Can Chipotle Afford to Pay $15/hr?

Nov 1, 2022 | Corporate Insights, No Bull Economics

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Chipotle’s recently reported 3Q22 results highlight an interesting test that the chain embarked upon last year (one which is very important for everyone to observe). In an effort to cover the chain’s pay hike to $15/hr during 2Q21 (or higher in certain high-cost markets), Chipotle took a +15% menu price increase (which ran +13% during 3Q22). At the time, the premise was that Chipotle enjoyed sufficient pricing power among its customers to pass along this hike in its labor costs.  

So, what we find is that during 3Q22 Chipotle generated +7.6% same-store-sales growth with traffic down -1% and order mix down another -4.4%. This phenomenon was attributed to a return to the normal dining patterns of its guests which translated into fewer high-ticket digital orders and more low-ticket in-store visits. Also, this reflected fewer group orders as customers were just shopping for themselves whereas in the past they were buying for larger groups. In defense of its past strategy, Chipotle pointed out that despite the menu price hike, it still offers value as represented by its $9 Chicken Burrito Bowl which represents 50% of its orders (of course, maybe that’s all some of its guests can afford).

Judging by a -7% drop in CMG shares 2 days after reporting, it seems like the market was not buying Chipotle’s confidence that its massive menu price increase was well tolerated by its high-income $75k+ guests. Could it be that it has become too expensive for Chipotle’s customers to pick up the tab for family & friends? We understand that the chain sought to become a first mover in hiking its pay, and perhaps that was effective at minimizing turnover during a time when industry players struggled to maintain required staffing levels. But now the chain must recognize that even its own menu is not price inelastic and a +15% price hike has implications, but hopefully not for its brand reputation.

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