On a chilly Tuesday afternoon earlier this month, James Marsh stopped for a bite to eat at a Chipotle near his home in suburban Chicago.
It had been a while since Mr. Marsh had been to Chipotle – he reckoned he was there five times a year – and he was cold when he saw the prices.
“I got my usual steak burrito, which was maybe in the mid-$8 range,” said Mr. Marsh, who trades stock options from his home in Hinsdale, Illinois. “Now it was more than $9.”
He went out.
“I thought I would find something at home,” he said.
The pandemic has caused price spikes on everything from pizza slices in Manhattan to beef sides in Colorado. And it has led to more expensive items on the menus of fast-food chains, traditional establishments where people are accustomed to grabbing a quick bite that doesn’t break the bank.
At a Chipotle in Costa Mesa, California, a chicken burrito — nothing special, just the guacamole — was $7.25 about a year ago. Today, the same burrito costs about $7.95, according to pricing data collected by analysts. In Ann Arbor, Michigan, a ShackBurger at Shake Shack used to be $5.69; now it’s $6.09. And in Oklahoma City, an order for 50 boned wings from Wingstop that cost $41.99 early last year is now $47.49, a 13 percent increase.
Last year, prices for menu items at fast-food restaurants rose 8 percent, the biggest increase in more than 20 years, according to government data. And in some cases, portions have shrunk.
“For the past several years, most fast food restaurants have increased prices by maybe a low single digit every year,” said Matthew Goodman, an analyst at M Science, an alternative data research and analytics firm. “What we’ve seen over the last six months or more are restaurants aggressively enforcing their prices.”
This comes at a time when the competitive fast food market is booming.
Chains like McDonald’s, Chipotle and Wingstop have been big winners from the pandemic as consumers who work at home and are tired of cooking multiple meals for their families increasingly turned to them for practical solutions. But over the past year, as the cost of ingredients rose and the average hourly wage rose 16 percent year over year to $16.10 in November, restaurants began quietly raising prices, according to government data.
But getting customers to pay more for a burger or a burrito is a tricky art. For many restaurants it is about complex algorithms and test markets. They have to walk a fine line by raising prices enough to cover costs while not alienating customers. Also, there is no one-size-fits-all approach. Chains operated by franchisees typically let individual owners decide pricing. And national chains like Chipotle and Shake Shack charge different prices in different parts of the country.
When Carrols Restaurant Group, which operates more than 1,000 Burger Kings, raised prices in the second half of last year, customer numbers actually improved from the third to the fourth quarter. “Over time, we haven’t seen much resistance from consumers in general” to the higher prices, Carrols chief executive Daniel T. Accordino told analysts at a conference in early January.
Menu prices are likely to increase further this year. Many restaurants say they are still paying higher wages to attract employees and anticipate rising food prices.
“We expect an unprecedented increase in the cost of our grocery basket from 2021,” Ritch Allison, the chief executive officer of Domino’s Pizza, told Wall Street analysts at a conference this month. While Domino’s hasn’t increased prices, it is changing its promotions — offering the $7.99 pizza deal only to customers who order online, and reducing the number of chicken wings in certain promotions from 10 to eight — to reduce profit margins to maintain.
Despite higher food and labor costs, some restaurants are seeing sales and profits recover above pre-pandemic levels.
Jan 21, 2022 12:42 PM ET
When McDonald’s reports earnings this month, Wall Street analysts expect sales will have hit a five-year high of more than $23 billion, up $2 billion from 2019. Net income is expected to be over It’s $7 billion, up from $6 billion in 2019. Other chains, such as Cracker Barrel and Darden Restaurants, which own Olive Garden and Longhorn Steakhouse, have resumed dividend payments or cash buybacks of shares after doing those activities early in the pandemic suspended to save cash.
And next month, when Chipotle reports 2021 results, analysts expect revenue to top $7.5 billion, up 34 percent from 2019. Net income is expected to nearly double from pre-pandemic levels. During the third quarter, the company repurchased nearly $100 million of its stock. Chipotle declined to provide an executive for an interview, citing the quiet period before the results were released.
While Chipotle executives blamed higher labor costs for a 4 percent price increase on menu items this summer, the company has been looking for ways to boost profitability.
One way was to charge higher prices for delivery. Delivery orders through vendors like DoorDash and Uber Eats have exploded during the pandemic for Chipotle and other fast-food chains. But also the commission fees that Chipotle paid to the sellers. So it began testing in the fall of 2020 to see what would happen if it hiked the prices of burritos, guacamole and chips that customers ordered for delivery, executives told Wall Street analysts on a earnings call. It essentially meant that the customer covered Chipotle’s shipping costs.
The company found that customers were willing to pay for the convenience of delivery. According to an analysis by Jeff Farmer, an analyst at Gordon Haskett Research Advisors, customers who order Chipotle for delivery now pay about 21 percent more than if they ordered and picked up the food in stores.
“I would say that our ultimate goal, so long-term, maybe medium-term, is to fully protect our margins,” Chipotle’s chief financial officer Jack Hartung said when speaking to Wall Street analysts Fall. “When you look at our prices compared to other restaurant companies in terms of food quality, food quantity and the quality and convenience of the experience, we offer excellent value for money. So we believe we have leeway to fully protect the margin.”
This does not mean that customers are enthusiastic about the additional costs.
This month Jacob Herlin, a data scientist in Lakewood, Colorado, placed an order: a $11.95 steak-and-guacamole burrito, a $3 Coca-Cola, and chips and guacamole that were free with a birthday coupon. The total was $14.95 before tax.
But when he clicked for delivery, the burrito went up to $14.45 and the soda to $3.65, bringing the total pre-tax price to $18.10, up 21 percent, as if he had picked up the food himself.
There was more. Mr. Herlin was charged a delivery fee of $1 and another “service fee” of $2.32, bringing the total for the meal delivered to $23.20. He also tipped the driver three dollars.
Mr Herlin said he doesn’t mind paying for the delivery and wants drivers to be paid a decent wage. But he felt Chipotle wasn’t open about the additional costs with customers.
“They basically hide the fees in two different ways, through this base price hike and through the hidden ‘service fee,'” Mr. Herlin said in an email. “I would much prefer them to have the same prices and just be honest about a $5 delivery fee.”