There’s some bad news coming for Chipotle Mexican Grill (CMG) fans: Prices for some of its signature items will probably be inching higher this summer.
“Beef prices remain at historically high levels, although beef inflation was largely contained during the quarter,” Chipotle noted during last month’s conference call with analysts to discuss its first-quarter results. “We currently believe that the pricing for beef will remain at these elevated levels well into 2016 and perhaps even into 2017. As a result of this increased inflation, we expect to raise prices on steak and barbacoa this year — most likely by the end of the third quarter.”
In other words, the price of all of the burritos, bowls, salads and tacos that include steak and barbacoa as the primary protein will likely be moving higher. It will probably happen in September.
This isn’t a heads-up for meat lovers to enjoy as much Chipotle as they can between now and then. After all, it won’t be a dramatic increase. Chipotle estimates that the average increase will be around 4 to 6 percent. Chipotle prices vary by market, but this would mean that if your friendly neighborhood store is charging $7.25 for a steak or barbacoa entree, it will likely go up to between $7.55 and $7.70 in a few months.
We’ve Been Here Before
This isn’t the first time that Chipotle has had to push prices higher. There was a big menu increase in May of last year. It was the chain’s first major across-the-board boost in more than three years.
Customers probably didn’t appreciate the move, but that didn’t stop them from coming. Chipotle has posted four consecutive quarters of double-digit year-over-year growth in comparable-restaurant sales since last year’s springtime increase.
The typical Chipotle restaurant rang up 10.4 percent more sales during the first three months of this year than it did a year earlier. The popular burrito roller shed some more light on that financial performance, pointing out how higher prices accounted for 610 of the 1040 basis points of improvement. Put another way, the price increase was responsible for more than half of the increase — nearly 59 percent, actually — but the balance came from an uptick in store traffic and customers ordering more items.
“Our intent last year was to cover the inflationary cost pressures of beef, but we undershot this level in hindsight as beef costs continued to rise,” Chipotle explained during last month’s call.
Pay Up to Eat Out
Food costs are a major part of a restaurant’s pricing strategy, and chains eventually need to pass on rising expenses to its customers. If beef, pork, chicken and dairy prices are on the rise, it’s a safe bet that Chipotle’s menu board will be on the rise, too.
This will also happen if you eat at home. Supermarkets are always responding to commodity fluctuations, and often faster than restaurants do, since grocery stores work on leaner margins than eateries.
Restaurants will also pass on costs related to their operations. If rents move higher, utility bills climb, or minimum wage and health coverage requirements jump, it’s going to ultimately show up on your tab as a customer.
We are already seeing signs of menu hikes this year. Cheesecake Factory (CAKE) announced that it will be kicking in a price increase this year that is larger than its historical average of 2 percent.
The restaurant industry knows that larger-than-usual increases this year could backfire. Chili’s parent Brinker International (EAT) discussed the challenge of making it more expensive for someone to go out to eat in a climate of higher-than-normal price hikes during last month’s earnings call. Brinker’s CEO was concerned that the projected 3 percent increase for the industry in 2015 could test the restaurateur’s pricing elasticity.
Even Chipotle is braced for the challenge. Its stock took a hit after last month’s quarterly report when it warned that comps growth would decelerate sharply during the balance of 2015. Customers love Chipotle, but that won’t do any good if folks on tight budgets can’t pay more.