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Will Eating at Chipotle Get Too Expensive for Customers?

By Michael Carter – Feb 22, 2014 at 3:27PM

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

In the past five years alone, shares of Chipotle Mexican Grill (CMG -1.29%) soared more than 900%. Chipotle continues to dominate the burrito scene even though competitors Taco Bell, under Yum! Brands (YUM 0.38%), and Jack in the Box's (JACK -0.98%) Qdoba have also experienced solid sales, while some classic chains like McDonald's (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?

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.

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. 

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. 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.

Stocks Mentioned

McDonald's Stock Quote
$273.40 (%)
Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
$1,604.88 (-1.29%) $-20.95
Yum! Brands Stock Quote
Yum! Brands
$129.68 (0.38%) $0.49
Jack in the Box Stock Quote
Jack in the Box
$69.90 (-0.98%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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