Posts filed under “Cognitive Foibles”

Chipotle Spices Up The Minimum Wage Discussion

@TBPInvictus

If you’re just joining us, here’s our story thus far:

Some on the right took a fairly benign article out of a Seattle publication and twisted it to fit their agenda, i.e. that the increased minimum wage there would spell disaster for the Seattle restaurant scene as eateries closed in rapid succession. Their hopes were bolstered – or so they thought – when one (that’s “1″) pizzeria closed, with its owner citing the wage increase. I chronicled that story here, here, here, and here.

I began keeping weekly tabs on restaurant-related NAICS codes for Seattle, the latest of which looked like this (as of July 22):

seattle naics 722

When it became crystal clear that Seattle restaurants were not closing as forecast, another narrative needed to be found. This is not to say that the Seattle story has dropped off conservatives’ radar, but restaurateurs and their patrons in the pacific northwest have just not been cooperating and it simply cannot be the case that a higher minimum wage can work.

Which leads us to a research report on Chipotle Mexican Grill (NYSE:CMG) from William Blair analyst Sharon Zackfia. Zackfia, as part of her coverage, surveys CMG’s business on an ongoing basis. In a recent report, this is what she wrote:

Screen Shot 2015-07-27 at 6.38.40 PM

Very importantly, note that Zackfia speculated – “We believe” – on the reason for the price increase in San Francisco. Her speculation notwithstanding, the report found its way into the hands of Mark Perry, who’s never one to let facts or truth stand in the way of what he thinks is corroborative evidence. Perry immediately posted an article titled “Who-d a-thunk it? SF minimum wage increased 14% and local Chipotles just raised prices by 10-14%?” (It should be noted that there are no – zero – Chipotle franchisees. All stores are 100% company owned. They do not, as yet, franchise. So decisions about pricing are made at corporate, not on the local level.) Perry’s article was immediately seized upon by like-minded ideologues – see here, here.

Chipotle held its quarterly conference call last week pursuant to an earnings release. The call contained some interesting mentions of how minimum wage legislation is impacting (or not) their business model. There is no better source for information about a company than its own senior management. So let’s have a look. All emphasis added.

First, as to labor costs:

Labor costs were 22.6% of sales during the quarter, an increase of 80 basis points compared to last year.

They are seeing some wage inflation. Chipotle is also known as an above-average (wage-wise) employer (as we’ll see below):

Hourly labor rates including our hourly managers increased 4.2% in the quarter, the fastest we have seen in many years. There has been a general increase in wage rates in many of our markets and because we desire and expect to attract and reward only top performers, very important for us to stay ahead of the curve and pay attractive starting wages. We also continually monitor the pay of our top performers already in our restaurants as they progress through the manager ranks to ensure we’re paying fair wages in light of their significant contributions and so this is also a contributing factor to the increase in the quarter.

Not to make a direct comparison to, say, big box retailer Costco, but I’d venture that a much smaller percent of Chipotle employees are paid at minimum wage than at its competitors/peers, as indicated in this comment:

We typically pay above minimum wage in all of our markets, so a normal increase in local wages usually has little effect on us. But in some local markets the minimum wage has been or soon will be pushed well above our national average rate.

Here’s where things start to get interesting:

In the San Francisco Bay Area for example, the minimum wage was recently increased to over $12 an hour. This increase coupled with higher occupancy and other operating costs excluding food costs contribute to an overall cost of doing business of 30% or more higher than our average Chipotle. But our menu prices in the San Francisco area were until recently only about 4% above the typical Chipotle and were lower than most competitors in the area. So as a result of looking at all of these factors, we decided we were underpriced in San Francisco and we recently increased prices by 10% in the 10 restaurants within San Francisco and by 7% for the 74 restaurants outside San Francisco in the Bay Area.

Read that very, very carefully: Chipotle’s cost of doing business in the Bay Area is “30% or more higher than our average Chipotle,” yet “menu prices in the San Francisco area were until recently only about 4% above the typical Chipotle and were lower than most competitors in the area.” Is it any wonder they raised their prices? They’d have been crazy not to – they were, as noted, clearly underpriced in the area. Note also the mention of “occupancy costs.” As I’ve mentioned previously, I think it’s entirely possible that rapidly rising rents are going to play a much bigger factor in fast food pricing than minimum wage will.

These relatively modest increases effectively pass along only some of the higher cost of doing business in that area. Because only 84 restaurants were affected, the impact on the overall company will be about 30 basis points on an annual basis. We’ll take a similar approach when the overall costs of doing business in a market are escalating on a case-by-case basis, whether these higher costs are driven by legislative changes or by market forces. As an example, although the minimum wage in Maryland recently increased to over $10 an hour, our overall cost of doing business are reasonable there. And so we do not plan to increase our pricing in those restaurants.

