Dive Brief:

• If President Donald Trump's proposed tariffs, which he announced Thursday, are enacted on Mexican goods, Chipotle expects costs could rise by $15 million in 2019 and decrease margins by 20 to 30 basis points, Chipotle told CNBC.
• CFO Jack Hartung said that if these tariffs became permanent, the chain would have to increase costs as much as a nickel on a burrito.
• These tariffs could begin as early as June 10 if Mexico doesn't help prevent illegal immigrants from crossing the U.S. southern border. The tariffs, which would start at 5%, could gradually rise as much as 25% this year.

Dive Insight:

Tariffs aren't anything new for the restaurant industry. The trade wars heated up within the last 18 months, impacting both U.S. imports and exports. Tariffs imposed on U.S. pork products by China and Mexico led to an influx of supply within the U.S. because it is costing too much to export. Pork prices are at their lowest price in a decade, which has allowed restaurants to add bacon to many popular menu items.

But the latest round of tariffs could be more problematic for restaurants and consumers, especially since over half of its agricultural imports come from Mexico, which is the largest produce exporter to the U.S., according to The Wall Street Journal. Tomatoes are already expected to be in short supply with a 17.5% tariff going into effect in mid-June, according to Food Dive. Prices on avocados were already expected to increase due to a tough season, according to Bloomberg. Tariffs on mangoes and avocados could cost consumers up to $3 billion each year, according to the Los Angeles Times. 

Chipotle's Hartung said he expects food costs to be about 33% of revenue. He is already expecting food costs to rise in the second quarter due to a spike in avocado prices in March, which were led by increased demand, according to CNBC.

The fast casual restaurant has room to increase prices as well, according to a BTIG report emailed to Restaurant Dive. Its prices are below competitors like Qdoba, Moe's Southwest Grill and Baja Fresh by mid- to high-single digits and lower than many new fast casual companies like sweetgreen, Chopt and Dig Inn by the mid-teens. Regardless of tariffs, BTIG expects management to consider a low-single-digit menu price yearly to keep pace with the industry and ot offset labor and commodity inflation. Even a 1% increase in menu pricing would generate about $54 million in additional revenue, which would more than offset the impact of tariffs, according to BTIG.

The restaurant is already reviewing its supply chain to diversify, but it won't turn to premashed or processed avocados because it would violate its integrity principles, Hartung said. With so many restaurants advocating for fresh ingredients over processed foods, Chipotle won't be the only restaurant bearing the brunt of rising food costs, and many others are likely to turn to pricing increases as a result.