Mexican Grill Inc. expects to raise menu prices in 2014 to combat higher food costs, the company said Thursday.
In a call to analysts following the release of strong third-quarter results, officials with the Denver-based fast-casual operator said the higher price of ingredients like avocados, tomatoes, corn, dairy and chicken has cut into margins. The chain’s commitment to shift to ingredients that have not been genetically modified, such as non-GMO sunflower and rice bran oils, has also raised costs.
As a result, company officials said menu prices will likely rise between 3 percent and 5 percent around mid-year. The price hike may vary by location, but all markets are expected to see some increase.
“What it will depend on is what happens with general ingredient inflation between now and then and what it costs us to remove GMOs from the rest of our ingredients,” said Steve Ells, Chipotle’s co-chief executive, noting that the chain hasn’t raised menu prices in about three years, except among West Coast units, where prices increased two years ago.
In reports Friday, Wall Street analysts were happy to hear of the planned menu price hike, saying the move would boost margins.
“We are encouraged to hear that Chipotle is likely to take a mid-single-digit price hike in mid 2014, in conjunction with the planned rollout of non-GMO ingredients, given our confidence that the brand retains significant pricing power and given opportunity to drive rapid EPS growth after management’s patient approach has led to margin pressures and slightly below-average EPS growth for Chipotle over the trailing four quarters,” wrote David Tarantino of Robert W. Baird & Co.
Tarantino said Chipotle has room to raise prices because the brand offers an appealing value proposition of quality food for an attractive relative price. The chain’s robust same-store sales momentum also helps, as does the fact that most markets have not seen a price increase in two years, he said.
For the quarter, Chipotle’s same-store sales rose 6.2 percent, largely due to higher traffic that accelerated at the end of July and continued into October.
Ells attributed the traffic gains to improved marketing and faster throughput. During the peak lunch hour, for example, the chain has added five more transactions year-over-year. Transactions also increased at dinner and throughout the day, the company said.
Tarantino said Chipotle’s same-store sales were much better than those in the fast-casual space in general. His surveys indicated same-store sales were trending up 1.5 percent in the third quarter for the fast-casual segment.
Tofu to be tested at more units
Average unit sales for Chipotle restaurants open at least a year was $2.1 million during the quarter, the highest it has ever been, said Jack Hartung, Chipotle’s chief financial officer.
During the quarter, Chipotle expanded the rollout of a braised tofu option called Sofritas, which is available in about 25 percent of restaurants, including those in California, Oregon, Washington, Colorado, New Mexico, Idaho and Utah. Ells said the tofu accounts for more than 4 percent of sales in restaurants where it is offered.
Tofu will begin testing next week in Chicago; Baltimore; Philadelphia; Richmond, Va.; and Washington, D.C. By the end of the year, Chipotle expects the vegan protein option to be offered in about 40 percent of units.
The chain’s catering program, which launched in January, will roll out the week of Oct. 21 to all Chipotle restaurants in the U.S., with the exception of those in New York City, which will have catering available in 2014.
Monty Moran, Chipotle’s co-chief executive, said catering shows great potential.
“Overall, for restaurants that are offering catering, we are already seeing catering sales approach 1 percent of total sales, with most of this being incremental,” he said. “We will also be starting our first national catering promotion in mid-November, in time for the holiday party season.”
Chipotle ended the quarter with 1,539 units, including three ShopHouse Southeast Asian Kitchen locations and 14 international units. A fourth ShopHouse restaurant opened Thursday in Santa Monica, Calif.
In 2014, the chain will amp up restaurant openings. This year the company expects to open 165 to 180 units. Next year the goal will be 180 to 195 new restaurants.