Tomahawk, WI 10/22/2013 (BasicsMedia) – Chipotle Mexican Grill, Inc. (NYSE:CMG), with a market cap of $15.77 billion, operates a chain of restaurants all over the U.S, as well as in Toronto, Canada and in London, England. It boasts of 22 distribution centers that are independently owned and regional. It has more than 1,200 restaurants that it operates. This industry has been quite competitive and now CMG intends to raise its menu prices in 2014 so that it can stay in business. CMG has been in operation since 1993, and it is popular due to its classic cooking method and high quality of ingredients it uses.

CMG Reports Better Revenues and Net Income in Q3 of 2013

CMG’s revenue has improved by 18%, and the third quarter of 2013 figure is $826.9 million. It also reported an increase of 6.2% in comparable restaurant sales. The operating margin at the restaurant level was 26.8%, the representing a decrease by around 60 basis points over the same quarter in 2012. CMG’s net income rose by 15.3% in third quarter of 2013 compared to the same period in 2012, to settle at $83.4 million. CMG managed to achieve these results despite the fact that it opened 37 new restaurants during the same quarter, which was a costly exercise.

More importantly, one also has to look at CMG’s revenue in the first nine months of 2013 to check whether there was an increase or decrease.  Its revenues rose to $2.37 billion, representing an increase of around 16.7%. Comparable restaurant sales reported an increase of around 4.3% during the third quarter of 2013. Net income rose by 14.4% to settle at $247.8 million, while restaurant level operating margin decreased by around 110 basis points before settling at 26.9%. Since food costs have shot up, CMG now intends to increase its menu prices from 2014.

Increase in Menu Prices is Justifiable

CMG owes its shareholders and Wall Street a lot. It has responsibilities it has to meet, and failure to do this could create many problems for CMG. Therefore, the decision by CMG management to raise menu prices is quite understandable and something I think will work well for them, if they carry it out properly. There is the danger that clients or regular patrons to CMG’s restaurants may just opt to move elsewhere if they feel the prices are beyond their reach. I would recommend that CMG undertakes this exercise after a lot of research and with caution as well.

The increase in menu prices will not take effect at CMG restaurants until mid-2014. CMG says that the increase will be between 3% and 5%, and will not go beyond this.  I think a 3%-5% increase in menu prices is something that guests can handle, but if it goes beyond this percentage, it could be detrimental and costly for CMG’s prospects in 2013. The changes will not be uniform but will vary depending on location of each restaurant. What is not in doubt is the fact that there will be increase in menu prices across all CMG restaurants in the U.S and abroad.

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