Operations

How California's fast-food bill will impact Chipotle's menu prices

Company officials say the required wage hike next year will increase labor costs by up to 3%. And that cost will be passed on to consumers.
Chipotle storefront
Chipotle's same-store sales were up 5% for the third quarter, largely on transactions. |Photo: Shutterstock

If Chipotle's prices go up significantly next year, blame California.

Company officials reporting third quarter earnings on Thursday said the landmark bill approved last month that will increase wages for fast-food workers to $20 per hour, starting in April 2024, will force the chain to raise wages in the “high teens to 20%” range. About 15% of Chipotle’s units are in California, and the legislation will increase the chain's labor costs overall by roughly 2.5% to 3%, said Jack Hartung, Chipotle's CFO.

That’s going to result in a menu price hike, he added. But what that will look like is yet to be determined.

“We haven’t decided yet where we will land on that. It’s going to be a mid- to high-single-digit price increase, but we are definitely going to pass it on,” he said.

But for now, menu price creep does not seem to be hurting demand for Chipotle.

Chipotle’s same-store sales were up 5% for the Sept. 30-ended third quarter, with about 4% of that attributed to transactions and the rest an increase in average check. Revenues were up 11.3% to $2.5 billion.

Price hikes that were implemented last year had menu prices up about 2.8% year-over-year during the quarter. But company officials still believe the chain has pricing power.

In fact, Chipotle recently raised prices after about a year of keeping price hikes on hold.

In mid-October,  Chipotle’s menu prices increased about 3%. And still—despite the consumer pressures of inflation, higher grocery and gas prices, and higher interest rates—Chipotle’s traffic continues to do well, improving every month during the third quarter and into the fourth, said Hartung.

“We continue to do well, not just across our income levels, but with the lower income, they’re holding up really well. They’re really hanging in there at the same as our medium- and high-income levels,” he said. “So I think that Chipotle's value, where we haven’t raised prices in over a year until this latest action, I think is coming through and people are choosing to dine at Chipotle because we are very affordable.”

Most restaurants raised menu pricing last year to address rising food and labor costs across the industry, and Chipotle was no exception.

But after a series of increases last year, Chipotle said lower-income guests were starting to push back in the second half of 2022, and officials put price hikes on hold.

Still, Chipotle CEO Brian Niccol continues to make the case that Chipotle is less expensive than competitors, especially considering the quality of ingredients.

The team recently took a look specifically at 18- to 34-year olds with student debt and found that Chipotle was the best value proposition among that universe, he said.

“So one of the things we’re seeing is, whatever the situation you’re in, whether it’s low income, higher income with some student debt, we continue to be a strong value proposition, regardless of where you look across consumer segments,” Niccol said.

The return of carne asada during the quarter helped boost traffic, and Niccol predicted the dish would perform better than last year’s Garlic Guajillo Steak promotion.

Digital orders ticked down slightly from the prior quarter. During Q3, digital sales accounted for 37% of total sales, compared with 38% in Q2, and Hartung said some guests are “de-selecting” delivery in favor of the more affordable option of ordering ahead for pickup. But digital sales overall have remained stable.

The company opened 62 restaurants during the quarter, including 54 with a drive-thru Chipotlane, for a total of 3,321. Niccol was confident the chain would reach the high end of its projected openings of between 255 to 285 for the year.

And next year, Chipotle is picking up the pace of growth, projecting 285 to 315 new restaurants will open. Chipotle has set the goal of reaching 7,000 units across North America, though no timeline has been stated.

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