Chipotle has raised menu prices 6% to 7% in California restaurants to cope with the state’s new Fast Food Wage of $20 per hour, which went into effect April 1.
The move will cover the cost of the state-mandated wage increase in dollar terms, which for Chipotle will increase wages in the state about 20%. Systemwide during the first quarter, menu prices went up a relatively minor 2.8%, but the state-specific price increase will also add almost a full point to total company pricing, starting in the second quarter.
And California’s Fast Food Wage is expected to have a negative impact on restaurant-level margins by about 20 basis points, said Jack Hartung, Chipotle’s CFO on Tuesday, as the company reported first quarter results.
But the company doesn’t expect those higher prices to hurt traffic.
For the March 31-ended first quarter, Chipotle said same-store sales increased 7%, driven in part by a 5.4% increase in transactions and a 1.6% increase in average check.
And with strong trends continuing into April, the company upgraded guidance for the year, projecting comp sale growth in the mid- to high-single digit range, up from earlier projections of mid-single-digit growth.
Across the restaurant industry, the reaction to the California wage hike has been somewhat mixed. Many restaurant chains have increased pricing, but others are taking a more cautious approach, looking instead for efficiencies to protect margins.
Hartung said Chipotle’s average ticket in California is pretty similar to the rest of the country, despite the higher cost of doing business in the Golden State.
Even after the menu price increase, a chicken burrito at units in California is about $10, he said. It’s too soon to tell if the increases will have an impact on consumer behavior there.
“We still think in California, compared to competitors, we’re still an intrinsic value if you look at what others are charging,” said Hartung. “If you look at others in California, before this increase, and compare them to average menu prices throughout the country, they tend to be higher. They’re passing on a higher cost of doing business.
“We’ve tried to keep our pricing very, very affordable in California,” he added. And as consumers adjust to the higher menu prices across the industry, “We think Chipotle will stay in the budget.”
CEO Brian Niccol said Chipotle continues to make progress on boosting throughput, adding nearly two entrees in 15 minutes during peak periods on average, compared with last year.
He gave the example of a restaurant in Boston where, a year ago, the crew could push through about 25 entrees during the peak 15-minute period, but today they are doing 40 and can reach as high as 80, which is among the highest systemwide.
That Boston unit also has low turnover and outsized transaction growth, which shows that nailing the key aspects of throughput improves operations more broadly and makes Chipotle a better place to work, he said.
Sales grew 14.1% during the quarter to $2.7 billion, driven in part by the popularity of both Beef Barbacoa and Chicken Al Pastor. Net income was $359 million, compared with $291 million a year ago.
The chain opened 47 new restaurants during the quarter, including 43 with a Chipotlane, for a total of 3,479.
Niccol also appears to be seeing opportunities with international expansion.
Last week, Chipotle saw the first franchise unit open, in partnership with Alshaya Group, in Kuwait City. The mega franchisee plans to open another four Chipotle units this year in the Middle East, including the first in Dubai.
Niccol said the company is now looking for growth in Europe, where the company has 19 units in the United Kingdom, six units in France and two in Germany. The chain has been working on the menu and operations there over the past year to improve results.
The company recently shifted responsibilities for Europe operations to Anat Davidzon, now head of international, who helped build the chain’s business in Canada, where there are 41 Chipotles.
“We see many similarities between the European operation today and the Canadian operation five years ago,” he said.
Five or six years ago, the company was struggling to make unit economics look compelling in Canada, he said.
But now unit economics are on par with the U.S. and Niccol projects the company will reach 100 units “pretty soon,” and someday have hundreds across the northern neighbor as Chipotle reaches 7,000 in North America.
“Our belief is we’ve learned a lot from what we’ve had to do in Canada and get that business to perform,” said Niccol. “We’re taking that leadership there, giving her the opportunity to oversee our Europe business, take those lessons learned and apply it. And at the same token, we’re taking what we think are some of our best operators and giving them the opportunity to grow by working in our European business.”
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