If you noticed that your Chipotle (CMG) burrito costs a bit extra lately, or that you need more rewards points for that free entree, you’re not imagining things.
The Newport Beach, Calif., chain, known for helping innovate the concept of fast-casual chains and offering a healthier alternative to most fast food establishments, has raised its prices in response to higher labor costs, supply-chain issues and more, according to its latest earnings report, and customers are responding.
Are they ever.
But the company is well aware of the discussion and is trying to balance pricing with customers' wallets.
For Chipotle, Inflation Is Definitely an Issue ...
“Besides ongoing labor pressures,” higher beef and freight costs cut into the chain’s profit margins, Chief Financial Officer Jack Hartung says. “As a result, we took a 4% menu price increase in the middle of December to help offset these headwinds.”
The price increase didn’t much help in Q4, he said, but “if you look ahead to Q1, where we will see the pricing benefit for the full quarter, our restaurant level margin is expected to be nearly 22%” And adjusting for higher marketing outlays CMG expects this quarter as well as temporary Covid-related costs, the underlying Q1 margin would be a bit above 23%, he said.
“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,” the CFO said.
“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.”
...But So Is Pricing, and ‘Judicious’ Is The Watchword
Chief Executive Brian Niccol echoes the CFO regarding Chipotle’s careful decision making when it comes to pricing. It does traditional market research and crunches the data it gains from the rewards program to look at customer behavior. And it looks at the marketplace, otherwise known as the competition.
“[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,” the CEO says.
“We're kind of in our own space, and we're very fortunate to be in that space. And there's a lot of [pricing] 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.”
Some Chipotle Fans (and a Senator) Are Unhappy With the Price Rise
Price increases aren’t among the types of things a restaurant chain will go out of its way to publicize, like its a new menu addition. But customers do pick up on these things, and people have taken to Twitter to voice their complaints.
One particular sticking point is that because of the price increases, the Rewards Exchange loyalty program doesn’t seem to go as far as it once did. Chipotle introduced the program in 2019 and tweaked it last year to offer more options.
Previously, customers could exchange points only for free entrees, but now they can cash in points for guacamole, drinks and Chipotle merchandise, as well as to support nonprofit organizations.
But it’s not just Chipotle customers who are complaining. Sen. Bernie Sanders (I-Vermont) also took to Twitter to accuse the company of price gouging; Chipotle did not respond to TheStreet’s request for comment.
Chipotle Rewards Program Is a Key Revenue Driver
The company is well aware of the sensitivity of the issue. Niccol put it this way on the Q4 earnings conference call:
“We now have more than 26.5 million members in our rewards program, which is a key enabler of our digital flywheel. … As the program grows and we gain more experience, we are constantly learning, evolving and optimizing. For example, offering greater customization and flexibility to redeem rewards as well as gamifying the program with personalized challenges and badges that helped drive engagement and deepen relationships with our guests.
“Not only have we seen strong positive responses from our most loyal fans, ... these program enhancements have increased engagement from our medium- and low-frequency guests. We … believe ongoing investments and further leveraging of data-driven insights will make us even better.”
He noted that more members equal more revenue: “We know when we get people into the [rewards system], the average ticket goes up and the frequency at which they shop with Chipotle goes up.”
Chipotle Strategy to Grow Rewards Membership
Chipotle, the CEO says, continues “to grow the loyalty population in a meaningful clip. Obviously, it's not at the same speed it was a year or 2 ago, but … one of the things that's kind of interesting” is that as “we add more restaurants and we get people more access, the loyalty/rewards program becomes even that much more of an appealing program that they want to be a part of. …
“One of the big unlocks for us, frankly, is we still have a lot of people that are only dining-room people, and then we have a lot of people that are only digital people. And there's a small group that's doing both.
“And call it the 50%, 60% that are dining-room-only people, I think if we get those people to have a really positive experience using the rewards program, it's just a tremendous unlock for what that rewards program can grow to be.”
