Learning about inflation in Econ 411 and other classes, we economics students are familiar with the slow creep up in prices over time. At the current target rate of 2%, however, it is hard to notice inflation on a day-to-day basis. One must look at a long time period to see the true impact. Prices, however, can be sticky as firms raise their prices in larger increments over longer periods of time. As a piece in today’s Business Insider points out, two notable American consumer oriented businesses are planning notable price hikes within the next quarter – Chipotle and Netflix. Business Insider laments the negative effect this could have on American consumers who have faced higher than natural unemployment and stagnant wages but I believe that the two companies are right in increasing their prices.
Let’s start with Chipotle. Founded in 1993, the company has grown to over 1,500 locations and revenues of over $3 billion annually. From my experience, Chipotle is an incredibly popular fast dining option for most people I know from college students to families. It is also one of the most affordable. A full feature burrito or burrito bowl without guacamole or other extras currently costs less than $7. I have always viewed Chipotle as a high quality, value option when selecting a lunch or dinner spot. The news, therefore, that they are raising prices, did not really surprise me as I always believed this would be a possibility. The food items that go into burritos are commodities and Chipotle does not have much control over the cost of its food inputs. According to the company’s first quarter earnings release:
Food costs were 34.5% of revenue, an increase of 150 basis points driven by higher commodity costs. Higher commodity costs were primarily driven by inflationary pressures in beef, avocados, and cheese prices.
According to BusinessWeek steak prices have increased by 25% already this year while cheese and pork could rise by as much as 10% as well. It is fair for any company to pass on price increases to consumers, especially one that has maintained a steady price level for years like Chipotle. As with any item, the concept of price elasticity tells us that a price increase will likely lead some consumers to not buy the good, but considering that Chipotle is only planning an approximate 5% price hike, the increase should not deter too many hungry customers from buying burritos.
Netflix’s price hike brings up a similar point. Since they introduced their online streaming service in 2008, Netflix’s streaming subscriber count has passed 33 million in the US alone. And since they split their DVD mail order business from the streaming business in 2011, the price of a streaming subscription has remained $7.99 a month. As the company has accumulated more and more digital content – from AMC hits Breaking Bad and Mad Men to original content blockbusters like House of Cards and Orange is the New Black – the price of acquiring premium content has gone up. In order to continue to accumulate a world class content catalog, it makes sense for Netflix to increase the monthly subscription price by a dollar or two.
While Business Insider brings up a great point about the negative impact this could have on the American consumer, the danger is overblown. These are very small increases in services that were priced very reasonably to begin with. It will be interesting to see what impact this has on the number of customers at these two companies, but I can say that I will remain a loyal customer at both.