Chipotle Mexican Grill Inc. does not plan to raise menu prices across the board in 2015, but it is considering a surcharge for steak and barbacoa entrées in the second half of the year if beef costs remain high, the company said Tuesday.
Company officials discussed menu pricing in a call with analysts following its fourth-quarter earnings report. Net income rose more than 52 percent at the Denver-based fast-casual operator, and same-store sales increased 16.1 percent during the quarter ended Dec. 31, largely on an increase in foot traffic.
Average check increased 8.3 percent, in part due to a 6.3-percent increase in menu prices mid year, though growth in catering sales also contributed to the result.
Jack Hartung, Chipotle’s chief financial officer, said food inflation rose around 7.5 percent for the year, so the price hike did not cover the increase in costs.
Higher beef prices were primarily to blame. Although Chipotle raised the price of its steak and barbacoa entrées a bit more than other dishes last year, the surcharge hasn’t covered inflation.
As a result, Hartung said the chain is considering another menu price increase on beef dishes only, though a decision won’t be made until mid year, depending on beef inflation at that time.
“We don’t want to have a second increase within a 12-month period,” Hartung said. “It’s important to us that we remain accessible and affordable to our customers.”
The surcharge for beef dishes in 2014 did not push customers away from steak or barbacoa items, Hartung said.
This year, Chipotle suffered from a pork shortage after discovering that a supplier was not meeting its animal welfare standards. The company suspended the supplier, which was not named, and about one-third of restaurants are temporarily not serving pork.
Rather than serve the supplier’s pork that was already purchased and in distribution centers, Chipotle donated or sold the remaining product, which will result in about a $2 million charge during the first quarter, Hartung said.
When asked if the company was considering a breach of contract action against the supplier in question, Hartung said the company preferred to focus on ensuring an adequate supply of ingredients that meet Chipotle’s high standards in future.
“Rather than go and make this a legal issue, we’d like to find a way to get this supplier to rise up to our protocols on a more sustainable basis,” he said.
Despite the missing pork in some restaurants, customers have praised Chipotle for sticking to its values and refusing to compromise, Chipotle chairman and co-CEO Steve Ells said.
“People care about where their food comes from and how it is raised,” he said.
That’s particularly true among young diners, and Chipotle has been growing in popularity among teens, Millennials and Generation X, Ells said, citing industry research.
A report from 2014 ranked Chipotle as the third most popular restaurant chain among teens, an increase from No. 8 in 2013. Gen X consumers were 33 percent more likely than average to visit Chipotle, and Millennials were 75 percent more likely.
More diners prefer locally grown foods
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Chipotle’s in-house research indicates the brand is hitting on — or perhaps contributing to — growing trends.
For example, 87 percent of fast-casual diners say they prefer to eat foods that are locally grown, an increase from 70 percent in 2011, Ells said. Another 86 percent said ingredients that are responsibly raised taste better, an increase from 76 percent who said the same in 2011.
Those who find it important to buy organic have also increased, to 73 percent, from 61 percent in 2011. And 69 percent say they try to eat meat that has been raised responsibly, an increase from 53 percent, Ells said.
Despite strong fourth-quarter earnings, Wall Street initially reacted with disappointment after results fell short of investor expectations. Chipotle’s fourth-quarter same-store sales increase of 16.1 percent was lower than analyst expectations of a 16.5-percent increase, and food costs were higher than expected. The chain’s stock price to fell more than 6 percent in after-hour trading, to $678.80.
Another factor may have been Chipotle’s rather cautious outlook for fiscal 2015 of a same-store sales increase in the low- to mid-single digit range. The chain faces tougher comparisons with the double-digit comparable sales of fiscal 2014.
However, this time last year the company gave the same cautious outlook for 2014. Same-store sales rose 16.8 percent for the year.
Ells attributed strong results to the brand’s ongoing commitment to reinventing the notion of fast food.
Since the first restaurant opened nearly 22 years ago, Chipotle has charted its own path for how a restaurant company should be run, he said.
“We have shown that you can own and operate all of your restaurants, rather than franchise, and still grow at a rapid rate,” he said. “You can spend more on ingredients, not less, and still serve high-quality food at reasonable prices and have industry-leading margins and returns.”
Chipotle has also shown that “you can build teams of top performers and power them to deliver high standards, while still maintaining an efficient labor model,” he added. “And that you can remain focused on doing just a few things extremely well, rather than trying to be all things to all people, or engaging in the kind of marketing gimmicks that have become the hallmarks of traditional fast food, and still continue to attract new customers and profitably grow the business over the long term.”
Chipotle will continue to apply its fast-food model to its growing secondary brands, including the nine-unit ShopHouse Southeast Asian Kitchen and Pizzeria Locale. The two-unit pizza concept is scheduled to open its first location outside Denver this year in the Kansas City, Mo., area, Ells said.
Contact Lisa Jennings at [email protected].
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