Chipotle Mexican Grill (CMG, Financial) is planning to increase its "free burritos" offer to boost its sales in the wake of its food safety scandal.
The company may give away nearly 9 million burritos to regain customer confidence and win back their loyalty. Chief Financial Officer Jack Hartung said the free burritos campaign is proving effective by attracting customers, and some are becoming repeat customers.
The turnaround strategy
Chipotle initially offered free meals through coupon offers for salads, tacos, burritos and burrito bowls on Feb. 8 after all outlets were closed for a company meeting to discuss food safety procedure. Chipotle’s creative chief Mark Crumpacker said that 5.3 million customers downloaded the free meal codes, which was more than twice the company’s expectation. Of these, two out of three customers converted the codes and redeemed them.
In addition, the Denver-based chain has mailed 6 million to 10 million free entree offers to certain customers. The company aims to send a total of 21 million such offers. These will be valid through mid-May. At an investor conference, Chipotle executives said that customers could expect more such offers as it builds a turnaround strategy and puts more effort into reviving sales.
Chipotle spokesperson Chris Arnold said the company aims to become “a leader in food safety.” The company has implemented several programs and added procedures to ensure food safety. Some of them include preparing certain ingredients in the central kitchens and performing high resolution testing of ingredients to assure top quality food. There are also procedural changes in the outlets.
Regaining customer confidence
Hartung was happy to note that at least the company’s outlets aren’t empty anymore. "Our restaurants are full again," he said. "When people walk by a Chipotle restaurant, they would look in and say, that’s a Chipotle restaurant, it’s busy, they’re cooking food, lots of people are eating, and so it must be OK again."
Customers are gradually returning to the chain, though 5% to 7% of customers say they will never visit again after the food safety lapses. Most of the customers expressed their eagerness to return to Chipotle but only after waiting a bit more and being reassured.
Hartung reported that the number of paid entrees is rising. Customer traffic fell 20% in February compared with a year ago, but that was better than the steeper fall of more than 30% in January. Steve Ells, Chipotle’s co-CEO, confirmed that all cooking techniques are being thoroughly inspected. Several changes have been incorporated to ensure better and safer food.
High promotion cost to hit profit
Chipotle executives said that such heavy campaigns and promotions are stressing the company’s bottom line. These efforts are coming at a huge cost. Such discounts coupled with overall poor sales would deteriorate profits.
Sales at Chipotle's established restaurants dropped 26.1% in February, which is better than the steeper drop of 36.4% in February. But this is not going to support profits in the first quarter, particularly when the company is spending massively on promotions and marketing to woo customers back. As such, the company expects a first quarter loss to the tune of $1 per share.
The cost of distributing free burritos to get people to pay for burritos is expected to be $70 million between February and May. This might appear to be a lot, but such outflow is meaningful if it works.
