Market Commentary: What Chipotle’s Bold Move Means For You

Chipotle has managed to do what few food companies ever achieve, keep prices low, win over customers with taste, and maintain high quality offerings. But recently one of those three ingredients was forsaken because the company hiked prices to combat inflation, which has a knock-on effect not only to you and me but to the broader economy.

How will Chipotle’s pricing strategy affect its growth prospects in the face of economic challenges and what dominos will fall as a result of it?

Key Points

• Chipotle faces inflationary pressures, leading to a fourth price increase in two years to offset rising costs, particularly in commodities like avocados, beef, and chicken.
• To control costs and gather valuable customer data, CMG is heavily investing in online capabilities, with digital sales accounting for nearly 40% of Q2 revenue.
• Chipotle’s pricing move signals risk to consumers over the coming year as other restaurants follow suit.

Chipotle’s Bold Move

The announcement of yet another price increase marks the fourth in two years for Chipotle. The company’s Chief Corporate Affairs Officer, Laurie Schalow, cites the need to offset inflation as the driving force behind this decision. While the exact timing and extent of the price hike remain undisclosed, industry experts speculate it could be around 3-3.5% and might coincide with the usual Q4 menu update.

Commodity prices, particularly avocados, beef, and chicken, are applying consistent pressure on Chipotle’s costs. The impending Fast Food Accountability and Standards Recovery Act (FAST Act) in California, which raises the minimum wage to $20 by April 1, 2024, is likely also be influencing this move.

Despite reservations among consumers, Chipotle’s value proposition appears resilient. Analysts suggest that in the current economic climate, a $13 Chipotle burrito is more appealing than a salad at a competitor like Sweetgreen that costs 45% more. Chipotle’s value perceptions are surpassing those of its peers, positioning it to capture additional market share, much like it did during the 2008-2009 financial crisis.

Burritos Go Digital

To keep costs under control, management is heavily investing in digital capabilities, including mobile orders and drive-thrus, called Chipotlanes. The digital strategy can accelerate order placement and it is also a means to gathering consumer data, which can be used later to boost lifetime values.

The company can offer consumers rewards to revisit locations and encourage repeat purchases. The strategy seems to be working digital sales accounting for nearly 40% of total food and beverage revenue in Q2.

Chipotle’s expansion plans align with this digital focus as the vast majority of new restaurants opened feature a Chipotlane. This approach is hailed as a massive win for the company because these locations tend to have higher digital sales and stronger overall performance.

Chipotle’s Growth Prospects

While Chipotle’s stock is flat over the past 6 months, it’s up by more than 4x over the past 5 years.

The company is dedicated to expansion, with a long-term target to more than double the 3,200 restaurants it operates in North America.  Moreover, Chipotle’s first-ever development agreement for locations in the Middle East signals its intent to accelerate international growth.

In addition, cutting-edge innovations are geared towards speeding up service and ensuring you enjoy a smoother and more efficient visit. But that’s not all – the growing presence of Chipotlanes hints at the potential for new menu items, perhaps even breakfast selections.

Conclusion

Chipotle’s pricing strategy shows that even a company whose core tenet is affordable prices cannot withstand the forces of inflation at play now. That suggests a domino effect will occur at restaurants nationwide that will hurt consumers’ pocketbooks over the coming year or more.

Expect more companies in the sector to make similar announcements that will have a detrimental knock-on effect on the all-important consumer confidence. It’s possible 2024 could shape up to be a rough year if the inflation tide is not stemmed soon.