Article

Chipotle plans to raise prices 4 to 6 percent this quarter

CEO says younger generation is bonding with the brand similarly to how kids bonded with McDonald's in the 1980's.

April 29, 2014 by Alicia Kelso — Editor, QSRWeb.com

Chipotle's co-CEO Steve Ells and CFO Jack Hartung spoke this morning at Barclay's Retail and Consumer Discretionary Conference, covering topics such as food costs and their effect on pricing, spinoff concepts ShopHouse Asian Kitchen and Pizzeria Locale, and the brand's resonance with younger consumers.

Food costs and pricing increases

Hartung addressed increasingly high commodities prices and how they will affect Chipotle's pricing structure. He said beef prices are up 25 percent this month compared to where they were in Q4.

The spike will lead to the company increasing prices for the first time in three years.

"We feel (increases) more quickly because we're not able to contract because we're dealing with smaller suppliers. So it's going to hit us sooner and the impact is going to be greater, but we believe we have pricing power. We know that from research," he said, adding that prices are expected to rise 4 to 6 percent, from the original target of 3 to 5 percent.

"Comparing our prices compared to our competitors, it shows we're underpriced. We've got pricing power, more than we plan to take," Hartung said.

The pricing increases will start to take hold this quarter. The chain is also going to "widen the gap" between its current chicken and beef burrito prices.

"We're going to allow our customers to choose whether they want to pay the higher price of steak," Hartung said. "This is what's happening in the industry — a more effective pricing increase, or let customers trade off to chicken. It puts the choice in consumers' hands."

'Uniquely positioned because of food and people'

Ells said that although Chipotle is marking its 21st anniversary this summer and has about 1,600 U.S. locations, the brand still has a lot of potential.

"We're just starting to become this new way to eat fast food. We're not even close to a plateau," he said.

Driving that potential is the brand's resonation with younger consumers, many of whom believe in Chipotle's "food with integrity" mantra, prioritize animal welfare or are experimenting with vegetarianism or veganism, Ells said.

"The most exciting thing to me is seeing these young kids latch on to Chipotle; junior high into high school and entering college. They come because they love the taste of the food, and it's customizable," he said. "Everything has to be customizable in their world. It's very specific to them."

He added that this generation is bonding with the brand similarly to how kids bonded with McDonald's in the 1980's.

"That's showing how much potential we have as they latch on and grow up," he said.

Unit growth strategy

At 1,600 units and growing, execs avoided specifying expansion goals, instead focusing on finding the right real estate and filling it with the "right people."

"We don't think about growth rate, we think about potential: What is the demand, how can we increase that, how can we improve the experience?" Hartung said. "Our potential Is 4,000 and likely greater."

Chipotle recently began entering food court malls, a strategy that is doing "phenomenally well," and is continuing to enter smaller towns.

The "potential-over-pace" strategy will also be used to grow Chipotle's fledgling brands, Shophouse — which has a presence in Washington, D.C. and is expanding into Los Angeles — and Pizzeria Locale, which recently debuted in Denver.

Ells said he is "obsessed" with the Pizzeria Locale concept.

"It has so much potential. And I think it will really change the way people think about pizza the way Chipotle changed the way people think about Mexican," he said.

Neither concept will be "ramped up" in terms of growth, but they will grow "much faster" than Chipotle did in its early years, he said.