UPDATE 2-Chipotle price increases possible in the middle of 2013

Thu Jan 17, 2013 5:31pm EST

* Meat and dairy drove higher-than-expected food costs

* Will test braised tofu "sofritas" in San Francisco

* Plans to open ShopHouse restaurants in DC and LA

By Lisa Baertlein

Jan 17 (Reuters) - Chipotle Mexican Grill Inc is considering raising menu prices in the middle of this year to offset rising food costs, an executive at the popular burrito chain said at the ICR XChange investor conference on Thursday.

Late on Tuesday Chipotle forecast fourth-quarter profit below Wall Street expectations. It blamed a faster-than-expected rise in food costs during the latest quarter, when cost pressures squeezed profitability.

The company, which said meat and dairy were responsible for most of the increases, expects food price inflation to level off this year.

Chipotle is vulnerable to big swings in food costs because, unlike many other chains, it often cannot lock in prices for the antibiotic-free meats and organic ingredients used in its "premium" menu offerings.

The slow U.S. economic recovery has forced many diners to pinch pennies on meals away from home. That has made it difficult for Chipotle and other restaurant chains to raise prices to offset the hit from higher food costs.

"We're looking at possibly raising prices during the middle of 2013," Chief Financial Officer John Hartung said.

The Denver-based chain, which in autumn warned investors that its restaurant sales could slow in 2013, said it would put heavier emphasis on advertising with the goal of luring more diners.

It is planning a "significant" advertising buy in March, Steve Ells, Chipotle's chairman and co-chief executive officer, said, which will include radio, television, outdoor and print media.

The company also is launching Chipotle catering in Colorado this month, with the plan to roll that service out nationwide in the coming months.

The chain is testing a new meat alternative for its burrito, tacos and salads amid increasing competition from independents and Yum Brands Inc's Taco Bell chain. It will do a trial run of "sofritas" - braised, shredded organic tofu - in the San Francisco Bay Area next month, Ells said.

Chipotle's international expansion is marching ahead and the company plans to open ShopHouse Southeast Asian Kitchen restaurants in Los Angeles and Washington DC in the first half of this year, Ells said.

"We do not think these initiatives will be enough to drive upside to current (2013) guidance for flat to low-single digit" percentage growth in sales at established restaurants, Jefferies & Co analyst Andy Barish said in a client note.

The company may have limited its ability to layer on sales or expand to different mealtimes by keeping its menu simple and small.

The company opened its first ShopHouse in Washington's DuPont Circle neighborhood in 2011.

Shares of Chipotle closed up 3.3 percent at $290.33 on the New York Stock Exchange.

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