Chipotle likely to increase menu prices midyear

Chipotle Mexican Grill Inc. indicated during an earnings call on Tuesday that it would likely increase menu prices midyear to offset rising commodity costs.

After reporting a 6.8-percent increase in profits for the fourth quarter ended Dec. 31, Jack Hartung, Chipotle’s chief financial officer, said commodity inflation hit “harder and faster than expected.”

Though food inflation leveled off a bit in December and is expected to moderate over the next few quarters, Hartung said menu price increases would likely be warranted for the 1,410-unit chain this year. The amount and exact timing of the increase has not yet been determined.

Food costs during the quarter rose 130 basis points, or 1.3 percent, to total 33.5 percent of sales. Much of the commodity inflation was blamed on beef, but the higher cost of white corn and tomatoes used in salsas, as well as dairy products, also contributed to the increase.

Chipotle also reported that its restaurant level operating margin was 24.6 percent in the latest quarter, a drop of 150 basis points, or 1.5 percent, from a year ago. The company said the decrease was also the result of higher food costs.

Rather than jumping to pass that cost increase onto consumers, however, Hartung said the company prefers to wait. “The most important thing to us right now is to build customer loyalty and to build transaction momentum,” he said.

“As we hit the debt ceiling crisis and you know how people are feeling with their payroll tax increasing, we’d rather be more patient,” he added. “We’d rather see what happens with the economy, what happens with our transaction trend. If we’re a little late in the game in raising prices, that’s okay.”

The amount of the menu price increase will be determined once the company has a better picture of commodity costs for the year ahead, same-store sales trends and general economic and consumer confidence, he said.

The chain likely take one price increase this year, rather than inching prices higher a little at a time, because guests are more likely to notice multiple price hikes, said Steve Ells, Chipotle’s co-chief executive. “We’d rather not nickel and dime,” he explained. “We’d rather have the conversation (with guests) one time.”

If the chain decides to match inflation at 4 percent to 5 percent, for example, from a menu standpoint, the price increase would only add about 25 to 30 cents to the cost of a burrito, “which is not that much,” said Ells.