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Chipotle CFO on inflation: ‘We don’t have any plans to raise prices’ further

Chipotle CFO Jack Hartung joins Yahoo Finance Live to discuss company earnings, how consumers are reacting to price increases, inflation, and the outlook for growth.

Video transcript

BRIAN SOZZI: Shares of Chipotle are getting grilled after the company reported a same-store sales increase of only 5.6%, which is below the 7% estimate by analysts. That after the burrito chain hiked menu prices for the third time in 15 months back in August. Like always, Chipotle CFO Jack Hartung is here with us now. Jack, always great to get some time with you.

Lots of focus on that earnings call about the price increases and how consumers are responding. Do you have any plans to dial those back this quarter to regrow traffic?

JACK HARTUNG: Yeah, we don't have any plans to dial the menu price increases back, but we don't have any plans to raise prices either. Frankly, Brian, the last year and a half, inflation was in a runaway mode, and we were just trying to keep up with it. What we are doing, though, is we've been watching very closely our customer reaction. And most of our customers are coming the same amount of times or even more since we've taken some of these price increases.

We are seeing some softness in our lower-income customers, but we're also seeing that they're spending less in restaurants generally. So it's not just a Chipotle thing.

JULIE HYMAN: Hey, Jack. It's Julie here. If you could, can you dig a little bit more into your input costs for us? I know that costs for things like tortillas were still going up for you. We have definitely seen avocado prices come down in a pretty dramatic fashion. How are these various input costs affecting you? And throw wages into that equation as well.

JACK HARTUNG: Yeah, if you look at, Julie-- first looking backwards a little bit, if you look at the last two years, our wages are up 24%, and our ingredient costs are up nearly 20%. So that's the inflation that we've been dealing with. And our menu prices have lagged that a little bit. And so we've tried to keep up, and we still felt a little bit short. Our outlook going forward is that we think inflation is starting to normalize but still in that low single digits to mid-single-digit kind of range.

Looking forward, it looks like most of the pressure is going to come from beef. Most of the forecasts predict that there's going to be supply not keeping up with demand. We've seen a little bit of a bump up with chicken. You're right about avocados. Avocados recently have behaved very, very well, but avocado will go through seasons. And depending on where we're getting them from, whether it's Mexico or Peru or California, that may change.

So we're pleased that it's more of a-- I would call it a normal single-digit inflation outlook. And so if it stays that way, we don't have any plans to take any more menu price increases for-- at least for the foreseeable future.

- Jack, I've been kind of obsessed with your Chipotlane strategy and how well it's worked for you guys. And it's really in this plan to continue the expansion. And it looks like about 80% of the planned openings, 245 to 285, are going to include a Chipotle. And how much more profitable are the locations that have a Chipotlane than those without one for you guys?

JACK HARTUNG: Yeah, they're better on every single measure. When we open up a Chipotlane versus a non-Chipotlane, the sales are higher. The margins are higher. It's more efficient for us because more of the business comes through our digital drive-thru, and that's a more efficient channel for us. It's more convenient for the customer.

And it's a convenience channel that also comes with a lot of value, which is really important in this kind of environment where customers are dealing with inflation. So they don't have to get out of their car. So it's not as convenient as delivery, but boy, it's a whole lot cheaper. And so our customers really flock to these Chipotlanes. And so it's better for the customer. It's better for Chipotle as well.

BRIAN SOZZI: Jack, you know I'm an avid Chipotle customer. And I've gone to a couple of occasions in the past three months, and they were out of chicken. One was out of the salsa that I normally like. And it sounded like you talked a little bit about that on the call-- menu deactivations. How widespread is this problem now, and what exactly is causing it?

JACK HARTUNG: Yeah, we've spent a lot of time over the last three months dealing with deactivations. And this really, Brian, has happened over the last couple of years. With COVID, we had things like supply interruptions, distribution. Trucks didn't arrive to the restaurant on time. We've had call-offs. Our folks come in, like, 7:00, 8:00 in the morning to start prep so that we can open up at 10:30. If you have one call-off, you're going to fall behind on things like cutting onions, making the salsas, marinating the meats, things like that. And so all those things were hitting us over the last couple of years.

