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Will Chipotle raise prices again in 2015?

Another price increase may be on the horizon as Chipotle navigates high beef costs, and the pork supply issue could take a $2 million chunk out of the bottom line in Q1 2015.

February 4, 2015 by Brenda Rick Smith — Editor, Networld Media Group

Some Chipotle customers might not be able to order carnitas any time soon, and they might have to pay a bit more for that grilled steak or barbacoa burrito in the future.

Supply issues and price pressures are expected to continue for Chipotle, according to their Q4 and full year 2014 report.

Food costs were up 1.1 percent over 2013, primarily driven by high beef, avocado and dairy costs. While dairy costs are expected to ease, beef will likely continue to rise.

Chipotle did increase prices last year, but not enough to cover the cost for beef items, according to John Hartung, CFO for Chipotle, in an investor call.

As a result, Hartung says Chipotle is "open to the possibility" of increasing prices on Steak and Barbacoa items, which account for less than one third of entrée sales, to offset the cost. He expects to make a decision mid-year regarding any price increase.

Pork supply issue will cost $2M in Q1

Earlier this year, Chipotle also pulled Carnitas from its menu in about a third of its stores when it uncovered evidence during a routine audit that a supplier was not following its animal welfare protocols. As a result, Chipotle chose to remove product from the supplier from its restaurants and distributions centers, which it then disposed of or donated. All told, the pork supply issue has cost Chipotle about $2 million in food costs, which will show up in Q1 2015 results.

Chipotle hasn't decided whether or not it will try to recover those costs from the supplier, said Hartung in the call.

Since Chipotle's expectations for suppliers is high, sourcing challenges are not entirely unexpected, said CEO Steve Ells in the call.

"Because meat raised in this way is such a small portion of the overall supply system we will see disruptions from time-to-time. But these disruptions just reinforced and strengthened our commitment to continue to look for ways to increase the supply that is available to us," said Ells.

Customers seem to back Chipotle, too, said Ells, citing messages of support the company has received via social media.

While it's too early yet for a full analysis, it also seems that customers are simply trading off to chicken or beef in cases where pork is not available.

Comp pressure

Comparable sales for the year increased 16.8 percent, and operating margins came in at 27.2 percent, a slight increase over the previous year.

"While those results would be strong for a company of any size I think they're particularly impressive considering how we now have nearly 1,800 restaurants averaging nearly $2.5 million each," said Ells.

Hartung pointed to increased customer visits, along with an average check increase of 8.3 percent as the main drivers of the same store sales increase. He credited Chipotle's mid-year price increase of 6.3 percent for the increase in average check.

But can Chipotle continue to top same store sales increases in the teens? The company is forecasting low to mid-single digit sales comps for 2015.

"While we're bullish about the sales trends and the growing consumer awareness and appreciation for our sustainably raised ingredients, in 2015 we will compare against the toughest comps we've ever had as a public company," said Hartung. "We expect our comps will be the highest in the first quarter, and then become more difficult."

Other highlights from the call:

• Chipotle also expects to open 190 – 205 new restaurants in 2015.
• Chipotle's Asian concept, ShopHouse, is now open in nine locations.
• The first Pizzeria Locale outside Denver will open in Kansas later this year
• Peak lunch hour transactions increased by three, and dinner transaction increased by five during Q4.
• More than 10,000 hourly employees a now being offered an insurance plan that meets requirements outlined by the Affordable Care Act. So far, more than 1,000 employees have enrolled. The projected added labor cost will be in the $4 million to $8 million range this year.

Photo courtesy of Wikipedia

About Brenda Rick Smith

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Brenda has more than 20 years of experience as a marketing and public relations professional. She invested most of her career telling the story of entrepreneurial non-profit organizations, particularly through social media.

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