June 10th, 2016
Something unexpected is happening at Chipotle
If you’ve recently found yourself battling lines at your local Chipotle, you aren’t alone.
The restaurant chain is showing signs of recovering from its nightmarish start to the year after a string of high-profile food poisonings left it without customers.
Surveys of customer perception and data on foot traffic at the chain indicate that Chipotle’s business is picking up.
It’s early days and not yet clear how much this is a product of an aggressive promotions, but a June 2 poll of consumer perceptions by YouGov revealed positive feelings for Chipotle. That’s the first time consumer perceptions have been positive since the news of the E. coli crisis hit, eight months ago.
By the time it was all over – regulators gave Chipotle an all clear in February of this year – 55 people had been sickened after eating at Chipotle locations in 11 states, and sales were in free fall. In the first quarter, revenue plunged and the shares have crashed from pre-crisis levels.
YouGov’s perception score ranges from negative 100 to positive 100. Right now the brand is near the neutral mark, which is still below pre-crisis levels, but means that appraisals of positive and negative reports about Chipotle across all media, including advertising, news, and word of mouth, are finally balancing each other out.
Growing foot traffic
As perception improves, there are also signs that customers are returning.
While Chipotle declined to provide any data on foot traffic or sales, holding out until the company’s next quarterly earnings report in July, location-based marketing company xAd revealed that Chipotle’s share of foot traffic is growing compared to Taco Bell.
“This doesn’t mean that Taco Bell visits are decreasing, but that the proportion is shifting as Chipotle gains back share,” Sarah Ohle, senior director of global research, told Business Insider, explaining that xAd measured Chipotle’s foot traffic against Taco Bell after seeing a strong customer overlap between the two chains.
Perhaps even more importantly for the chain, these customers are returning for lunch.
In May, Chipotle managed to grow its lunch foot traffic, compared to its traffic over the rest of the day, likely as customers cashed in various free-Chipotle deals and regular lunchtime customers returned to the chain.
” In May, the dinner peak is still present, but lunch is now a much stronger time period for relative visitation to the brand,” says Ohle. “This could signify the work crowd returning to Chipotle as a go-to lunch option!”
Anecdotal evidence of Chipotle locations once again filling up with lines have been published in Seeking Alpha , appeared on social media, and observed in Business Insider’s own visits to New York City restaurants.
“We’ve got people coming back,” an employee at a New York City Chipotle location told Business Insider late Thursday aftern it’s 3 p.m. and people are still coming.”
An April survey from UBS Evidence Lab indicates that many of the returning customers are regulars, with heavy users indicating they planned to visit the chain more in the future.
While it’s probably too early to say Chipotle has totally recovered from the crisis, this is evidence that Chipotle’s efforts to get customers back in the door are working.
Since February, when the crisis was declared over by federal investigators, the company has focused on implementing preventative measures to make sure the chain never faces a similar crisis again and on promotions to bring customers back to the chain.
Chipotle has rolled out new safety measures and hired food-safety experts to guard against further health scares. The company spent $70 million on promotions, something that contributed to the drop in sales in the first quarter.
The changes did not immediately have the impact Chipotle would have liked. In April, Chipotle reported that comparable-store sales, or sales at locations open for at least one year, fell nearly 30% in the first quarter – an even greater loss than analysts had anticipated.
However, the promotions may now be taking effect. The chain’s free burrito SMS coupon had a redemption rate of 67% on 5 million offers, according to the company, with Chipotle continuing to roll out new promotions.
” Once customers eat at Chipotle and enjoy their meal without incident, they will return as paying customers,” Andrew Tseng, founder of investment advisory firm Bramble Hill, told investor social network SumZero, last month.
Investors still haven’t caught on
While some investors, like Tseng, are convinced of Chipotle’s comeback, many investors haven’t yet noted the rise in foot traffic and growing positivity from customers.
Chipotle stock was trading at $415.79 when the market closed on Thursday, still well below its level before the outbreak. The stock’s all-time high, $758, was set last August.
There are still many questions as to when Chipotle will return to its previous heights – if ever.
Menu fatigue may ultimately be a bigger problem for the brand than E. coli. According to analysts, chain’s simplistic menu contributed to sales growth contracting even before the outbreak, which emerged in the fourth quarter of 2015.
Plus, while former regulars are returning to Chipotle, it seems that the chain is still struggling to appeal to infrequent visitors, according to UBS data. While the chain may build back its army of regular Chipotle eaters, infrequent and new customers are still more likely to have a more negative opinion of the chain, and say they’re unlikely to eat there with greater frequency in the future.
The comeback is proving costly as well. The company spent roughly $70 million on promotions between February and May 15 – about 16% of Chipotle’s total sales last year.
Even as the promotions shift to buy-one, get-one offers, and with the hope that customers continue to come back and actually pay for burritos, that’s a lot of money to earn back.
Chipotle’s return to greatness is far from guaranteed. But things aren’t as bleak as they were just a few months ago. And if this is the start of a recovery, it’s happening much sooner than many analysts had expected.
For Chipotle, that’s some of the best news it can hope for.