Chipotle Mexican Grill (NYSE:CMG) warned on Wednesday that its margins in the upcoming earnings could be hurt due to higher costs of raw materials. The cost of food, beverage and packaging now accounts for about 33.5% of sales, up from 32.6% last quarter. Furthermore, the same-store sales growth slowed to 3.8% last quarter. Chipotle will announce its Q4 earnings on February 5. 
The restaurant chain has been reluctant to raise menu prices for a while now as it fears that it might drive away customers to its rivals. Chipotle’s competition intensified in 2012 when Taco Bell introduced a new Cantina Bell menu, consisting of burritos and burrito bowls, at prices lower than Chipotle’s.
On the other hand, the cost of raw materials such as dairy and meat has continued to rise and is eating into its margins. Chipotle announced that it is looking to raise prices in mid-2013.  At the same time, it is optimistic that food inflation will level off in the third quarter of 2013. A menu price increase should give the company a much needed respite from soaring food prices as well as help it post better same-store sales.
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Restaurant chains have been struggling to generate the desired comparable sales and are coming up with inexpensive, more value-for-money meal options to attract footfalls. McDonald’s is promoting its Dollar menu and Taco Bell is testing the new $1 Cravings menu, which includes items such as spicy chicken mini quesadilla, spicy cheese roll-up and a smaller version of its beefy cheesy burrito.
There has been pressure on Chipotle to either diversify its menu or expand into the breakfast segment as it struggles to post same-store sales close to its historical rates. Management announced on Wednesday that they were testing new vegetarian products including Sofritas, which is made from tofu, tomatoes and chipotle poblano peppers. Recently, Chipotle also announced it will start catering services in all of its restaurants in Colorado. 
We have a price estimate of $313 for Chipotle Mexican Grill, which is about 5% higher than the current market price.Notes:
- Chipotle Dims 4Q Outlook on Higher Food Costs, January 16, 2013, foxbusiness.com [↩]
- Chipotle (CMG) Execs Plan Price Increases in Mid-2013; See Food Inflation Leveling, January 17, 2013, streetinsider.com [↩] [↩]