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Can Customer Loyalty Be Measured In Free Burritos?

In business there are few hard and fast rules. What works brilliantly in one context can miss terribly in another. However, “few” hard and fast rules and “no” hard and fast rules are not quite the same thing — and no matter what business one is in, there are usually a few time-honored nuggets that seem always to be true.

For example, if one is in the business of selling food to customers, “don’t give people food poisoning” is an example of such a hard-and-fast sort of consideration. Human beings can forgive a lot when it comes to dining, but getting physical ill because of the experience pushes the consumer loyalty test to the max.

Which leads to the current the woes of Chipotle, the restaurant that set the world on fire with its fast casual model and Volkswagen sized burritos — only to subsequently set their customers’ digestive tracts on fire with Norovirus, gastroenteritis and E. coli bacteria.

Oops. Also, ew.

Since the food poisoning outbreaks started in the latter half of 2015, a small but vocal cohort of nauseated people have complaining loudly on social media that perhaps Chipotle’s branding as the “fresh” and “healthy” alternative to fast food is a bit misleading. The Cheesecake Factory’s Bruleed French Toast may have 2,780 calories and the capacity to make anyone who eats it feel an inexplicable sense of shame and regret, but ordering one has no recent history of putting anyone in bed for three days after eating it.

Chipotle has taken a hit with customers staying away from locations where they were once lining up around the corner, literally.

“”It was kind of eerie — and we’d hear this from customers. They would walk by a restaurant and see, that was always busy, and now there’s no line whatsoever,” noted Jack Hartung, Chipotle’s chief financial officer.

And falling foot traffic has not been good for the company’s bottom line, with mounting losses throughout Q1 that even the regularly staid, non-superlative laden folks over at Barron’s called “ginormous.”

So how bad is it, what’s the way back and will it work?

The short answer is: pretty bad, lots of free burritos and maybe.

As for that longer answer …

A Dubious Milestone Crossed

After a lot of explosive growth since going public, gravity found Chipotle this quarter, and with a vengeance. According to the firm’s latest regulatory filing, shares were down 36 percent in January, 26 percent in February and 22 percent so far in March.

That means that, for the first time since its IPO, Chipotle is notching a quarterly loss. The firm has been predicting that despite the year’s rocky start, things would even out and Q1 would end up as a break even.

Not so much, and the losses only precipitated a share slide of 4 percent in after-hours trading. The company admits it now expects to report a loss of at least $1 per share for the start of 2016.

Those big losses drew from a bludgeoning in sales figures, which fell 26 percent in February and haven’t recovered all that much. Plus, February also gave Chipotle something of a surprise bonus in the form of an extra day — without it, sales losses would have actually been worse.

“Consumers still have a level of distrust or reluctance to embrace the brand,” noted Asit Sharma, an analyst at The Motley Fool.

Plus, those losses aren’t just in the diminishing sales. They are also fed by Chipotle’s efforts to turn the ship around in that regard with additional marketing and promotional offers aimed at luring consumers back in.

“Chipotle is finding that it is indeed able to now move the needle on sales, but the marketing and promotion expense required to pull customers back in is higher than expected,” Sharma noted.

When The Going Gets Tough, The Tough Give Out Burritos — Lots Of Burritos

Part of the aforementioned promotional efforts to drive consumers back into stores were “free burrito coupons” that the firm was handing out fairly liberally in February.

That promotion seems to have gotten a mixed result. It did bring people in, but not at the levels hoped. Also, it was expensive to run. Chipotle has decided to double down on the effort, however, and has announced its intention to give away tens of millions of dollars more away in the form of free burritos. They will be made available via 21 million free food coupons sent via snail mail to U.S. consumers.

Given an approximate $7 cost per burrito, and Chipotle’s assumption that around a quarter of coupons will be redeemed, the rough estimate of the cost comes out to $62 million.

“So free burritos, it turns out, works,” Hartung said at a Bank of America Merrill Lynch investor conference. “It brings people into the restaurant.”

It should be noted, however, that sometimes free burritos work better than expected. Chipotle’s last “free burrito giveaway” was more popular than projected by a fair amount — and so theoretically Chipotle could find itself on the hook for a lot more than $62 million.

However, those paper-based coupons are only part of the effort, noted Mark Crumpacker, Chipotle’s chief creative and development officer. The fast casual firm will also be working to tie their promotional offer more closely to their mobile program and to build programs that reward their consumers for eating at Chipotle often.

“As we move into the summer and we do additional promotions, you probably will see BOGO creep back in,” Crumpacker said.

So, Is Customer Loyalty A Free Burrito Away?

So, when trust between a brand and its customers is damaged, is there any number of enormously overstuffed burritos that can be thrown at the problem to bring back that loving feeling?

OK, admittedly that might be too esoteric a question since the burrito solution is really limited.

But Chipotle is not the first brand to make a major swerve in the wrong direction. Coca-Cola decided that New Coke was an appropriate response to the Cola wars of the ’80s — and believed it so strongly they locked the original recipe in a vault and vowed never to produce it again.

That lasted less than six months, when Coke brought back Coca-Cola Classic, said they were sorry and saw their sales skyrocket. However, in that case, Coke didn’t literally poison anyone with New Coke — and some corporate conspiracy theorists think New Coke was in itself a marketing ploy to terrify people into buying Coke instead of Pepsi, lest the beloved and iconic brand die out.

Jack in the Box and Taco Bell, on the other hand, both had massive foodborne illness outbreaks — and both saw massive and sustained damage to their bottom line. Taco Bell took four straight quarters of losses, and Jack-in-the-Box took years to regain its footing and came close to shutting down entirely.

But both brands recovered — in both cases by apologizing, giving away free food (yes, Taco Bell also gave away free burritos) and hiring a food safety expert to redesign their standards around food handling.

A move, incidentally, that Chipotle has also made.

So it seems possible, and even likely, that Chipotle can recover as others have from similar instances.

They just might have to give away a lot of burritos on the way there.

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