Posts filed under “Research”

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

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Category: Current Affairs, Cycles, Data Analysis, Economy, Research

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