Unfortunately, we kind of got into the habit of it's OK to be out of ingredients. Well, we've really focused on that last three months. We've had an all hands on deck to make sure the supplies are arriving to the restaurant, that when there's a call-off, you bring somebody else in, or you bring an extra person in in case there is a call-off, and you make sure that you are getting the ingredients into the back door, that you're prepping the ingredients so that when we open up the doors at 10:30, we have all these ingredients.

We've made tremendous progress. I would say we've solved about 80% of the problem. So we're not back to 100% yet, Brian, but we've made such good progress. And we're not going to quit until every ingredient is available every time a customer comes in.

- When the ingredient supply is rattled, either on a store-by-store basis or more broadly, how do you ensure or just make sure that there is that quality assurance that consumers have come to expect from Chipotle?

JACK HARTUNG: Yeah, a lot of it's visibility. And it's been difficult because there are so many changes and interruptions that we've seen over the last couple of years. And so we've developed, in terms of our supply chain team, their ability to see when a truck is late, that they can respond and at least contact the restaurant and maybe divert supply from either one restaurant or from another truck that's going to another restaurant to make sure we can get supply to the restaurants.

As you guys know, we deal with-- we don't have freezers. None of our ingredients come in frozen. So we're dealing with fresh food all the time. So you really have to be on this because if you lose a little bit of time, that fresh food, if it takes longer to get to a restaurant, it's not going to be as tasty. So this is something we spend a lot of time on. And like I said, we've solved about 80% of the problems in the last few months, but we still have another 20% to go. We're not going to rest until we get all the way there.

JULIE HYMAN: Jack, the garlic guajillo steak did not perform as well as you guys had anticipated because you were testing it in a different economic environment, as Brian talked about on the call. Is that going to go away, do you think? And maybe can you give us a teaser as to what other exciting stuff we can expect to eat at Chipotle this year?

JACK HARTUNG: Yeah, so it was always intended to be a limited-time offer. And you're right-- we tested it in one environment. And garlic gaujillo steak is delicious, and the customers that bought it absolutely loved it. But it is a premium item. And a premium item during an inflationary period where customers are feeling pressure with their budget, that timing wasn't great.

We are, in the very near future, going to offer-- again, for a limited time only-- chicken al pastor, which is our version of chicken with a little bit more spice and a little twist of pineapple in there as well. It's delicious, so look for that coming soon. We're testing things like desserts as well. And then we've got a menu hack that we're going to try to make available in a couple of weeks now. And it's really related to having our quesadilla with steak and our fajita peppers. And so those are the few things that you can see on our menu in the fairly near future.

BRIAN SOZZI: Well, sign me up for that, Jack. I am ready--

JULIE HYMAN: I want some churros from Chipotle.

BRIAN SOZZI: Sure, some menu hacks, whatever you got. We're buyers here. But Jack, I also wanted to ask you about this. I was talking upstairs to my boss, Ken Underwood, and we were talking about delivery fees. We both order a lot of Chipotle via delivery. And the fees to get our products delivered has gone up a lot. And the delivery sales in the quarter fell 15%. Is there any way around this delivery network? Can you bring it in house? Are you looking at ways to bring these costs down?

JACK HARTUNG: You know, delivery is just really expensive. There's no way around that, whether we deliver the food ourselves or you work through an outside party. And so Brian, we've taken the position that we're going to have all the channels that our customers want available to them, including delivery, but we're also going to price it such that we're covering the cost.

The thing we don't want to do is, for example, a discount. And there has been a lot of dealing with the delivery channel to keep those sales coming. Our model, because of the more expensive food that we buy, because we have a lot of handwork a lot of cooking, a lot of prep going on in the restaurant. Our model doesn't work if we're going to discount to get people into that channel.

And so yeah, the delivery transactions were down 15% during the quarter, but we feel like a lot of that business moved into-- for example, especially if we have a Chipotlane in that market, moved to another convenient channel that is a better value through our Chipotlanes. But the thing we're not going to do is we're not going to discount to try to get people in the delivery channel.

The sales of delivery are still quite high. They're still almost in the high teens, almost 20% of our sales. And it's a choice that our customers that want to pay that higher price for that convenience, we're going to be there for them.

JACK HARTUNG: Jack, thanks, as always, for spending some time with us to break down the numbers. Really appreciate it. Chipotle CFO Jack Hartung, thank you.

JACK HARTUNG: Thank you.