Why Wall Street Is Worried About All Those Chipotle Coupons

For Chipotle, there’s no such thing as a free lunch. (Photo credit: Craig Warga/Bloomberg)

Chipotle is trying to win back customers, and in doing so, some new lingo has become part of its regular vocabulary. Take BOGO, freebie and direct mail, for instance.
As the Mexican restaurant chain prepares to report its first-ever quarterly loss on Tuesday, thanks to the fallout from hundreds of sickened customers across the country, it has turned to discounts and promotions.
There are some early signs that this might be helping. When Chipotle started to see sales recover in February, it gave credit to the burritos it was giving away. “Free burritos — turns out it works. It brings people into the restaurants,” commented chief financial officer Jack Hartung.
The company has since done a lot more with coupons, like offering free chips and guac for playing a game and a free Izze drink and entree with the purchase of an entree. Chipotle said last month that it was putting a whopping 21 million coupons in the mail and a recent survey from Cowen & Co. found that people who received a coupon ate at Chipotle roughly four times in one month. This was about three times more than people who didn’t get a coupon.
These efforts are seen as important for luring customers back and Chipotle has said it may continue to add promotions if it’s not seeing as many people in its restaurants as it would like. For instance, Chipotle’s chief marketing officer Mark Crumpacker said direct mail wasn’t working as well as expected on the West and East Coasts so the company may “goose” them with mobile offers.
This type of thing suggests Chipotle may be “bending to soft traffic,” says J.P. Morgan analyst John Ivankoe, and executing from “a position of weakness.”

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Wall Street is already questioning what it will take for Chipotle to pull back on promos — and how it will fare once it does. ”We view couponing as the gateway to improving traffic in the near term, but do not view it as a sustainable strategy,” wrote Cowen & Co. analyst Andrew Charles in a recent note.
Stephens analyst Will Slabaugh echoed this sentiment: “We think it will be difficult to fully dial this back down to previous levels without a traffic impact (i.e., it likely isn’t fully dialed back).”
Chipotle is also facing scrutiny about how much it’s spending on these marketing efforts. As Charles puts it, Chipotle faces a “‘double whammy’ risk” as it shells out on marketing and promotions in an effort to boost traffic, which then eats into its profits.
For the first quarter, Wall Street is anticipating a loss of 94 cents per share, above Chipotle’s projections that it would post a loss of $1 per share “or worse.” This would be the first time Chipotle has ever reported a quarterly loss.
The restaurant chain is also shelling out on costs associated with the careful handling of its food, pay for its employees and legal fees.
“2016 will be a very difficult year relative to our past performance,” remarked co-CEO Monty Moran earlier this year. Chipotle same-store sales plummeted 16% in November and have only gotten worse since then, falling 36.4% in January and 26.1% in February. That’s where the coupons come in.

Chipotle’s stock has also taken a beating and, at $438 per share, is down by almost half from its high last fall.