Chipotle is considering raising prices...Will customers bite?
Less than a year after Chipotle Mexican Grill raised prices nationwide, the chain is mulling increasing them again to cover escalating beef costs—a jump that analysts say will not deter customers.
Although Chipotle already raised prices 6.3 percent last year, CFO Jack Hartung said it is considering increasing prices on steak and perhaps its braised beef barbacoa later this year to account for a sharp increase in beef. It costs Chipotle about a dollar more to serve steak versus chicken, but the chain only charges about 70 cents more on average, Hartung told analysts.
If the company increased prices to make up for this gap, customers in some pricier areas like New York City would be looking at a $10 steak burrito with tax.
During the fourth quarter, Chipotle's food costs jumped 1.1 percent to 35 percent from a year ago. Wall Street's disappointment in the company's latest report sent its stock tumbling Wednesday. (Click here for the latest price.)
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While Lynne Collier, managing director and senior restaurant analyst at Sterne Agee, said the chain cannot raise prices every year, she thinks it still has pricing power to hike beef entrée prices.
"Historically we haven't seen any push back from consumers, and I would expect that to be the same case in the event they put in targeting beef price increases," Collier said in a phone interview.
The Chipotle "customer base is slightly less sensitive than McDonald's or Sonic or Jack in the Box customers," she added.
Chipotle diners seem to have absorbed last year's price increase, which doubled the price difference between chicken and beef items, with relatively little blinking at the higher totals.
"We expected to see some tradeoff from steak and barbacoa as a result of the higher relative price, though we saw virtually no trade down," Hartung said on the call.
Indeed, the chain's average check increase eclipsed the menu price increase, which indicates customers were ordering more.
Nick Setyan, vice president of restaurant equity research at Wedbush, said to some extent customers expect regular inflation at the restaurant checkout. Chipotle would prefer to hold off on raising prices for as long as possible to remain accessible price-wise to more people.
"I'm all for it," Setyan said in a phone interview. "I think they should take even more price."
"Beef costs have been just a dramatic headwind—we're talking about double-digit cost increases year over year for some years now," he added.