Price Theory and Portion Sizes: Why Chipotle Got Cut for Cutting Costs 

Lately, complaints have arisen on social media accusing Chipotle’s management of decreasing portion sizes and food quality standards, while simultaneously increasing prices across the board at restaurants for their bowls, burritos, and other menu items.   

Economist Ludwig von Mises commented that, in a market economy, the customers are the bosses and “They are no easy boss…with them nothing counts more than their own satisfaction.” So why would Chipotle appear to do something to upset the people it depends upon to stay in business?  

Businesses, especially restaurants like Chipotle, will do anything to stop price increases from being passed onto customers. This is because they know that customers could easily substitute other dining options. Rather than change menu prices, restaurant owners may make adjustments on other margins. Unfortunately, this sometimes leads to backlash. 

The public relations trouble for Chipotle started when internet restaurant reviewer Keith Lee made a video reviewing his local Chipotle to test whether the restaurant was offering smaller portions than in the past. After expressing his resounding disappointment, Lee’s review dropped Chipotle from a near-perfect score a couple of years ago to a much more negative review today.  

Since Lee’s video was posted on May 3rd, it has amassed 2.3 million likes and gone viral, with many others creating reviews of their own. Others have even gone so far as to film Chipotle employees making their order in hopes that the obvious (albeit rude) surveillance will incentivize Chipotle employees to dish out large portions. To top it all off, a video was leaked allegedly showing Chipotle’s employee training, which tells employees to provide smaller portion sizes than previously offered.  

Chipotle, with a growing PR problem on its hands, decided to address the accusations directly. CEO Brian Niccol was interviewed by Fortune at the end of May and assured customers and investors that complaints about portions were hyperbolic. Niccol’s interview, however, did little to quell customer frustration. 

Chipotle raised menu prices four times between 2021 and 2023 thanks to above-average inflation raising the cost of production. Chipotle does not franchise, so the main company owns and operates all 3,300 restaurants worldwide. Chipotle must bear all the operational risks and absorb the losses when locations do poorly.   

Meanwhile, recent surveys find that customers increasingly view fast food as a “luxury” due to rising prices. To further complicate matters, Chipotle locations in California have also raised prices due to an increase in the minimum wage to $20 per hour, leading California customers to spend less when dining there. 

Chipotle’s own reports found that it had a net profit margin of 12.12 percent  for 2023 (before the online controversy and California minimum wage hike). For every dollar in sales Chipotle earned 12.12 cents, slightly above the restaurant and dining average net margin of 10.66 percent. A single month’s performance could make or break a location.  

When a business already operating on thin margins anticipates rising costs, it has few choices. When customers already see a business as a luxury due to rising prices, operators will be hesitant to continue raising menu prices, rightly worrying that customers will be driven away.  

Chipotle leadership could try the risky option of waiting out the bad PR, but the brand may not be willing to take that risk. It’s not expensive for customers to switch to a Chipotle substitute. Boycott success is determined by potential substitutes. How expensive in time, money, or quality is it to switch from Chipotle to a similar restaurant? Chipotle knows that its customers can easily substitute a Chipotle meal for Moe’s, Qdoba, or local Mexican restaurant (not to mention other fast-food options). It also knows that customers can continue the trend of dining home more often. From the customer’s perspective, Chipotle is not always the go-to option. 

Facing backlash on portion sizes, Chipotle may try other options to cut costs: shortening business hours, decreasing staff, or even shrinking the number of options on the menu. Still another option is to consider dynamic pricing (without the communication mishaps that occurred to Wendy’s), where certain menu items could be offered at reduced prices during slower periods of the day to attract customers. If all those other options are exhausted, the last choice for business owners is to shut down. 

Ultimately, research shows that customers value fast food because it’s fast. A 2008 NIH survey showed that the most frequently reported reasons for eating fast-food were: “fast food is quick (92 percent), restaurants are easy to get to (80 percent), and food tastes good (69 percent).” Chipotle can maintain its competitive edge by making dining at Chipotle as convenient as possible. In its latest earnings report, Chipotle credited growth in Q2 2024 in part to improving “guest access and convenience.” This includes the growth of “Chipotlanes,” which allows diners to place their order online and pick their order up in the drive thru “Chipotlane” without the hassle of getting out of a car or being stuck behind an indecisive customer holding up the drive-thru line.  

While it seems that Chipotle has survived the brunt of the backlash against portion sizes, other restaurant owners are likely to take this as a warning that anything they do to cut costs (even when they try to minimize menu price changes) can become the object of ire. If these abrasive customer tactics continue, many restaurant owners may think twice about staying in business, and potential entrepreneurs may shy away from the restaurant and dining sector altogether. That will mean fewer options are available to diners. In the end, though, this saga is a harsh reminder of Mises’s comment that all business must ultimately answer to the customers.