Compare and contrast the situation in San Francisco to that of Maryland, mentioned above, where the minimum wage also rose recently, but where the company’s cost of doing business is more reasonable and they therefore “do not plan to increase our pricing in those restaurants.” (Read about Maryland’s increase here.)

There are some additional structural costs, higher costs of doing business that we will look at next year like we did in San Francisco. But just because minimum wage is increasing in a market doesn’t mean we’re going to raise prices. The example that I gave in Maryland is a great example. Another one is in Chicago. Chicago just recently implemented higher minimum wage, and we don’t expect to raise prices there in the near future, probably not at all this year. And so we’ll look at it market by market and there might be some cases where when you look at all of our higher cost of doing business that we might deem that it’s necessary to take a price increase in those markets. But I wouldn’t expect that to be a significant add-on to our comp or a significant add-on to the menu price increases.

And with that, it would appear that conservatives will have to move on to yet another city, as neither Seattle nor San Francisco will have them. Bottom line: Chipotle’s price increase in the San Francisco area was, as one would expect, the result of several factors; to claim otherwise is simply to be dishonest. The firm flat-out stated – see above - that increases in the minimum wage do not automatically trigger higher prices to consumers. Will facts and/or the truth stop those with an ideological agenda from latching on to absolutely anything to “prove” their case? Unlikely. After all, there are never any consequences, no penalties, no loss of credibility. Just on to the next falsehood.

UPDATE: See also this excellent piece by Goldy over at Civic Skunk Works.

Category: Cognitive Foibles, Consumer Spending, Current Affairs, Data Analysis, Employment, Research, Wages & Income

Trump Rules

He can’t win and he shouldn’t… But it’s mindblowing to watch the pundits and players react to his statements. I’ve got no love for John McCain, but he’s an untouchable. You can’t question the man because of his war hero status. But what if you questioned that itself? What if you refused to play by…Read More

Category: Cognitive Foibles, Corporate Management, Crony Capitalists, Politics, Think Tank

You’re Only Human: Here’s How it Hurts Your Portfolio

I recently had the privilege of sitting down for a chat with Richard Thaler, professor of the Booth School of Business at the University of Chicago. Thaler is widely recognized as the father of behavioral economics. He is perennially on the short list for a Nobel Prize in economics. His observations about how people behave in the…Read More

Category: Apprenticed Investor, Asset Allocation, Cognitive Foibles, Investing

The Big Disconnect Between Investing and Human Behavior

    My Sunday Washington Post Business Section column is out. This morning, we look at the work of Richard Thaler, the father of Behavioral Economics. His findings are very applicable to investors. The print version had the full headline You’re only human: How it hurts your investments; online its You’re only human: An economist explains how…Read More

Category: Asset Allocation, Cognitive Foibles, Investing

Home State Investing Bias May Be Skewing Your Portfolio

Most investors are (or at least should be) familiar with the concept of “Home Country Bias” — the natural tendency to be more familiar and comfortable with public companies in your home country. Investors everywhere consistently display this trait, which is in direct conflict with the basic principles of international diversification. A 2014 report by Vanguard found…Read More

Category: Asset Allocation, Cognitive Foibles, Investing, Psychology

Where You Live Correlates to a 20% Investment Bias

More on this shortly . . .   Source: Imgur

Category: Cognitive Foibles, Markets

Red State, Blue State: Kansas & Washington

@TBPInvictus here. We have interesting experiments going on in the state of Kansas and the city of Seattle. Herewith a brief update on both. Thanks to the following Tweet, I was made aware of the fact that – as you can see – the state of Kansas, under Sam Brownback’s awesome tax cuts, recorded the…Read More

Category: Bad Math, Cognitive Foibles, Current Affairs, Data Analysis, Really, really bad calls

The NY Post’s Financial Innumeracy

@TBPInvictus here: The New York Post ran a piece on Netflix (NFLX), written by Claire Atkinson, that was, to put it charitably, interesting. And by interesting I mean that it painfully misstated the very simple mathematics of stock splits. The piece implied that NFLX is wildly overvalued. I have no problem with that. Not that…Read More

Category: Bad Math, Cognitive Foibles, Data Analysis, Financial Press, Really, really bad calls

More Fun With Useless Correlations: American Pharoah

About a year ago, we discussed what happens “When Correlations Lie.” Delving into the classic logical fallacy that correlation implies causation, we looked at equities and a variety of supposedly related factors, including gross domestic product, rising interest rates, earnings surprises, new financial products and the “death cross” involving daily moving averages. All were classic coincidences of…Read More

Category: Bad Math, Cognitive Foibles, Investing

Mount Stupid

I interviewed Richard Thaler for MiB today. He is known as the father of Behavioral Economics. Parts of our conversation made me think about this classic comic from SMBC” Mount Stupid Source: SMBC

Category: Cognitive Foibles, Humor, Psychology, Really, really bad calls