generic Why Chipotle just raised prices
With third-party food delivery outfits such as Uber Eats and Grubhub having their moment during the pandemic — and flexing their pricing power as a result of everyone ordering for home delivery — Chipotle (CMG) has had no other choice but to raise prices on takeout orders.
After all, Chipotle is a for profit business and can’t be selling burritos online for deep losses while the delivery companies financially clean up.
“It’s no surprise that delivery comes with an added cost. Our belief has been that’s a premium experience from a convenience standpoint. We want to make sure that channel covers the cost — we raised the prices 13% in our app [in the fourth quarter],” Chipotle CFO Jack Hartung told Yahoo Finance Live. “We also lowered them before the pandemic, we were charging a $3 delivery fee, we lowered that to $1. If you were ordering in the app prior to the pandemic and now you’re ordering delivery through the app, the increase is 2% to 3%. The 13% increase all it does is allow us to cover most of our cost in delivery.”
Chipotle says it hasn’t seen much resistance to the higher online prices. Hartung fancies Chipotle will continue to toil around with online pricing.
“In terms of pricing, I think in the delivery channel there is additional pricing potential there. We found that when people decide they want that channel they’re willing to pay a higher price. I don’t think we have reached the limit there. We’ll continue to experiment. We’re not going to go crazy on pricing because we think we can. We’ll try to understand when and where customers want that channel and how much they are willing to pay and we will act accordingly,” explained Hartung.
Chipotle’s online business has surged during the pandemic with many restaurant interiors closed or operating under reduced capacity. The company’s online sales skyrocketed 174.1% year-over-year to $2.8 billion in 2020, comprising 46% of Chipotle’s annual business. Fourth quarter online sales rose 177.2%.
That type of growth makes it critical that Chipotle also focuses on online profitability, not unlike most bricks and mortar retailers.
Despite the heady digital growth in the fourth quarter, Chipotle’s shares fell slightly in Wednesday trading as it fell short of analyst profit forecasts due mostly to higher operating costs. Chipotle’s same-store sales in the fourth quarter rose 5.7%. In January, Chipotle’s same-store sales increased 11%.
“Chipotle remains a premium brand with strong digital/off-premise business helping it manage through the current environment better than most with continued unit growth in mid-single digit percentage range (70%+ Chipotlanes in '21), but we think much of this is already reflected in the stock,’ said Jefferies restaurant analyst Andy Barish in a note.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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