How Chipotle Is Spending Millions to Win Back Its Most Loyal Customers

By Markets Fool.com

Available this past summer, the loyalty program Chiptopia yielded some intriguing numbers forChipotle Mexican Grill(NYSE: CMG). For example, over 75,000 people managed to earn the program's biggest reward: a catered meal for 20 people. That amounts to about $18 million in free food!

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In the accompanyingvideo fromIndustry Focus: Consumer Goods, Vincent Shen and Asit Sharmabreak down the details behind Chiptopia and how it delivered for the struggling fast casual chain.

A full transcript follows the video.

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This podcast was recorded on Nov. 1, 2016.

Vincent Shen:I want to take our conversation now to our second company. Whereas Dunkin' Brandshas,I think, instituted a very competitive programeven against a very well-establishedincumbent with its ownvery competitive and successfuloffering, we haveChipotle. Chipotle obviously hasexperienced a ton of challenges, we've talked about them on the show previously together,in the past year, with food safety scandals. Over the summer,July, August, and September, they had their temporaryChiptopia program. During those three months,essentially, based on the frequency with which you visited their locations, you could reachone of three tiers: mild, medium, or hot. Each one came with its own benefits. Going four times in a month,you would reach mild status. Another four times on top of that, medium. Another four times on top of that, you'd reach hot.

The big carrot that they offered to members of Chiptopia were the catered meal for 20. Basically,if you can reach hot status with 12 visits each month for each month of the program,at the end of the program, they will give you acatered meal for 20,which is about a $240 value. I think this was obviously reservedfor the real die-hard fans. With this show, today, I was with my brother over the weekend,he mentioned that he had just recently eatenhis last free mealthat he got from Chiptopia. I thinkhe was a regular medium level member over the three months. But, 75,000people actually managed to reach that hot status, and to get that catered meal for 20. 75,000 people, a $240 value.I think the company said that over the next six months, they'regoing to have to give out about $18 million in free food,on top of the approximately $2 million infree burritos those customers were already getting,assuming you're paying about $9 per meal.

Theprogram overall attracted about 6 million people, with2.5 million actually earningrewards through the program. What were your thoughts on Chiptopia? The company recently released earnings -- the stock took quite a hit,I think they're down about 11% since theyrelease earnings last week. What do youthink about the program? Anddo you think this will be a preview of somethingthey establishon a more permanent basis in terms of a loyalty program?

Asit Sharma:First, on a personal level, I reached medium status in our household. Myyoungest is a Chipotle freak. We didn't obtain the highestreward simply because I had to say no after a while. But this,I think if you extrapolate this,I think it's very indicative of Chipotle's approach and how it's very different from Dunkin's.Chipotle started with the premise thatwe do have this core of really loyal customers. So,they weren't trying to build loyalty. They hit a rough patchwith theirnorovirus and E. coli scare, and they're stillmodeling in the revenue trough,honestly. So their proposition was, why don't we --I'm going to use this key word today -- activatesome of these loyal customers. If you are a casual eater of Chipotleand happened to look at the rewards chart that Vince was talking about, it reallyrewarded very frequent visits. It wasn't really just a dollar spend. You had to show up at Chipotle. What they were trying to do wasrekindle the fire and enthusiasm of their peak visitors. This is one of the reasons, in the first place, to institute a loyalty program. It's much cheaper to get acurrent customer to spend again than it is togo out and acquire a new customer. So,for Chipotle, this made all the more sense. AndI think this was a tremendous cost they undertook. I, too, was really surprised by those statistics, hearing them on the conference call. Yet,it's exactly what Chipotle needed to do, which was to solidify --if I can use this phrase in the political season --they needed to solidify their base.This cost they're incurring now is really an investment instabilizing of revenue. As they additems to their menu, they'll be able to have newer customers come on.

But,my personal take is,it was a very appropriate action for Chipotle. I'm going to make a prediction that we'll see a revival of Chiptopia. It may not be called that. But you'll see a program leaning towardrewarding frequency. Chipotle wants you back in the stores. It's a little less concerned in the near-term with how much you spend. They want you to have thatexperience so that you begin to build a deeper innate trust in their product once again,just like they enjoyed before all this food scare came and walloped the company.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.