Big Business Thinking

Nation’s Restaurant News recently reported that Chipotle Mexican Grill, a fast-casual chain with over $1B of annual sales of sort-of make-your-own burritos, is raising prices by 6%, having already raised prices 4% earlier this year.  Look at this quote from Steve Ells, the company’s founder and CEO:

We do not predict that there will be no resistance, but we’ve got confidence that our customers understand that we haven’t raised prices and we’ve been very hesitant to do so, that they understand our ingredients are better, and they’re very loyal.

Disregarding Mr. Ells’s double negative, run on sentence and wishful thinking, note that here is a branded, national company which:

a) previously had a very hot IPO and stock run-up (NYSE: CMG; 52 week high of $155, trading today right near its 52 week low of $40),

b) is exposed to declining gross profits due to rising commodity costs comprising its primary variable expenses, and

c) is highly susceptible to declining discretionary consumer spending.

The company feels that it has no choice but to make the effort to maintain its profitability by raising prices, even if its direct competitors, who face identical issues, choose not to.  Why?  Because, to its credit, Chipotle apparently believes that it offers a product and a customer experience that will let it maintain its profits even if it loses the equivalent of a half-turn from its most price-sensitive customers.

On the upside, if it raises prices and these prices stick (i.e., revenue does not show an immediate decline larger than the incremental EBITDA value of the price increase), the company is setting itself up for profit expansion when commodity prices (for them, chicken, cheese, flour, gas, etc.) decline.  Lastly, if the price increase does stick, then Mr. Ells’s view of his customers’ loyalty will be proven correct and the income statement will benefit from it.  Remember, his best customers are not going to be trading up to Ruth Chris, and only a few of them are likely to trade down to the Taco Bell value menu.  If the average check is a dollar or two more, but the value proposition appears to be four or five dollars better to the customer, then even during hard times many customers will stay the course.

Indeed, it seems like Chipotle is preparing to move itself from a Market Price Follower to a High Price Follower.  Having done so, for it to be successful, the company will be forced to make itself a Leader.

In case this is unclear, yes, this entire story is a metaphor for your own pricing decisions for your business.  Market Price Followers should not stand still in this economy.