Chipotle Mexican Grill Inc. is testing delivery menu price increases to offset higher costs related to delivery operations.
Chipotle's delivery expenses were elevated on a year-over-year basis, pushing the company to try out the delivery menu price increases. The company had previously reduced delivery fees from $3 per order before the pandemic to $1. The company expects the net increase to its customers to be 2% to 3%. The new delivery menu pricing strategy will evolve over time as the company gauges consumer responses, and adjustments could made market by market.
"When customers choose a premium convenience channel that attracts higher cost, our objective is to largely cover those costs within that channel," John Hartung, Chipotle's CFO, said during an Oct. 21 earnings call.
Chipotle's margins were hit because about 15% of its in-store customers opted for delivery due to the coronavirus crisis, Hartung said. If delivery sales shift to in-store, order-ahead and pickup sales, it will improve Chipotle's margins, Hartung said.
"If delivery stays the same or increases, we'll have some challenges," Hartung said.
If the current trends continue in the fourth quarter the company's digital sales could exceed $2.5 billion in 2020, which would more than double 2019's digital sales when the company's full-year revenue was $5.59 billion, according to S&P Capital IQ.
Chipotle reported Oct. 21 better-than-expected third-quarter earnings that included $776 million of digital sales, a 202% year-over-year increase that represented 49% of the company's sales. Shares of Chipotle fell 4% to $1,310 in after-market trading.
About half of Chipotle's digital sales came through the delivery channel, with the rest coming from people ordering ahead and pickup transactions. Chipotle's reward program has expanded to 17 million enrolled members since March.
Chipotle expects its fourth-quarter food costs to be in the low 32% range as the benefit from a full quarter of delivery menu price increases will be offset by the launch of carne asada. The company's third-quarter food costs were 32.3%. Fourth-quarter labor costs are expected to be about 25% as the benefit of delivery menu price increases will be slightly offset by lower seasonal sales. Chipotle's third-quarter labor costs were 25.3%.
Marketing and promotional costs are expected to be in the mid-to-high 3% range in the fourth quarter, up from 2.6% in the third quarter.
"Looking beyond Q4, we expect COVID-related direct and indirect costs to ease over time, and we have a number of plans in place to ensure we are able to deliver our full margin potential," Hartung said.