Chipotle's CFO on Avocado Prices, Inflation and TikTok-Inspired Menu Items - The Wall Street Journal
Lower-than-expected avocado costs have helped Chipotle Mexican Grill’s margins, offsetting higher costs for other items such as oils and tortillas.
Photo: Brandon Bell/Getty ImagesChipotle Mexican Grill’s shares hit a record high last week after the fast-food chain reported first-quarter results that beat analysts’ expectations. Quarterly and comparable sales were up, and its restaurant-level operating margin improved by roughly 25%.
One reason behind the results: avocados.
Lower-than-expected avocado costs have helped the company’s margins, offsetting higher costs for other items such as oils and tortillas. The average price for each Hass variety of avocado was $1.32 last week, down around 18% from around a year ago, according to the U.S. Department of Agriculture.
This matters because the burrito chain buys more avocados than most if not all other U.S. restaurant companies, said Chief Financial Officer Jack Hartung. In restaurants across the U.S., Canada and Europe this year, Newport Beach, Calif.-based Chipotle expects to use roughly 4.5 million cases of avocados, which amounts to around 100 million pounds of fruit.
The company’s first-quarter results were also lifted by a new TikTok-inspired menu item, a so-called fajita quesadilla. The dish, made a part of Chipotle’s permanent menu in March, adds fresh fajita vegetables to the company’s quesadilla. The concept went viral after two TikTok influencers posted reviews of their versions of the newfangled quesadilla, leading to two top sales days for Chipotle’s digital business, which includes sales made online through its website or app.
CFO Journal talked to Mr. Hartung about food and labor inflation, pricing considerations as consumers face the potential of a recession and the new TikTok-inspired menu item. His responses have been edited for length and clarity.
Jack Hartung, chief financial officer of Chipotle Mexican Grill.
Photo: Laura McDermott/Bloomberg NewsWSJ: The price of avocados has recently dropped considerably, which has offset higher prices for other menu ingredients. Are you expecting that to continue?
Mr. Hartung: Around half of our transactions include guacamole, so when avocados are more expensive, that impacts us. Right now, we’re seeing avocado prices that are the lowest we’ve seen in a number of years, and that’s definitely helping us. While costs for some of our ingredients have gone up during the first quarter, avocados went down and it had an offsetting effect.
But that could change because the sourcing, where we get avocados from, changes quite a bit. We get most of them from Mexico, but we will shift where we’ll get more of them within the next month or so from California. Later in the summer and in the fall, we get them from Peru and Colombia. So it changes and that pricing can change as you move from season to season based on supply and demand from where you’re sourcing and weather conditions.
WSJ: What are you seeing when it comes to other inflationary pressures?
Mr. Hartung: Labor costs are still inflating. We have seen [that] in the first quarter, and we expect it to continue in the remaining quarters, a mid-single digit inflation, in that 4% or 5% percent range. And I don’t think that will change unless unemployment goes up. I frankly am fine with a mid-single digit inflation if unemployment will stay low. I think that will keep our economy healthy and I think our business can handle modest inflation, especially if inflation on ingredients remains relatively tame.
Looking at food inflation, costs for most ingredients a year ago or over the last 18 months were going up and the projection was [that they] were going to go up again as you looked forward. Now, what’s happened to us is, in the first quarter, we had zero net inflation with our ingredients. A number of things went up, but a couple of things went down, so they offset each other. It’s a very different dynamic. There is still some expectation that some ingredients will show inflation in the coming quarters, but not all of them.
WSJ: As things stand now, are you thinking you can hold the pricing for menu items?
Mr. Hartung: Right now, we have no plans to take any additional pricing steps. We haven’t taken a national price increase since last August.
The situation that would probably make us take a hard look at a price increase is if there is inflation that looks like it’s coming on pretty hot, inflation where it looks like the forecast is that it’s going to sustain for a number of quarters. But it also would have to be accompanied by a robust economy where unemployment is low and people are spending.
With the other combination, where inflation is happening but the economy is weakening and unemployment is going up, we would be patient. Because what tends to happen when inflation is happening and then the economy softens suddenly, inflation disappears really quickly. We may see inflation impact our [profit-and-loss statement]. But we may wait a few quarters before we consider any pricing action just because, with uncertainty about the macro, we don’t want to raise prices, see our consumers pull back on spending and then see inflation go away.
So we’ll watch what happens with inflation, we’ll watch what happens with the economy. We know we have pricing power, but we’re going to be very thoughtful and it’ll be kind of a last resort. If inflation rears its ugly head again in a big way, we’ll consider it. But our plan right now is to hold off.
WSJ: A new menu item, the fajita quesadilla, is also lifting sales. What’s the story behind this option?
Mr. Hartung: What’s really cool about it is there’s nothing new in terms of ingredients in that quesadilla, but we’d never assembled it that way. A couple of social-media influencers—Keith Lee and Alexis [Frost]—assembled our ingredients in a unique way that we hadn’t done before. It got a lot of following and we were able to pivot and support it.
WSJ: How does this impact the way you think about adding items to Chipotle’s menu?
Mr. Hartung: You know, it was opportunistic, I would say. I don’t know how often it’s going to happen. If somebody comes up with another burrito that our customers really resonate towards, we’ll do what we can to support it.
The one thing that we would be cautious of is if it were complex for our restaurants to offer it. We have to be protective because what we don’t want to do is basically end up having a bad experience for a lot of customers to serve a few. So if this were something customers were asking for as a menu hack on the front line [versus being ordered digitally as quesadillas are] and it caused everybody to have to wait longer on the front line, we wouldn’t want to do something like that.
Write to Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com
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