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Chipotle CFO defends price hikes amid ‘waves of wage pressure’

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Chipotle CFO Jack Hartung joins Yahoo Finance Live to discuss company earnings, the company’s decision to raise its prices as inflation continues, consumer spending, wage pressure, and the outlook for growth.

Video Transcript

BRIAN SOZZI: Seeing the bulls eat up shares of Chipotle today-- I should say devouring-- after the burrito king revealed a better than expected quarter. But the company did warn that sales slowed down a touch to kick off the third quarter as consumers pinch pennies with recession fears mounting.

Let's dive in here with friend of the show and Chipotle CFO, Jack Hartung. Jack, good to see you here. I think the market's locking in on what you said about pricing. Taking another price increase in August, how much is that increase? And do you think consumers will start to push back a bit?

JACK HARTUNG: Yeah, we're looking at about a 4% price increase in August, Brian. And listen, inflation continues. And what we're seeing is the next wave that we're going to see into the third quarter is going to involve beef, dairy, packaging. And we're still seeing waves of wage pressure as well. We took that big increase where we took our wages up more than 15% over a year ago. That brought our wages to a $15 an hour average weight.

But we're still seeing pockets where we have to increase wages beyond that as well. So inflation is here to stay, or at least for a while, it's here to stay. The good news is we have pricing power. And so we have the ability to raise prices. That's not what we love to do. But when the inflation keep coming at us, and it doesn't look like it's going to abate in the near future, we will have to take price from time to time.

BRIAN SOZZI: As I mentioned at the top, Jack, consumers are in a tough spot right now, especially lower income consumers. Have you started to just parse your data to see who is coming into the restaurants and who is buying what and who is not buying it?

JACK HARTUNG: Yeah, when we stratify our customer base, we did see a slight slowdown during the quarter. We're really seeing our upper income consumers, those at $75,000 or more, have not changed their buying habits. They're coming just as often, if not more often. And they're spending just as much, if not more. Where we're seeing a little softness is under $75,000.

And it's really-- it's understandable, I mean, when you're paying double or near double for gas compared to what you paid last year. Vacations are more expensive. Groceries are more expensive. Everything's more expensive. At some point, the consumer has to pull back a little bit. And it's unfortunate that we are seeing that. Luckily, our consumer base does skew towards more upper income consumers. About 60% of our customers are in that $75,000 and higher income bracket.

BRAD SMITH: Jack, to your point, I mean, I've even pulled back some of the levels of spend, not just at Chipotle, but around a lot of the lunch or dinner experiences, especially in cities like New York. But when you think about the different cities and the different pricing mechanisms that you have to your advantage, you know, what do you kind of look out to in the future to say that the customer can either continue to take on costs in one part of the menu or whether you're going to actually-- and they were able to pull how much I spent 2022 versus during 2022.

Look, I've pulled back a little bit here. So, you know, what are you looking at within the customer to define exactly where they're going to be able to continue to take on costs?

JACK HARTUNG: Yeah, the main thing that we look at is, what does a Chipotle meal-- you know, what does it cost compared to other competitors? And when we look at Chipotle compared to others in the fast casual sector, we're still underpriced. Every competitor we look at, whether they're in the Mexican category or they're in the salads but they have a food ethos, they're much, much, much more expensive.

Even after this price increase, you can get a chicken burrito-- more than half of our customers get a chicken burrito or a chicken bowl for around $9. Now that's on average. In New York, it's going to be more. In the middle of the country, it's going to be less. But on average, it's still going to be around $9.

It's really hard to find a meal anywhere in fast casual for less than 10. It's getting harder to find a quality meal with real ingredients like you find at Chipotle and real culinary like you might find at Chipotle for less than $12 or $13.

So that's the thing that tells us we're still underpriced based on the culinary we provide, the food with integrity we provide, the customization, and then the speed, whether you're coming through our digital channel or you're coming in the restaurant, and we provide great throughput. So that's the main thing we look at to make sure that the meal we provide at Chipotle is still a delicious meal that our customers love and at an affordable price compared to any other alternative.

BRAD SMITH: I always fascinated-- find it fascinating to get an update on the rewards members. You've got over 29 million. I believe that's one million net add during this most recent quarter, since the last time we checked in with you, at least, at about 28 million. And so with regard to that, what are you noticing in the spend levels from those rewards members? Are they spending higher? Or are they being driven by some of the menu innovation items that get added on to the menu?

JACK HARTUNG: Yeah, well, listen, our customers that are in loyalty, they come more often. They spend more. And I'm not just talking about them joining the program because they're already a frequent customer. After they join, even frequent customers come more often. After they join, even medium frequency customers come more often, and they tend to spend more.

Now, there are a few cohorts within that group. And again, it would be more the lower income cohort who have pulled back a little bit. But as a group, the loyalty members, they do love trying our new menu items. They love coming more often. They really-- the more they come to Chipotle, the more we have a personalized message to them where they learn more about new menu items.

In fact, one of the things we're doing with every loyalty member on National Avocado Day, they're going to be able to buy either guacamole or queso for just one penny. So there are rewards like that where we'll surprise and delight to make sure our customers love being part of the program and love coming back to Chipotle.

BRIAN SOZZI: Jack, I want to highlight something you guys said on the conference call last night. You said, quote, "We are exploring an automated real-time kitchen production system." Now, I know you guys to cut all your vegetables, cut all your meat, and grill it accordingly. I mean, are you going to start turning these locations into scary-looking McDonald's internally just to meet the demand you're seeing?

JACK HARTUNG: No, no, rest assured, we still value real culinary. We still value real ingredients coming in, so whole onions, whole avocados, mashing by hand. But there are some tasks in the restaurant that our crews just don't love doing. And one of the things we're experimenting with is a automation called Chippy. And it will automatically fry our chips. Frying the chips is-- it's really hot. I mean, the crew is standing above a hot fryer for a number of hours to fry these chips.

And so, if we can take a task like that and bring automation along with the employee experience, it makes the employee experience better. They can focus on other culinary in the restaurant. They can focus on customer service related items like that.

But the easier choice, Brian, that would have compromised our culinary we won't do is, we can have the chips made offsite and then brought in a bag. We won't do that. But we will look for automation that's going to allow us to continue to make fresh food in the restaurant and then enhance the employee experience.

BRAD SMITH: All right, gonna have some up in arms employees if Chippy starts winning employee of the month after the fact. Chipotle CFO Jack Hartung, thanks so much for joining us here today. Appreciate it.