In early May, TikTok food influencer Keith Lee posted a review of Chipotle Mexican Grill (NYSE: CMG). The creator, who boasts more than 16 million subscribers, called the restaurant’s portions “crazy” and rated its chicken al-pastor and rice bowl a 2 out of 10.
His remarks may have helped start a trend called the “walkout method,” where customers simply leave Chipotle restaurants mid-order if they aren’t satisfied with how much food they are getting. What could this mean for the company and its stock price? Let’s dig deeper to find out.
Business is booming
While some Chipotle’s customers seem dissatisfied with the restaurant online, real-life spending habits tell a different story. Chipotle’s fourth-quarter sales grew 14.1% year over year to $2.7 billion, driven by a healthy 7% jump in comparable restaurant sales. And this is despite a whopping four price increases in the last two years.
Chipotle’s profitability also remains strong, with net income growing by 26% to $282 million in the period (a margin of 11.2%).
When it comes to food pricing, Chipotle doesn’t have much incentive to change what it’s doing unless customers change their buying behavior. And that doesn’t seem to be happening anytime soon.
The issue of portion sizes is a little more complicated. Food, beverage, and packaging represented around 29% of Chipotle’s first-quarter operating costs, down from 32% this time in 2019.
The decline suggests management could be taking steps to save money on the food side of the business. This could be through tactics like smaller portions — or it could mean the company is benefiting from improving economies of scale, a changing product mix, or many other factors. It is difficult to know for sure. But whatever is happening, it likely starts from the top. Unlike McDonald’s or other franchise-based fast food restaurants, Chipotle owns and operates all its stores, giving it a high level of control over policies like portion sizes and pricing.
Demand-pull inflation
With inflation soaring in the post-pandemic period, so-called “corporate greed” has become the easy scapegoat for persistently high consumer prices, even as production costs start to moderate. However, this narrative reflects a fundamental misunderstanding of economics. Well-run businesses and individuals will always seek to maximize their income.
You wouldn’t take a job for $20 per hour if you could earn $30 for the same work. Big corporations like Chipotle are no different.
The problem is not corporate greed. It’s demand-pull inflation, which occurs when demand for goods and services is too high relative to supply, often because of government or Fed stimulus. This allows companies to increase their equilibrium pricing. And it is a normal part of running a successful business. It also swings the opposite way when low demand or recession causes companies to lower their equilibrium price.
This is an issue of branding
It is unclear how much longer fast food demand will remain elevated in the face of rising prices and anecdotally smaller portion sizes. However, Chipotle currently faces limited threats to its revenue growth and margins. Despite the online complaints, consumers are still scrambling to buy what Chipotle is selling — as evidenced by the company’s soaring same-store revenue growth over the last few quarters.
That being said, Chipotle could face significant brand and reputational damage if it doesn’t get this portion-size controversy under control. And that is not good news for shareholders.
While no competent economist would fault management for raising prices to meet healthy demand, lowering portion sizes in tandem seems to be a bridge too far, especially when customers have developed an expectation of how much food they should be receiving. It’s hard to imagine that a couple of dollars saved on rice and beans is worth potentially alienating the customers who helped make Chipotle’s success possible.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The Chipotle Walkout Method: What Does This Mean for the Stock? was originally published by The Motley Fool
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