The second half of 2015 represented a turning point for Chipotle Mexican Grill, Inc. (NYSE:CMG), but not in a good way. As we all remember, the company’s restaurants were involved in two E.coli outbreaks, which affected dozens of people. The outbreaks did not cause any complications and no deaths were reported in the outbreaks, but it put a strain on Chipotle’s financial results. Following the outbreak, NPD Group, which tracks consumer awareness about food safety outbreaks said that teen and young adult customers had not been discouraged from eating at Chipotle restaurants, which was a good sign, since this demographic represents the largest share of the chain’s traffic. However, even though the youth’s brand loyalty was unshaken by the outbreaks, Chipotle Mexican Grill still posted a 14.6% comparable restaurant sales drop in the fourth quarter of 2015, which included a 30% decline in December.
Following the food safety issues, Chipotle, one of the largest Mexican restaurant chains in the US, embarked on a campaign to try and bring back the lost customers or attract new ones. One of the key aspects of its new marketing campaign was giving away lots of free food. In March it launched an online game, ‘Guac Hunter’, which involved spotting differences between two similar images and rewarded winners with a free order of chips and guacamole. On July 1, 2016, Chipotle launched Chiptopia, a new customer frequency program, which had three levels: Mild, Medium and Hot. Customers that spent at least $6 before tax in four visits were awarded the Mild status and a free entrée, while the highest Hot level rewarded customers with up to nine free entrées and a $240 ‘Catering for 20’ Bonus Reward.
In September, Chipotle offered free fountain soft drinks or iced tea for all college and high school students and customers with kids were offered a free kid’s meal with the purchase of an entrée every Sunday. Earlier this year, Chipotle announced a new online game, ‘Cado Crusher’ with also free orders of chips and guacamole as prizes. Aside from campaigns, the company also gave away coupons for free burritos. In February the company had an online promotion with 5.3 million people downloading the mobile coupon and 2.5 million redeeming the offer and in March it sent 21 million direct-mail coupons.
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On the next page, we are going to see how these promotions affected the company’s financial results and what plans Chipotle has for the current year.
In this way, in the first nine months of 2016, the company boosted its marketing and promotional costs, which represented $20.7 million and $75.9 million of its third-quarter operating costs, according to the company’s last 10-Q report. Out of revenue of $1.04 billion for the first nine months of 2016, restaurant operating costs, restaurant operating costs amounted to $890.29 million. As percentage of revenue restaurant operating posts increased by 15.4% on the year with marketing spend on promotions to regain customers contributing 3.5% to the increase.
Earlier this year, Chipotle Mexican Grill, Inc. (NYSE:CMG) said it registered a nearly 15% increase in same store sales in December, which was a sign that the company is finally managing to get some traction following the food safety scandal. At a recent conference in Florida, the company announced its marketing plan for this year, which involves a big marketing campaign and a TV series for kids (no idea why), but the company also plans to cease giving away free food. Chipotle also plans to focus on digital ordering and has recently launched an online tool that helps customers build their meal based on their diet and count calories. Aside from expenses on promotions to regain customers, Chipotle Mexican Grill, Inc. (NYSE:CMG) is also burdened by increased labor costs and in 2017 it may increase menu prices to offset the costs. The company will proceed with caution and will analyze customer reaction to price hikes. However, even though Chipotle Mexican Grill, Inc. (NYSE:CMG) plans to launch its largest advertising campaign ever this year, free burritos will certainly be missed by customers.
For long-term Chipotle investors, 2015 was not a particularly good year, with the stock plunging by over 20% due to disappointing financial results and uncertainty over the effectiveness of the company’s marketing campaigns. However, the decline represented a good entry point for investors that believe in Chipotle Mexican Grill, Inc. (NYSE:CMG)’s long-term potential. One of these investors is billionaire activist Bill Ackman, whose Pershing Square fund added a $235 million position to its equity portfolio during the third quarter. The positive news since the beginning of the year sent Chipotle’s stock higher and it is currently 12% in the green year-to-date. However, it is still 30% lower from the levels it had been trading at before the food safety issues emerged.
Disclosure: none
