Chipotle Keeps Raising Prices. Gym Rats and Millennials Are Still Buying Burritos.

The burrito chain outperforms restaurant rivals with customers who tend to have higher incomes and be health conscious 

By Heather Haddon of The WSJ.

Below I have some information about price elasticity of demand. One thing that affects it is how much of your budget you spend on a good. If you make more money than most people (which the article says about Chipotle customers), then you spend a smaller share of your income on fast food and this makes your demand inelastic. When price goes up, your quantity demanded does not decrease very much since it does not affect your budget very much because of your high income. So with prices going up, the firms whose customers make more money will keep buying (or at least not cut back very much) while the other restaurants see a larger drop in quantity demanded.

Excerpts from the article:

"Chipotle fans have been tested lately. Chipotle Mexican Grill CMG 2.41%increase; green up pointing triangle has increased prices six times since 2021. It was among the first restaurant companies to say it would boost its menu prices on delivery apps. And its prices are set to rise further in California, where roughly 400 locations are paying higher hourly wages in response to a new state law. 

Higher costs and inflation-weary consumers are starting to erode sales across much of the U.S. restaurant industry. Traffic last year, while 1% higher than in 2022, remained 8% below prepandemic levels, according to market research firm Circana.

Many Chipotle customers, though, are still willing to pay. The California-based chain’s same-store sales grew 8.4% last quarter, outpacing rivals including McDonald’s and Starbucks’s U.S. operations. Chipotle has reported better-than-expected earnings for four straight quarters, according to FactSet. It is one of the industry’s fastest-growing chains, with plans to build around 300 new locations this year."

"Chipotle is benefiting from a unique base of customers who tend to be more affluent and health-conscious than the average restaurant-goer—and loyal, executives and analysts say. More than half the chain’s customers say they actively manage their health, according to market research firm Numerator, and they tend to eat out several times a week."

"Chipotle’s customers are 20% more likely than the average U.S. consumer to earn more than $125,000 a year, according to Numerator data from its panel of 150,000 U.S. households. Fast-casual chains typically charge more than fast-food and tend to attract higher-income consumers, along with families with children, market research firms said."

Price elasticity of demand-It tells us how responsive quantity demanded (Q_d)is to a change in price. That is, when price changes, will the change in Q_d be large or small? The bigger the change in Q_d  the greater will be the price elasticity of demand.

We will use E_d to stand for price elasticity of demand. Here is the definition

E_d = %DQ_d /%DP

where D (the Greek letter delta) means "change in."

OR  E_d = % change in Q_d divided by % change in P

Determinants of price elasticity of demand

1. Share of the budget going to a good

If this is low, then price elasticity of demand is low or inelastic. For example, if you only buy one box of cooking salt a year and the price doubles from $1 to $2, you will probably still buy that one box because this spending makes up a very small share of your budget.

If this is high, then price elasticity of demand is high or elastic. But if the price of cars doubles, you will probably buy fewer cars since that takes up a much larger share of your budget.

2. Adjustment time. 

In the short-run price elasticity of demand is low or inelastic. For example, if the price of gas doubles, you will probably only reduce your quantity purchased slightly because you still need to get to school and work.

In the long-run price elasticity of demand is high or elastic. In the long-run, when you have more time to adjust to the higher gas prices, you can shop around and buy a car with better mileage, move closer to your job, get into a car pool or find a bus route. So your quantity purchased of gas will decrease more than in the short-run.

3. Number of close substitutes. 

If there are few substitutes for a good, then price elasticity of demand is low or inelastic. For example, if there is a drug you need to take (or something like insulin for diabetics), there will be few substitutes. So if the price increases, your quantity purchased will not change much because you must buy this drug.

If there are many substitutes for a good, then price elasticity of demand is high or elastic. For example, if the price of potato chips increases, your decrease in quantity purchased will be great because there are many substitutes for potato chips. You can get nachos, pretzels, corn chips, etc. instead.