Chipotle's efforts to protect its value proposition pay off

Healthy transaction gains for both the fourth quarter and the year indicate that guests feel they are getting their money's worth, said CEO Brian Niccol.
Chipotle ended the year with 3,437 units after opening a record 271 last year. | Photo: Shutterstock.

If consumers were worried about the cost of their burritos at Chipotle, it doesn’t seem to be holding them back.

The Newport Beach, Calif.-based chain on Tuesday said same-store sales were up 8.4% in the Dec. 31-ended fourth quarter, an increase that was driven by a 7.4% increase in transactions.

For the year, Chipotle’s same-store sales increased 7.9%, with 5% of that driven by transactions and 2.9% by an increase in average check that included menu price hikes.

The popular carne asada LTO during the fourth quarter helped. But fundamentally those better-than-expected results are an indication that Chipotle remains a great value, said CEO Brian Niccol in a call with analysts on Tuesday.

 McDonald’s opened earnings season this week by indicating the fast-food giant is losing some lower-income customers who are opting to cook at home. But  Niccol said Chipotle’s sales during the fourth quarter rose among all income cohorts.

And despite social media-driven complaints suggesting shrinking portion sizes, Niccol said in-store sales are the strongest in part because that’s where guests see the greatest value.

“There’s no better experience than walking down the line, seeing the rice and chicken that you want, and then giving one of our team member the look, like, how about a little more? And they do,” said Niccol. “That’s how you end up with these big bowls and big burritos. So I think the value proposition is just really strong in store, especially when we’re executing great culinary and great speed.”

Ordering Chipotle for delivery, however, remains a higher cost option, and Niccol said guests know that.

“At the end of the day, if you need to manage your money, delivery is the most expensive access point,” he said.

Yet, despite that higher cost, Niccol said delivery sales have remained pretty stable, at about 20%.

Chipotle’s menu prices are going up 2.5% to 3% during the first quarter, however, and the chain hasn’t made a decision about whether prices will increase further as a result of a wage hike coming in California, where about 15% of units are located. The minimum wage for fast-food workers in California will increase to $20 per hour in April, which is about a 20% increase at Chipotle.

Fundamentally, Chipotle is facing the choice between raising prices enough to break even, or perhaps raising them a little more to protect margins, said Jack Hartung, Chipotle’s CFO.

“We’ll wait and see what the landscape looks like, what the consumer sentiment is, and what other companies are going to do,” he said. “So, depending on where we end up, there will probably be an extra 80-ish, 90 basis points to maybe something over 100 basis points, in terms of additional menu price across all of our 3,400 restaurants.”

Still, Niccol said Chipotle’s value scores remain strong, and that the chain is 20% to 30% less expensive than its fast-casual peers.

“Maintaining that value is a really important piece of the puzzle for us,” said Niccol. “I just love that we’ve got quality, we’ve got value and we’ve got speed, and we’ve got customization. We’ll protect all those things and I think we’re going to continue to do very well.”

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