Chipotle’s Price Hikes Are Beginning To Turn Customers Away

Chipotle had a good third quarter in a challenging environment. The company’s band and value proposition remain strong despite rising inflation, which leaves little money for consumer discretionary spending like eating out.

“Our performance in the third quarter confirms our brand and value proposition remain strong, even during a challenging economic environment” said Brian Niccol, Chipotle Chairman and CEO, following the release of third quarter results. “With consumer discretionary spending tightening, we are focused on running great restaurants and delivering excellent customer and employee experiences.”

But Quo Vadis President John Zolidis sees a mixed picture in the company’s results, depending on how transactions and price hikes are analyzed. On the side, Zolidis sees bulls siding with the company’s CEO, arguing that everything is fine with the company’s performance.

“Bulls can argue that small transaction losses are not a big deal given the environment and profit per burrito sold is rising while the company is growing its earnings power,” he told International Business Times.

On the other side, bears may think otherwise by carefully doing the math behind the company’s reported sales and prices.

“IF pricing is up 13% AND the company is not seeing any trade-down in protein or change in attachment rate for chips or drinks, THEN transactions MUST be the difference between the reported comps of 7.6% and price,” calculated Zolidis. “This implies CMG sold 5.4% fewer burritos at same-stores in the third quarter compared to the year ago.”

That’s a far more significant decline than the 1% decline reported using CMG’s method, meaning that Chipotle’s price hikes are beginning to turn customers away. The declines in burrito sales must be worse in October, according to Zolidis calculations.

“The month is benefiting from another round of incremental price increases with the quarter expected to see 14.5% or even 15.0% menu price increases (on top of 8% LY),” he observed.”If October comps were +5% (disclosed on the call), then transactions (burritos) MUST be nearly 10% lower.”

That doesn’t bode well for next quarter’s sales and earnings and Wall Street has noticed, siding with the bears. For example, Chipotle’s shares lost ground following the release of the third-quarter results.

Zolidis thinks the company’s problem of declining transactions is the model it uses to determine the value it provides to its customers and eventually set burrito prices. “Chipotle made pains to reiterate the value it provides to consumers relative to other restaurants and grocery stores,” he explained. “However, we think this is the wrong way to look at it.”

What’s the proper benchmark of comparison? “We believe consumers compare Chipotle pricing to alternatives and how much it used to cost to eat at Chipotle. And this price is much less attractive than it used to be, ” Zolides added.