Californian burrito lovers are fed up with higher prices.
While some thought Chipotle would be able to pass along higher costs to its loyal following once the FAST Act took effect in April, CFO Jack Hartung said customers across the industry pulled back.
“It’s not because the Chipotle burrito costs a little more. There’s really a reduced spending across the restaurant industry [in California],” Hartung told Yahoo Finance, “When we’ve looked at it, restaurant companies that took a very high increase had a impact on sales, about the same as what we’ve seen. Restaurants that have taken no increase had the same kind-of reduction in sales.”
The FAST act mandated food chains that have at least 60 locations nationwide to raise their minimum wage for restaurant employees to $20 per hour, up from $16. As a response, Chipotle raised prices in California by 6.5% to 7% in April, Hartung said.
The “best offense” to combat the slowing growth in foot traffic is with “great operations,” Hartung said.
“It’s high quality food, it’s big portions, it’s a fast experience, and it’s the food that they crave,” Hartung said of Chipotle’s recipe to success, regardless of the macro environment.
In its latest quarter, the company beat Wall Street estimates for revenue, earnings, and same store sales.
For Q3, the company expects labor cost “to be in the low 25% range due to seasonally lower sales with wage inflation to remain at about 6%,” Hartung told investors on the earnings call. California accounts for around 15% of Chipotle locations.
“About half of the wage inflation is due to the nearly 20% step-up in wages in California as a result of the increase in minimum wage for restaurant companies like ours that took effect in April,” he added.
Foot traffic jumped 8% in the quarter, more than the 6.3% expected, with growth across all income cohorts. That’s compared to a 0.6% decline in the industry, according to a note to clients from Bernstein analyst Danilo Gargiulo.
“Market share gains despite burger wars reinforce our view of Chipotle’s enduring value superiority,” Gargiulo wrote. “Wth the normalization of trends and on the back of the pricing resistance encountered in California,” Gargiulo expects fiscal year 2024 to end with 7.8% sales growth.
Gargiulo said the company will still be able to increase prices, if the fall return of another limited-time offering — smoked brisket — surpasses expectations, and the inflationary environment persists.
Hartung said this limited-time offering will likely bring in more customers, but is more expensive for the company than its current Chicken Al Pastor special.
The industry at large has been keeping tabs on the impact California’s higher wages.
“We continue to see visitation trends for most QSR and fast-casual restaurant chains in California lag the national average since the implementation of the $20 minimum wage increase in the state (and subsequent menu price increases by many operators),” R.J. Hottovy, Placer.ai’s head of analytical research, told Yahoo Finance in an email.
Chipotle’s year over year weekly foot traffic growth in California lags behind the company’s national average by more than 5% since April 1, according to Placer.ai.
Domino’s Pizza CEO Russell Weiner told Yahoo Finance, “We haven’t had closures [in California], we haven’t had to lay off our drivers, like some of our competition has, but it’s a long haul, and in the short term, you’re definitely going to lose orders when you increase prices.”
The pizza chain’s Q2 results “benefitted from 1.5%” of price increases, “which was inclusive of high single digits [increase] in California,” CFO Sandeep Reddy said on the earnings call.
McDonald’s is set to report its Q2 earnings on Monday, July 29, but Yahoo Finance previously reported one McDonald’s franchise owner that made the decision to close one location.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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