Burrito lovers in the Bay Area already know that their Chipotle orders are getting more expensive. What they might not know is why.
According to a report from global wealth management firm William Blair, San Francisco's minimum wage increase is to blame. The report found that, while Chipotle recently raised prices in several cities by about 4 percent, the burrito giant raised prices in San Francisco by 10 percent. Furthermore, while the increases were limited to beef menu items in most other markets, they were implemented across the board in San Francisco.
The report attributes the above-average increase to San Francisco's new minimum wage law passed late last year. As of May 1, minimum wage in the city is $12.25 per hour, 14 percent higher than the previous rate of $10.74 per hour. By 2018, the city's minimum wage is slated to rise to $15 per hour.
Chipotle has confirmed both the price increase and the role that the minimum wage hike played in the decision to raise prices. The company reports that from 2014 to 2015, minimum wage increased 14 percent in San Francisco (where Chipotle operates 10 restaurants) and 36 percent in the East Bay (home to 74 Chipotle locations).
"The 10 percent price increase in San Francisco, and 7 percent in the East Bay, was done in part to offset higher labor costs," Chipotle communications director Chris Arnold said in an email to Entrepreneur. "Even with the price increase, our prices remain very competitive in the market, particularly given our ingredient quality compared to that of other restaurants."
According to Arnold, the minimum wage hike hit Chipotle harder in San Francisco than similar legislation may have in other parts of the country. Occupancy costs in the city are about double Chipotle's average as a percentage of sales. Despite this, menu prices in San Francisco have remained close to the company's average, though the company is open about varying prices across the country due to deviations in the cost of doing business in different areas.
Chipotle's ability to keep food prices relatively stable even when local conditions such as rent or regulations increase costs is supported by the chain's refusal to franchise. While Forbes took the opportunity to remind "well meaning liberals" that "a rise in the minimum wage really does destroy jobs," perhaps more remarkable is the fact the chain can afford to sell burritos at around the same price in San Francisco and Columbia, S.C., despite higher rents and minimum wages in the Bay Area.
The company has chosen not to franchise to allow for greater control over issues such as employee pay and menu pricing. In cases such as this, the united company structure allows for more profitable locations to help support locations such as those in the Bay Area. As an independent restaurant or franchise, a San Francisco location operating on thin margins may find itself forced to immediately raise prices more than 7 to 10 percent, cut jobs or simply go into debt.
In 2014, a smattering of unaffiliated restaurants across the country added "Obamacare taxes" to protest the increased expenses due to the Affordable Care Act. While these restaurants were certainly more in-your-face and explicitly political in the price increase, they were essentially doing the same thing as Chipotle – raising prices to compensate for increased employee costs due to new regulation. While Obamacare protestors were roasted for their "tax," media reports on Chipotle price increase have either used it to critique minimum wage increases or deem the price hikes a "pretty good deal."
Increased costs, whether due to the Affordable Care Act or employee pay, are something that the restaurant industry is going to have to deal with in the coming months, especially as the minimum wage battle continues. Some restaurants may be able to recoup costs by selling more food at the same price, reducing worker turnover, cutting jobs or limiting executives' pay. However, for the most part, prices will increase. It's just a matter of seeing which restaurants can keep menu price hikes low enough that the customers don't mind.