Why Chipotle Mexican Grill increased its menu prices

Amit Jhaveri

Must-know: Chipotle Mexican Grill quarterly overview 2Q14 (Part 5 of 14)

(Continued from Part 4)

The process of increasing menu prices

Chipotle Mexican Grill (CMG) increased its menu prices by first reviewing the menu prices for each of its items and for each of its markets. Then it compared its prices with those of its local competitors in each market. Finally, the company looked at the actual inflation and the expected inflation, along with other costs of operating in each market.

 

Menu price increases due to food inflation

The company raised the beef menu prices by ~9% on average and chicken prices by ~5%. This was due to price inflation, especially in beef, which the company anticipates will continue rising in the future. The above chart shows the increasing price inflation over the past 18 months as of June 2014. Panera Bread (PNRA) and Potbelly (PBPB) have also increased their prices due to food inflation.

An investor interested in the restaurant industry as a whole can invest in ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY) and the PowerShares Dynamic Food & Beverage ETF (PBJ).

The company’s menu prices increased by 2.5% in the quarter, which started in April. However, the company stated that this increase represented only a partial impact. The actual average menu prices increased by 6.25% to 6.5%, which varied by menu item and by market.

The anticipated impact

Due to beef items getting expensive, the company expects customers to trade down from beef to chicken items. As a measure to check if customers have accepted the price increase, the company will keep watch of customer resistance in the form of fewer store visits and a further shift from beef to chicken items. Due to these factors, along with the assumptions that customers may resist price changes, the company has raised its guidance for comparable sales for the full year to “mid-teens.”

Continue to Part 6

Browse this series on Market Realist: