California Chipotle customers spend less after chain raises prices due to rising wages: CFO

California burrito lovers are fed up with the high prices.

While some thought Chipotle would be able to pass on the higher costs to its loyal customer base once the FAST Act effective in April, Chief Financial Officer Jack Hartung said customers across the industry have pulled back.

“It’s not because the Chipotle burrito is a little bit more expensive. There’s definitely a reduction in spending across the restaurant industry. [in California]”When we looked at it, the restaurant businesses that had a very large surge had about the same kind of impact on sales that we saw. The restaurants that didn’t have a surge had the same kind of reduction in sales.”

The FAST Act requires restaurant chains with at least 60 locations nationwide to raise the minimum wage for their restaurant workers from $16 to $20 an hour. In response, Chipotle raised its prices in California by 6.5 to 7 percent in April, Hartung said.

The “best attack” to combat slowing foot traffic growth is to conduct “big operations,” Hartung said.

“It’s high-quality food, big portions, it’s a fast experience and it’s the food they crave,” Hartung said of Chipotle’s recipe for success, regardless of the macroeconomic environment.

In its most recent quarter, the company beat Wall Street estimates for revenue, profit and same-store sales.

For the third quarter, the company expects labor costs “to be in the low 25% range due to weaker seasonal sales and wage inflation that is expected to remain around 6%,” Hartung told investors on the earnings call. California accounts for about 15% of Chipotle locations.

“About half of the wage inflation is due to the nearly 20% increase in wages in California following the minimum wage increase for restaurant businesses like ours that went into effect in April,” he added.

Foot traffic increased 8% in the quarter, more than the 6.3% expected, with growth across all revenue cohorts. That compares with a 0.6% decline across the industry, according to a note to clients from Bernstein analyst Danilo Gargiulo.

“Market share gains despite the burger wars reinforce our view of Chipotle’s enduring value superiority,” Gargiulo wrote. “With trends normalizing and pricing resilience seen in California,” Gargiulo expects fiscal 2024 to end with sales growth of 7.8%.

Gargiulo said the company will still be able to raise prices if the fall return of another limited-time offering — smoked brisket — exceeds expectations and the inflationary environment persists.

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Hartung said the limited-time offer will likely attract more customers, but it will be more expensive for the…