Because Chipotle Mexican Grill is a public company whose stock is red hot and whose customer base is vast, its recent move to raise prices got a lot of attention. Wall Streeters loved the idea of what turned out to be roughly a six percent boost. Many customers didn’t, and they went on social media to register their displeasure. If you’re thinking about raising prices to keep your restaurant’s food costs in line, get ready for strong reactions from your texting, tweeting and online-review-writing customers.
Of course, patrons have never liked paying more for any restaurant meal. But now they have a platform on which to publicly vent their spleen about higher prices and to publicly commiserate with other customers who don’t like them, either. Restaurant operators now have to carefully calibrate any price hikes. Otherwise, perception of the restaurant’s value proposition can turn negative in a hurry.
Chipotle, a much-watched growth stock that keeps delivering for investors, began raising menu prices in late spring. A market-by-market analysis performed by RBC Capital Markets concluded that Chipotle had increased menu prices 6.5 percent for core menu items while side items and beverages went up 7.3 percent.
As you’d expect, the chain targeted items that whose ingredients have seen big price jumps of late. Steak and barbacoa burrito prices went up 8.3 percent in most of the large markets tracked by RBC, climbing more than 10 percent in others. Higher avocado prices resulted in a bump in Chipotle’s chips and guacamole price 10.2 percent in many markets, 6-7 percent in a few others and just 4.8 percent in Los Angeles.
But customers in Los Angeles now pay a whopping 18.8 percent more for sodas. It’s a significant increase, considering that the cost of soda ingredients has been stable A few Chipotle markets, including New York City, saw no increase in soda prices. In many others, increases were the low double-digit range.
RBC applauded the price boosts. It expects the chain’s food costs—which had risen to 34.5 percent in the most recent quarter as Chipotle absorbed higher steak, avocado and cheese prices—will retreat to 32 percent because of the hikes. The firm thinks the move could perhaps boost Chipotle’s stock price by $70-$80 per share.
Speaking at a recent security analyst conference, Chipotle chairman and co-chief executive Steve Ells said that, early on, customers seemed accepting of the new prices. “Anecdotally so far, we’re not hearing anything that concerns us whatsoever,” he said Chipotle might be hearing it now. The Restaurant Social Media Index, a proprietary product of social analytics company DigitalCoCo and its Foodable Web TV Network, found that the price boosts caused social consumers to look at Chipotle in a less favorable light. One metric in particular—Social Guest Satisfaction (SGS)—documents a big shift in consumer sentiment.
“In our SGS Score, Chipotle dropped from an 87.6 value score to a 59.3 over the past two weeks, and the Decision Set Score (an allied metric) dropped from 69.2 percent to a 47.6 percent of consumers who said they plan to choose Chipotle over other competitors,” writes DigitalCoco c.e.o. Paul Barron. “We think this may be just a knee-jerk consumer reaction and could correct over some time, but the reality of pricing is here to stay in social guest satisfaction, and all brands need to consider pricing as a new science if they do not already. Brands need to consider social as the biggest revelation of push-back from consumers we have seen in the RSMI history since 2009.”
We’ll find out what dollars-and-cents effect these new prices are having on Chipotle’s revenues when the company releases its next quarterly reports. But in the meantime, brace yourself for a wave of online complaints if you increase menu prices at your place.