Shareholders Rejoice, Chipotle Mexican Grill Is Raising Prices!

Chipotle has been anticipating a price increase since last year. This move shouldn’t scare off investors; in fact, shareholders should be singing the company’s praises for making this move now.

Apr 27, 2014 at 1:00PM

Why is Chipotle Mexican Grill (NYSE:CMG) able to increase its prices without breaking a sweat, while McDonald's (NYSE:MCD) is having a hard time staying relevant? Two words: stakeholder engagement.

You scratch my burrito...
Basically, Chipotle has integrated a collaborative dialogue within its scope of influence, thus fostering honest, trustworthy, and loyal relationships with its customers, suppliers, and shareholders. This rapport gives Chipotle the permission to raise prices without worry.

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Source: Chipotle Website

The last time the burrito maker raised prices, about three years ago, it quoted some of the same concerns it did on its conference call earlier in the month: that food prices, specifically those of steak, avocado, and dairy products, were going up. After its previous price increase Chipotle saw no real negative effects on its sales; in fact, its same-store sales grew by 11.3% in the quarter following the bump. Historically, Chipotle's customers have been willing to pay higher prices for quality products, specifically because the company is transparent about having the best interests of the customer at heart.

Bonus points for meaningful relationships
This increase will likely provide a nice boost to Chipotle's bottom line. However, in the worst-case scenario, if sales stayed flat its operating income would still go up by 27%. With that said, Chipotle's goal is not to raise prices strictly to boost profits, rather, its intention is to gain pricing power through effective stakeholder engagement. This focus has, thus far, afforded the company the luxury of being quite patient with price increases. This buildup of a "permission bank" of sorts has made Chipotle more confident in its ability to raise prices now and again, say in a year or so.

What's value got to do with it?
Chipotle's customers have an evolving view of the definition of value, as they don't seem to care so much about a single-digit percentage increase. Instead of placing an emphasis strictly upon price, the Chipotle customer seems to gain much more value from the overall flex food experience.

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How do you define value? Source: McDonald's Website.

This shift in how folks derive value from restaurant experiences is something that even the McDonald's CEO, Don Thompson, has acknowledged as he noted that there is a bit of "bifurcation", or divergence, in the quick-serve industry. Thompson expanded on the point to state that better-off customers are starting to move to the new breed of more-expensive brands.

Mickey-D's, you've got some splainin' to do
This growing movement to pay more for higher-quality products doesn't seem to be going anywhere anytime soon. In order to gain credibility among the customer segment which is willing to shell out more per meal, companies like McDonald's and Yum! Brands will have some back-peddling to do. The fast food industry, historically dominated by these two companies, doesn't have a track record of embracing operational transparency. In fact, both Yum! and McDonald's have taken retroactive engagement approaches in which they have opted to beg for forgiveness instead of asking for permission.

Screen Shot

Source: Chipotle Website

This approach speaks to a much larger issue within the fast-food and industrial-agriculture industries. Because they have been profitable for so long without being held accountable for their opaque practices, companies like Yum! and McDonald's don't have the ingrained agility that Chipotle exemplifies. It is this flexibility, approachability, and transparency that gives the burrito maker the license to operate in this manner. Chipotle's scope of influence will likely continue to support the company, even in the face of increasing prices, as there is much more value in the brand beyond cheap, fast food.

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Leah Niu owns shares of Chipotle Mexican Grill. 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.

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