Chipotle Sales Jump Shows Guests Will Pay More
by David Klemt
Chipotle’s latest earnings report may show that guests are willing to pay more at their favorite restaurants.
In Q3, the fast-casual giant’s net sales grew by nearly 22 percent. Per reports, same-store sales rose by just over 15 percent.
Is it possible that Chipotle’s earnings—which exceeded Wall Street estimates—indicate that guests will tolerate price hikes?
Rising Costs
No, it’s not a “hot take” to state the obvious: Everything is more expensive.
All operators and managers are aware that costs are rising across the board. Beef, chicken wings, cooking oils… Prices are increasing and the trend is expected to continue.
Not that any of us need a real-world example, but Chef Brian Duffy shared on episode 53 of the Bar Hacks episode that he now has to price a pound of chicken wings at $13.
One reason that Chipotle made the choice to raise prices comes down to rising beef prices. Another is increased freight costs.
As every armchair economist knows, when a business’ costs rise that increase falls on its customers.
The reason is fairly simple: If prices remain the same while costs rise, the situation becomes untenable, the business doesn’t generate enough revenue, and doors close.
So, Chipotle’s decision was simple. The fast-casual chain announced in June that menu prices would increase by about four percent to defray rising costs.
Rising Wages
Chipotle’s June announcement followed one the company made in May.
Six months ago, Chipotle announced the hourly wage for their restaurant workers would increase to $15 by June.
How did the company afford to raise hourly wages, offset ingredient costs, and deal with rising freight rates? The aforementioned menu price hike.
Now, Wall Street didn’t seem to anticipate backlash toward Chipotle for increasing their prices. However, plenty of other people have said—and still say—that customers won’t support restaurants or bars that raise prices.
It appears that a significant percentage of brand-loyal customers will remain loyal and continue to support the businesses they like even through price hikes.
Is This the Way?
I’ll address a crucial detail: Chipotle is a fast-casual brand valued at close to $52 billion.
They’ve got incredible brand recognition and tremendous purchasing power. Reportedly, there are 2,857 Chipotle locations in the United States. In fact, the company announced in February of this year that it planned to open 200 more locations this year.
So, no, there’s not a direct comparison to be made between Chipotle and an independent restaurant or bar.
However, that doesn’t mean there’s no lesson to be learned here.
Chipotle was transparent about the reasons for their price hikes. The Great Resignation has shined a spotlight on wages, and Chipotle addressed that concern.
The pandemic has also unleashed havoc on supply chains. Again, Chipotle was forthcoming about the challenges the company was facing.
Moving forward, it may be wise for restaurant and bar owners to address menu price increases. There does seem to be some level of understanding among the more rational guests out there that if they support increased wages for hospitality workers; understand supply chain challenges; and know costs are up for everything, they’re going to see price hikes.
You very likely need to raise at least some of your prices. When you do so, consider telling your guests why. You may be surprised by the support you receive.
Image: fancycrave1 from Pixabay