Chipotle Mexican Grill Inc. executives said freezing weather in Florida and Mexico may result in shortages of key ingredients or skyrocketing food costs, but the chain will hold off on raising prices until later in the year.
In a call to analysts Thursday, Chipotle officials said food costs jumped 31 percent during the fourth quarter and are expected to continue to climb, largely because of rising costs of beef, cheese and avocados.
Despite higher food costs, Chipotle posted a 47-percent increase in profit for the fourth quarter. Click here for full results.
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Company officials also offered analysts more details on recent investigations into the chain’s immigration compliance in Minnesota, Virginia and the District of Columbia and plans for a national marketing event aimed at turning customers into “informed evangelists” for the brand’s “Food with Integrity” philosophy.
More highlights from the call:
Food costs: Chief financial officer John Hartung said Chipotle expects to see food cost inflation in the mid-single digits for 2011.
Officials said they were still assessing the impact of the freezes on tomatoes, green peppers and tomatillos grown in Florida and Mexico for the 1,084-unit Chipotle.
“The cost of these items has surged threefold as a result of severe crop loss, which, if we remain fully supplied, would increase our food cost by over 200 basis points,” Hartung said.
Chipotle will continue to evaluate the quality and quantity of the produce available, he said, adding that temporary “shortages or surging food costs or both” may occur.
Noting that food cost inflation likely “will get worse before it gets better,” Hartung said the company will hold off on raising menu price until later, “which will allow us to see how inflation plays out on a sustained basis and allow us to see how consumers react to price increases from other restaurants and grocers.”
Undocumented workers: After “a significant number of undocumented workers” were found in Chipotle 50 Minnesota locations, co-chief executive Monty Moran said the company is working to avoid a similar disruption elsewhere for the chain.
News accounts have said hundreds of workers were let go in Minnesota after their documents were questioned. Hartung said all the workers were replaced but that the shift in staff has resulted in the need for extra training, which could increase labor costs by 20 to 30 basis points. He said those costs are expected to level off, however.
Moran said Chipotle has long had policies in place to prevent the hiring of non-authorized workers, including training for hiring staff in forgery detection and document completion. The company has an anonymous call line and a full-time attorney as director of compliance, he said. Now the company is implementing a paperless I-9 system to reject documents that are not complete, he said, and working with federal officials and experts to further improve the system.
New loyalty initiatives: Chipotle co-chief executive Steve Ells said the company will host an event in a “major city” this year to talk more about its Food with Integrity emphasis of buying hormone-free and humanely raised meats and organic and sustainably raised produce. The event will include cooking demonstrations and highlight farmers who raise ingredients for the chain.
A new loyalty program to be launched in April will allow managers to invite in loyal customers to learn more about Food with Integrity. Those customers will be rewarded with free food or clothing as they demonstrate their knowledge of the importance of sustainably raised food, Ells said.
“If you look back on the history of Chipotle and how we’ve really grown the brand, so much has come from word of mouth and customers bringing in their friends and new customers and sharing the special-ness of how you order and the food and how it’s cooked and things like this,” Ells said. “So we think this is a way to really continue to build the brand by strengthening people’s knowledge about what makes the food taste so good and why sustainably raised food is important.”
Contact Lisa Jennings at [email protected].
