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.
Meanwhile, Chipotle is continuing efforts to build traffic.
After shying away from traditional marketing somewhat in 2012, Chipotle said it would invest in a “full complement” of marketing — including billboards, radio and print ads — in about 25 markets this year.
In the past, Chipotle had focused more on brand building, such as emphasizing the quality of its ingredients with its “food with integrity” campaign. This year, however, the efforts will focus on building traffic with the goal of engaging customers to go online for a buy-one-get-one offer or some other transaction-driving event, said Ells.
Last month Chipotle announced the launch of catering, which is available now in its home base of Colorado and soon will be rolled out nationwide.
Starting next week in San Francisco, the chain is testing a new braised tofu protein option, called Sofritas, which Ells said will appeal to meat eaters and vegans alike. “Even if one is not vegan or vegetarian, you can participate in the idea that eating less meat is somehow environmentally responsible or maybe better for your health,” he said.
Boosting international growth
For the year ahead, Chipotle is maintaining its growth plans, with 165 to 180 new restaurants scheduled to open — about the same as last year. Among them are four international locations, including the chain’s first in Germany.
Ells said Chipotle’s plans for Canada, where there are five units open, as well as the growth of the secondary ShopHouse Southeast Asian Kitchen concept, offer the most potential as “seeds” for new growth.
In Canada, Toronto is close to being considered a “proven” market where the company can expect a certain return on investment with new openings.
In London, however, the company is struggling to boost awareness of the brand, and units are showing less–than-typical volumes. Marketing efforts there are focusing on building awareness, said Ells. “Once people visit, they become loyal customers.”
The first ShopHouse location in Washington, D.C., is also performing well, and two more are expected to open during the second quarter: a second unit in Washington and a location in Santa Monica, Calif.
During fiscal 2012, Chipotle opened 183 new restaurants for a total of 1,410 units.