Chipotle

Despite expanding sales and profit margins, Chipotle’s CEO framed price hikes as a response to wage pressures

Chipotle’s CEO said prices had increased 6% year over year, and suggested it was a result of wage pressure. “David Palmer – Evercore ISI: Question on pricing. Is the current year-over-year run rate 12% after that latest increment? And what’s going to dictate your pricing strategy through the year? And in particular, I know people are curious about how you view your pricing power. What informs your view about Chipotle’s pricing power? And basically, how does that dovetail with your pricing strategy? Brian Niccol – Chairman & Chief Executive Officer: Yes. So David, I think we’re more in the 10% range right now as you look at Q1. And if we were to take any more pricing for the balance of the year, that ultimately ends up being about a 6% or more — probably a little bit more than 6% for the year. To answer your question on when and why we would take pricing, Jack can touch on this. Like, we continue to see pressure on wages. We want to make sure that we continue to be competitive on that front. We feel like we’re in a really good position right now. As a result, our restaurants are staffed better than they were pre-COVID and, frankly, better than they have been for the last 2 years through this whole COVID period. So we don’t want to slip on our wages. So we’re going to keep a close eye on that. And then obviously, we’ll look for any inefficiencies to help mitigate that, but we do have the pricing lever there.” (Chipotle Mexican Grill Q4 2021 Earnings Call, 2/8/2022)

Chipotle said ongoing pricing action would boost the company’s margins 

Chipotle’s CFO: “The bottom line is that our underlying margin remains healthy, and we believe we still have pricing power to use as needed if inflation continues to rise going forward.” “Jack Hartung – Chief Financial Officer: The bottom line is that our underlying margin remains healthy, and we believe we still have pricing power to use as needed if inflation continues to rise going forward. Of course, we’ll be thoughtful and patient as we consider these actions to make sure we continue to deliver an excellent value and dining experience to our guests. Now let me go through the key P&L line items, beginning with cost of sales. While our supply chain team continues to do an admirable job keeping our restaurants and supply key ingredients and managing the cost of doing so, external challenges were quite extreme in Q4, which led to food cost being 31.6%, an increase of 60 basis points from last year. As I just mentioned, inflation on beef and freight and to a lesser extent, avocado costs more than offset the leverage from our menu price increases.” (Chipotle Mexican Grill Q4 2021 Earnings Call, 2/8/2022)

Responding to a question on expected profit margins, Chipotle’s CEO said they were based on “it’s a combination of the sales growth and, obviously, pricing where we need to, when we need to.” “Dennis Geiger – UBS: Wanted to focus a little bit more on the margin. I guess both for kind of the 1Q, I think Jack and Brian, you talked to, I think a low to mid-23 sort of underlying. Wondering if you could just talk a little bit more about what goes into that. And just kind of the go forward, if you could kind of give any kind of color as we go through the year, what that margin trajectory looks like and related — as it relates to that long-term algorithm you provided, if there’s any change there or if it’s kind of consistent with what you’ve messaged prior. Brian Niccol – Chairman & Chief Executive Officer: Yes. So I’ll start, Jack. To answer your question, the long-term algorithm, we still believe we will achieve it. And it’s a combination of the sales growth and, obviously, pricing where we need to, when we need to. And then we’ve got a lot of initiatives going on, to make sure that we’re as efficient as possible. So long term, we’ve got 100% confidence in what we can achieve. To your specific question about some of the stuff happening in the short term, I’ll turn that over to Jack.” (Chipotle Mexican Grill Q4 2021 Earnings Call, 2/8/2022)

Chipotle CEO repeatedly boasted the company could boost prices further &  the company was “fortunate” in its pricing power

On CNBC, Chipotle’s CEO said “We’re pretty fortunate with the pricing power we have… So we have more room to take the price as we need to.” “CNBC HOST: Last quarter, we talked about pricing power and the ability that the company continues to have to increase cost. I’m curious how you’re evaluating price hikes and if there are concerns about consumers potentially pulling back if things go too far. BRIAN NICCOLS: Yeah, look, we’re pretty fortunate with the pricing power we have. I think we have talked about this in the past. Our brand is really strong, you know, we stand out with the commitment to food, the culinary, the customization. You really can’t find that anywhere else. and the fact remains, even though we have taken some pricing to date, our chicken burrito is still less than $8 for most parts of the country. So we have more room to take price as we need to. Obviously, we want to take our time on doing that but when we see these price increases on our input costs being sticky, we will obviously need to figure out how we take advantage of our pricing power and find any efficiencies in our business so that we don’t have to pass all of it on.” (CNBC Closing Bell, 2/8/2022)

Chipotle’s CEO: “We’ll have to take some additional pricing there. So it’s really the last thing we want to do, but we’re fortunate that we can pull it. And we see no resistance to date with the levels that we’re currently at.” “Brian Niccol – Chairman & Chief Executive Officer: And then as Jack mentioned, beef and freight and some of these other things that continue to stay elevated. We don’t see it abate. We’ll have to take some additional pricing there. So it’s really the last thing we want to do, but we’re fortunate that we can pull it. And we see no resistance to date with the levels that we’re currently at. And I think I mentioned this in my earlier remarks or maybe this was in the interview I did earlier. I mean, keep in mind, when we talk about these percentages, I’d like to run people the absolute dollar. The chicken Boorito for most parts of the country is still less than $8. Chicken bowls are still less than $8. And that’s phenomenal value, especially when I see where, frankly, food that I would question the caliber not being what our caliber is, nor what the customization is right in that price point, if not higher. So we’ve got a lot of pricing power. Our customers appreciate the brand, and appreciate the culinary. And we’re fortunate to be in that position.” (Chipotle Mexican Grill Q4 2021 Earnings Call, 2/8/2022)

Chipotle CEO: “pricing usually has something to do with your relative options…. We’re kind of in our own space, and we’re very fortunate to be in that space. And there’s a lot of headroom from what we can tell. And I really hope we never have to use all of it, but we’ll be judicious, and when we need to, we will.” “Brian Niccol – Chairman & Chief Executive Officer: Yes. So look, we do a couple of things. One, we have internal work where we’re constantly evaluating the value strength of our brand through, call it, traditional market research. And we also do the analytical side of things, where after we take pricing, we really do analyze what happens to transactions. And the good news is we have so much data now with our loyalty database that we’re able to understand are there any behavioral impacts from what we’re seeing. And we see very little resistance there. And then obviously, we look out into the marketplace. You look at — and all this stuff, right, pricing usually has something to do with your relative options. And when you look at the options, again, this is why I think we get such strong value scores to get our food with our customization, with our access, and frankly, the quantity that you’re also able to get. We’re kind of in our own space, and we’re very fortunate to be in that space. And there’s a lot of headroom from what we can tell. And I really hope we never have to use all of it, but we’ll be judicious, and when we need to, we will.” (Chipotle Mexican Grill Q4 2021 Earnings Call, 2/8/2022)