. Menu boards featuring the new prices will start to show up in the chain's restaurants next week with the rollout completing by the summer.

Chipotle executives have said in the past they were considering a hike of about 3% to 5%, USA Today reported. That works out to an extra $0.24 to $0.50 for an $8 burrito bowl.

Jack Hartung, Chipotle's chief financial officer, said during a conference call with analysts that price is not the main reason customers visit its restaurants anyway.

"Most of the value comes from the experience," he said.

That might be true, but raising prices also could remind customers that there is a Yum Brands (NYSE:YUM) Taco Bell somewhere nearby that may not be as good but is certainly cheaper.

Chipotle is really popular

Part of the reason Chipotle can justify a price increase is that the chain has been doing blockbuster business. In the first quarter of 2014 Chipotle reported that revenue increased 24.4% to $904.2 million and comparable restaurant sales increased 13.4%. That's impressive in a competitive climate that saw fast food leader McDonald's (NYSE:MCD) report a .3% global sales decrease in February including a 1.4% drop in the U.S. Yum Brands (which owns Taco Bell, Pizza Hut, and KFC) has yet to release 2014 numbers, but the company reported a 2% increase in global sales in 2013.

Chipotle's food costs are rising

Remember "Guacapocalypse" back in March when the media (and some Chipotle customers) were up in arms over this throwaway line in Chipotle's annual report?

"In the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than paying the increased cost for the ingredients."

The company was quick to release statements assuring fans of the avocado-based treat that Chipotle was merely covering all hypothetical situations as the SEC requires in annual reports. 

Company spokesperson Chris Arnold, in calming the masses of panicked guac lovers, did explain that rising costs were a factor. 

"Weather-related price volatility is just part of doing business when a company relies on fresh ingredients," he told NPR.

Higher prices are likely part of the reason for the increased prices as restaurant profit margins fell in the first quarter of 2014 largely due to increasing food costs.

"Food costs were 34.5% of revenue, an increase of 150 basis points driven by higher commodity costs. Higher commodity costs were primarily driven by inflationary pressures in beef, avocados, and cheese prices," the company said in its Q1 2014 financial release.

If a company has to pay more for its basic ingredients it's pretty rare it doesn't pass at least some of that cost onto customers.

Prices rise in general looked at price increases on common menu items across a number of fast food chains from 2002 to 2013. The general trend was for prices to rise -- the Taco Bell bean burrito, which cost $0.69 in 2002 and $1.19 in 2013 -- a 72% increase -- is a pretty typical example. While Chipotle is considered more of a fast casual restaurant than fast food, it's certainly competing for customers with fast food chains.

In general fast food pricing trends are much harder to decipher than Chipotle's straightforward prices. McDonald's and other chains run regular pricing deals, rotate items on and off their value menus, and use other tricks that make it hard to know when prices go up. Still the same Delish article shows that the average price of a Big Mac increased from $2.39 in 2002 to $4.19 in 2013 -- a 75% increase. (Prices vary market by market so these numbers are just an example of the overall trend).

Chipotle has not only been remarkably reasonable to is customers in not inching prices up every year, it also offers a very simple menu that does not rely on gimmicks or specials.

Customers love Chipotle

Chipotle has a strong relationship with its customers partially due to its efforts to be a good corporate citizen and partially because the chain serves high-quality food at a reasonable price. The closest comparison for how regular customers feel about the brand might be Starbucks (NASDAQ: SBUX), which has a similar socially conscious message and devoted customers that buy into the idea that the chain is about more than maximizing profits.

Starbucks has increased prices on numerous occasions and while there are grumbles, business has not suffered. Chipotle is not likely to lose audience over a small price hike when it has held the line for so long. In fact the only reason people will notice is because the chain had not had an increase in three years.

Of course there will be a few people who considered Chipotle an indulgence over cheaper fast food options that can't bear the increase, but the number will be very small. It's hard to begrudge a chain a tiny price increase after three years when food costs have clearly risen and high standards have been maintained.

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Daniel Kline has no position in any stocks mentioned. He eats at Chipotle often but wishes they would melt the cheese. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. 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.

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