Chipotle Mexican Grill Trades Free Burritos for Customer Data

By Markets Fool.com

As Chiptopia served up millions of free burritos to its members, happy diners were actually returning the favor toChipotle(NYSE: CMG) as the company collected valuable information about its customers.

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In this segment from the Industry Focus: Consumer Goodspodcast, the team discusses how the temporary loyalty program allowed Chipotle to not only reach out to loyal customers but to gain insight into customer behavior and perhaps sow the seeds for future pricing power as well.

A full transcript follows the video.

This podcast was recorded on Nov. 1, 2016.

Vincent Shen: There's some good points there that I want to touch on, especially with the idea of solidifying their base. I really like that because, in the end, a behavior they saw in some of their customer base was, they had some really die-hard fans, and as a result of the food safety scares, some of those die-hard fans stopped coming. The idea was, "Let's offer this very attractive program in Chiptopia, and bring these people back, hopefully reestablishing what was a habit for some of our biggest and most loyal customers."

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I have a quote here from Chief Marketing and Development Officer Mark Crumpacker. In terms of the loyalty benefit that Chiptopia offered, he said, "Throughout the course of the promotion, we saw increased transaction and frequency levels. But most important, we've nearly returned to pre-crisis levels among our most loyal customers. After the completion of the program, we anticipated traffic to fall slightly, but we've instead seen our improved sales levels generally continue to hold, which is very encouraging."

On that loyalty side, obviously, these affinity programs or loyalty programs keep the customers coming back -- in this case, with the rewards of free food. But on the flip side of that, too, Mark Crumpacker goes on to speak to the data benefit as well for how the company is leveraging some of the transactional data that it was able to accumulate. He said, "By combining the transactional information with other customer data, we are now able to identify more than half of our customers and reach them with specific offers and tailored messages. This important breakthrough not only allows us to target messages and offers to current and lapsed customers, but also allows us to accurately measure the effectiveness of those efforts by tracking return visits."

So, just like you had mentioned with Dunkin' Brands, here's a case where that one-to-one marketing, being able to cater your marketing, your promotions, to each customer, you're much better able to do that the more you know about them, the more you know about their buying behavior at your business.

Asit Sharma: I totally agree, Vince. I want to add to that that the food scare took away one of Chipotle's greatest weapons. It enjoyed extremely elastic pricing before all this happened. Customers loved the product so much, it could consistently raise, in small increments, prices on, say, the beef burrito, etc. That has really been impacted by a decrease in trust and a real reservation of customers to come back. So fighting in the trenches for their most loyal customers is a way, if you look at a P&L [profit and loss] statement, it's one way to compensate for margins that might be a little squeezed. Especially, we know Chipotle has a higher labor costs, a higher food waste component now, as it's trying to ensure that they are a place that you can return to with a 100% degree of confidence. They have to find another way to be able to nudge margin up.

This is the beginning of a long process which will enable them to get there, this data mining. It really, in the future, becomes about volume and margin. At the point where they can combine both of those -- in other words, let's say they have some new menu introductions, which there's an uptick of their most loyal customers. Maybe the chorizo continues to become a popular burrito filling, or they introduce yet another filling. That's going to be for them the same degree of margin leverage that they had when it was easy for them to raise prices. So, I think there's a lot going on in what you just mentioned and the quote you gave to us. Long-term holders of Chipotle should watch for this. Watch these frequency numbers. I think they'll be talking about them on conference calls for many quarters to come.

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.