Shareholders Rejoice, Chipotle Mexican Grill Is Raising Prices!

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.

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.

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.

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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Read/Post Comments (3) | Recommend This Article (3)

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  • Report this Comment On April 27, 2014, at 6:44 PM, gistanleyjr wrote:

    I am waaaay long CMG. Given the dumb reaction after the announcement before, all I have to say is LOOK OUT BELOW. Investors are so stupid.

  • Report this Comment On April 28, 2014, at 10:54 AM, zack777 wrote:

    I think Chipotle is already at the upper limit of what they can charge without losing significant number of customers. They are a few dollars more expensive than many of their direct competitors already; if that price difference gets to $3 or $ per meal, it is going to shrink their customer base.

  • Report this Comment On April 28, 2014, at 3:54 PM, EquityBull wrote:

    CMG was and still is too expensive. At best you can say fair value is 25 times next years earnings of 16 bucks. That gets you to 400 bucks even. That is no margin of safety either. Just right in the middle of fair value with a PEG of about 1.0.

    CMG down hard again today in the 470's. I think we will see carnage down to the 35o to 400 range. I'll be buying at 400 and below.

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