There’s no perfect storm of higher menu prices coming, but the winds of change have definitely begun to blow. First to announce an increase: Chipotle Mexican Grill. Are you prepared to react to soaring costs?
No one can feel sorry for Chipotle Mexican Grill (CMG), where same-store sales rose a remarkable 13.4 percent in the first quarter of 2014 despite negatives associated with bad winter weather. But even this fast casual juggernaut isn’t immune to the effects of food price inflation. Margins have shrunk to the point where this 1,600-store chain will raise menu prices sometime this year. Is this a signal to other restaurant operators that it’s time they rethink their menu pricing strategies, too?
Chipotle Mexican Grill c.f.o. Jack Hartung broke the news to security analysts during the company’s Q1 2014 earnings call last week. He cited pricing pressures on key ingredients such as beef (“our steak is up 25 percent already since the fourth quarter”) and cheese (“expected to be up over 10 percent this year”). Also likely this year: boosts in the cost of pork (hog virus) and avocados (potential supply issues from drought-challenged California). Hartung didn’t mention the soaring cost of limes, which can’t be helping the CMG situation either.
“With all of this food inflation we have seen so far and expect to continue to see, we’ve decided to increase our menu prices,” Hartung said, noting that CMG last took a price increase in 2011. “We need to pass along these rapidly rising food costs.” Analyst estimates put the proposed price in the three-to-five percent range.
Overall, CMG’s food costs rose to 34.5 percent in the first quarter of 2014 and are expected to climb to more than to 36 percent over the next two quarters of the year. By way of comparison, food costs in the fourth quarter of 2012 were 33.5 percent and were 32.2 percent in the fourth quarter of 2011.
With numbers trending like this, something had to give.
“We’re currently reviewing our menu price on a market-by-market basis compared to competitors and based on our analysis so far we plan to increase prices on average somewhere in the mid-single-digits. We expect we will start installing the menu boards with higher prices later this quarter and finish installation by early in the third quarter.”
Chipotle says its price increase will be carefully calculated to keep its food accessible to customers. “What we’ve seen so far, and looking at market by market pricing, we believe we’ve got a lot of pricing power,” Hartung told the analysts. “We feel very comfortable that if we raise prices somewhere in that mid-single digit range we’ve still got room.”
It’s probably true that Chipotle can raise prices without making a dent in aggregate demand for its offerings. The CMG conference call makes it clear that “throughput” is an ongoing focus for both management and analysts alike. Which is to say, Chipotle’s primary operating challenge is to figure out how it can serve more customers and take in money even faster than the admirable rates at which it already does both.
But most other operators may not enjoy a level of pricing power similar to that of Chipotle. Factor in the rising prices of even more items restaurants use, including shrimp, many kinds of produce and even coffee and its looks like higher menu prices, smaller portions or some combination of the two will be primary concerns for many restaurant operators this year. If you have menu engineering skills, 2014 looks like the year you want to put them to use.