Getting My Share of $20 Million (or: How I Participated in Chipotle's "Chiptopia" Reward Program)

By Markets Fool.com

Full disclosure: I not only want Chipotle to rise above its current travails, but I also count on the fast-casual Mexican chain for a modest portion of my weekly food intake.

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Recently, my friends and I took advantage of Chipotle Mexican Grill's (NYSE: CMG) "Chiptopia" rewards program. Our goal was to earn the program's holy grail: a free catered Chipotle party for 20 people.

Chiptopia's biggest prize was a fantastic deal -- particularly for those who have remained Chipotle loyalists in spite of the past year's foodborne-illness scares. Of course, the free catered Chiptopia parties are costing the company -- more than $20 million overall, in fact, as 85,000 people earned the catering valued at $240 a pop. So why did Chipotle feel the need to offer this generous rewards program? After all, its customers had already begun slowly returning after the food-poisoning ordeal. I decided to find out for myself. Besides, who doesn't love free food?

Here, then, is how I got my share of Chipotle's $20 million.

Just what was Chiptopia?

"Why is Chipotle allowing me to get a scrumptious $12.75 bowl, including a double portion of steak, for free?"

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Thoughts like this crossed my mind more than once from July through September, the three-month period during which Chipotle ran its rewards program, which let those who had signed on earn free food after spending a certain amount. This company had never needed any type of loyalty program. As the unquestioned leader of the fast-casual industry, it had lines out the door, with patrons practically begging for their favorite cilantro-infused dish on a daily basis.

That all changed, of course, with every unfortunate tale of food poisoning that ended in the ER. In all, more than 500 Chipotle patrons were reportedly sickened by foodborne illness originating from the chain.

Something had to be done. To its credit, Chipotle's management moved to correct the company's supply chain and rally the troops. But sales were still lagging, and comparable-store sales, that most important of restaurant metrics, were cratering. Management needed another solution to get patrons back in the door and make America see that the ship had been righted.

So Chipotle took us to a land called Chiptopia.

The idea behind the rewards program was simple. Participants were issued a plastic rewards card, one that looks like so many others in our wallets and purses.

Image source: Author.

You know the drill from there. Every time you dined at a Chipotle, you handed over the card at checkout. The transaction was recorded with a simple swipe, and each meal contributed to your "status." There were three status levels on the path to Chipotle nirvana: mild, medium, and hot.

Every three or four meals would earn an increased status and even a free meal, or merchandise from Chipotle's online store. (Cooking apron, anyone?) But to earn that grandest of prizes, a free catered party for 20, one had to achieve "hot" status in each of the three months the program was in existence. There was even an online app to monitor your Chiptopian progression:

Over 3.6 million people participated in the program. Most fell off at some point along the way, earning a free burrito bowl or two but never making it to the summit. But for the lucky few who prevailed -- some 85,000 in total -- the biggest reward of all would prove to be an awesome (and filling) experience. Chipotle did not disappoint:

Image source: Author.

After three months of hard work (well, OK, hard eating), I placed my catering order, and it was off to the local Chipotle.

Our food was waiting for us upon arrival.

Image source: Author.

As was our total at the checkout.

Source: Author.

Three hundred and eight dollars, you say? I have a solution for that.

Image source: Author.

That's more like it.

Image source: Author.

Time to dig in!

Image source: Author.

My friends and I had a great time, and the consensus was that the Chiptopia program was a winner. Of course, having just eaten over $300 worth of free food, we were a little biased. Could the same be said for Chipotle itself? Had this initiative been as worthwhile for the company as it had for us?

If you give a mouse a free burrito bowl, he's going to want extra chicken and guacamole

As you have no doubt guessed, patrons immediately started gaming this system. Well, "gaming" might not be the right word, but honestly, what would you do? If you knew you had a free burrito coming up, wouldn't you, when the blessed day arrives, load up that burrito with as much extra chicken, guacamole, cheese, and salsa as possible?

With that reality in mind, you're probably not going to be surprised that the financial results of this program have not been great for Chipotle, at least in the short run. In Chipotle's third-quarter results, announced on Oct. 25, not only did the bottom line take a $14.5 million hit from a writedown on the ShopHouse restaurant concept, but there was also deferred revenue of $11.5 million -- and that's to say nothing of the increased costs associated with giving away all this free food.

The catering-for-20 giveaway is costing Chipotle shareholders an estimated $20 million. That's not enormous, but plenty big for a company that's used to earning $120 million a quarter.

Still, $20 million is arguably a small price to pay to win back customers. As I noted in another article,the purpose of the program was twofold: (1) to prove that customers were not completely averse to dining at their local Chipotle, and (2) to get its most loyal customers back in the habit of frequenting its restaurants. The hope its that these customers, rebooted early adopters in a sense, will attract the rest of the American public back with them.

Given that over 3.6 million people participated in the program, I'd say that "Chiptopia" has been a solid success.

Foolish takeaway

Some Wall Street analysts said Chiptopia was a flop, that it wasn't even a rewards program, and that it smacked of desperation. But they missed the point of the initiative and failed to think several moves ahead. Of course the program didn't bring back every lost customer, and of course the American diner is just as finicky as ever. The most important thing was that Chipotle got a chance to hit the reset button and remind its most loyal customers (yours truly included) that we really do love a good steak bowl, regardless of any mistakes the company may have made.

This was a $20 million bet that my peers and I will reward in earnest. Chipotle wagered that we would continue engaging in our burrito habits and would tell everyone we know that Chipotle is back and better than ever. They were right. From what I've seen, this is a bet that will almost certainly pay off for Chipotle's shareholders.

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Sean O'Reilly 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.