Chipotle (CMG) easily beat Wall Street expectations in its third-quarter earnings report released Thursday. The company has faced several price hikes for its food in the past several years but customer base and growth remain strong, opening 62 new restaurants during the quarter.
Chipotle CFO Jack Hartung joins Yahoo Finance anchors Seana Smith and Diane King Hall and Executive Editor Brian Sozzi to discuss Chipotle's position and how the fast-casual restaurant has retained customers and value despite price hikes.
When asked about price increases during inflationary periods, Hartung explains: "Our current food and labor inflation is running at about 3-4%. Our strategy has always been just to keep up, or maybe stay a little bit behind inflation. We don't want to build our business or grow margins based on inflation. We want to grow our margins based on transaction growth."
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SEANA SMITH: Higher prices did not stop consumers from grabbing their Chipotle burritos last quarter, the food chain beat TheStreet's estimates in the third quarter, also saw same store sales growth of 5%. Chipotle CFO, Jack Hartung, joins us now, alongside Yahoo Finance's executive editor, Brian Sozzi.
Jack, it's great to see you here. So certainly we're seeing some encouragement here in terms of TheStreet's reaction to these results, and move to the upside here in shares today. But what struck me in this report, is that Chipotle, once again, remaining strong, remaining resilient in the face of higher prices, in the face of the fact that so many of your competitors are seeing consumers pull back their spending. What do you attribute this strength to?
JACK HARTUNG: Listen, I think a lot of it is that we are priced lower than other competitors, even though we've had to battle inflation, like every restaurant company, when you look at the cost of having a meal at Chipotle, compared to others in the fast casual, our prices are anywhere from 10% to 25% or 30% lower. So if you're looking for a quality meal, with real cooking, and the customization, and convenience that Chipotle offers, you can't get it at a better price than at Chipotle. And we think that in these times, where people are under pressure, and they're a little bit fatigued from inflation, Chipotle is a great alternative.
BRIAN SOZZI: Jack, Brian here, always good to see you. You've been at Chipotle for a while. You've seen really everything almost since day one. Social media loves talking about Chipotle, as you know. What do you say to those folks that suggest Chipotle has lost a step, that it's not the same Chipotle as five years ago?
JACK HARTUNG: Listen, I guess there's going to be totally haters out there, but we feel like the food is better than it's ever been, we feel like the convenience, because of digital, digital five years ago was 15, 16% of our business, now it's almost 40% of our business. We feel like the people in our restaurants are better than they've ever been, our stability in the restaurants, in terms of holding on to our people, is the best it's ever been.
And then we have better menu innovation, five years ago, we didn't really have menu innovation, so now we've got Carne Asada, which customers are responding in a big way. A couple of months ago, we had Chicken Al Pastor, which our customers love. So are we a different Chipotle, we certainly are, but I think we're better.
- Jack, OK, so I am a fan of Chipotle. I like your burrito bowls, your salad bowls. I don't do the burritos, currently, just because I'm watching my waistline. But I got to ask you more, and I dig deeper into the pricing, when you talk about you can't get a better price elsewhere, I do feel like the prices have skyrocketed over the years. What are you watching for in terms of the consumers elasticity when it comes to your pricing? Where do you say, OK, we can't take it further than this?
First of all, the prices that you put up, I think are probably in New York. So that's not what most customers are paying. The average chicken burrito is right around $9. If you go into a restaurant now, it's more for delivery, because we've got to pay for the delivery fee.
But go into our restaurant and order in the app, and then pick it up, the average Chipotle burrito is right around $9. In fact, more than half of our restaurants, the average Chipotle burrito is under $9. You go anywhere else and get a chicken sandwich, or a chicken bowl, or a salad with chicken, you're going to pay 11, 12 $13, and I'm talking about across the country.
So when we compare our prices to others, that's where we're at least 10, if not 20% or 30% below. We also look at, either our internal value scores, and then outside of Chipotle, independent studies have done it as well. They ask what is the best value out there, and they will stack rank us against other companies, we always end up on top, so our customers say it. And when we look at the data, our prices versus others, which you have to do on a market-by-market basis, you can't compare a New York price to something in the middle of Ohio. But when you compare within market, we're always the better alternative.
- Jack, when it comes to pricing. I'm curious just to know a little bit more about that strategy, because you have been forced to raise prices four times in the last two years, a lot of that obviously, because of inflation, higher input costs that you at Chipotle are facing. How do you see that pricing strategy shaping up, going forward?
JACK HARTUNG: So we just issued, rolled out a 3% price increase, because our current food and labor inflation is running about 3, 4%. Our strategy has always been just to keep up, or maybe stay a little bit behind inflation. We don't want to build our business, or grow margins, based on inflation, we want to grow our business and grow our margins, based on transaction growth. And you saw in the quarter, we had strong transaction growth in the quarter, we expect continued strong transaction growth in the fourth quarter.
And before this price increase, we didn't raise prices until over a year ago. So we've been over the year, and especially in the last year or so. We're usually slow to raise prices, and you're right, we've had to battle inflation, but if you look at the inflation we've taken on over the last two years, and the pricing, we've not even fully priced in that inflation.
BRIAN SOZZI: Jack, and next year, 15% of your restaurants are in California, and they're going to be dealing with higher wages to what, $20 an hour. How much of a headwind is that for Chipotle? And then as the CFO, do you pull back on how many stores you are going to open in California over the next few years?
JACK HARTUNG: First of all, Brian, that is a significant increase. We tend to pay higher wages than others. Our average wage in California is about $17. To get up to 20, as the minimum, keep in mind when the average is 17, you've got some below, some above that. To get the minimum to 20, we're going to have to raise wages across the board by somewhere between 17 and 18%, up to 20%, significant increase.
Our plan is, we have no choice every restaurant company in California is going to have to do this, we're going to have to raise prices. We've said that we've not made a decision, we'll wait till we get closer to the April time frame. But we'll have to raise prices somewhere in that mid to high single digit range.
In terms of opening restaurants, we'll still open restaurants. We have more restaurants in California than any other state. We do really, really well in California, and everyone's going to have to raise prices, so I would expect, Brian, when all this is said and done, and things settle, that Chipotle will still be 10 to 30% below other competitors in California.
- And Jack, really quickly, have you noticed any impact in terms of the weight loss drugs, and people cutting down on the size of their order?
JACK HARTUNG: No impact at all, and we think we will fare well, we're watching it very closely. At Chipotle you can get exactly what you want. And so over the years, as people have pursued different diets, you can come into Chipotle, it's like going to a grocery store, you can pick any ingredient, and you can custom, build your burrito or your bowl, to exactly your taste and your diet. And so we think whatever happens with this weight loss drug, I think the customers are going to be able to come to Chipotle and get exactly what they want.
BRIAN SOZZI: My order is double protein all day, Jack, you know that.
[LAUGHS]
JACK HARTUNG: I love it. I got to have a meal with you and see that. I got to see.
BRIAN SOZZI: Yeah, let's do it, let's go.
- All of us, we're all going to Chipotle, in Ohio, where I'm from. All right, our thanks to Chipotle--
JACK HARTUNG: It's on me
- --Jack Hartung-- Thank you. --alongside Yahoo Finance's Executive Editor, Brian Sozzi, thanks to both of you.
