Nighthawks, Edward Hopper's famous rendition of a New York diner. Image source : Art Institute of Chicago.
Almost exactly one year ago, and four months before it ran into a food-safety scandal from which it's still recovering, Chipotle Mexican Grill (NYSE: CMG) executives had their minds on customer engagement. On the company's July 21 earnings conference call last year covering its second quarter, CFO Jack Hartung shared the following:
"We know, that when we study our existing customers, that there is, like, 55% of our customers [who] only come a couple times a year."
The statistic, while not wholly unexpected, was nonetheless a bit surprising, because management had so often characterized its customer base as passionate, socially conscious, steeped in the principles of sustainability, and clamoring for fare that was the opposite of industrialized fast food. It wasn't a leap to surmise that loyalty was a key trait characterizing most Chipotle purchasers.
Hartung's comment threw into relief that more than one-half of Chipotle's customers weren't actually loyal and, worse, were perhaps indifferent to the company's core marketing messages. The motivations for visiting a restaurant only twice in a year can be ascribed to almost anything, from a passing curiosity to a need for a break from your regular haunts.
At the time, management saw the 55% gap as a key opportunity to increase same-store sales. During the July 2015 call, Hartung discussed ideas such as educating customers on Chipotle's natural ingredients as a means to improving return visits.
Of course, such logic simply doesn't apply today. The percentage of customers who visit only a couple of times a year is probably even greater than before, because of the food-safety debacle that began last November and caused a comparable-store-sales decline in Q1 2016 of nearly 30%. Incidentally, we'll see how Chipotle's "comps" fared in the second quarter later this month -- it's scheduled to report Q2 earnings on July 21.
A mission to learn about the company's regulars
If customer engagement was an area to invest in before the novovirus and E. coli crisis, what can be done now that patrons are even more tentative? For one, the Mexican-themed franchise could flip the fraction and reassess what back in July the made up the other 45% of the company's customer base -- its regulars. This basic idea amply informs Chiptopia, the company's first-ever affinity, or loyalty, program, which was launched on July 1 and runs through Sept. 30.
As you know if you've signed up, participants in Chiptopia earn rewards by spending a minimum amount of $6 on separate days during a single month. The first reward, a free entree, comes after four separate visits in a single month. Those who do that reach "mild" level status.
Customers can use the mild-reward redemption visit to count as one of the four visits required to reach the next level, "medium." The same holds for the three visits required to attain the highest level: "hot." Obtaining hot status, whether a customer uses mild and medium redemptions or not, requires 11 separate physical visits during the month. (The rewards reset each month.)
Chiptopia will strike many observers as a strange type of affinity program, as more than anything else, it rewards visits, rather than total spend. It may also appear odd that the reward levels seem geared to a much higher frequency than the average Chipotle customer or, for that matter, any restaurant enthusiast, would entertain.
Striving to be "hot"? Eleven visits in a month means you'll hit your local burrito joint a bit faster than once every three days. Granted, some customers will be trying to pack in 33 visits, earning "hot" status each month, to receive a grand prize of catering for 20, which Chipotle lists as a $240 value.
Far from being odd, however, this program demonstrates management's realism, and also its ingenuity. Chipotle's task at hand is to identify its core fans and give them future incentive to help drive up quarterly numbers. The stratification of mild, medium, and hot is a way to winnow out fair-weather patrons from the truly committed.
Just who are Chipotle's regulars? The company will probably identify many partisans through mild-level redemptions alone. After plying customers with free burritos and buy one-get one offers for much of the first two business quarters in 2016, the burrito chain is naturally curious to form an initial database of those who will exert the extra effort to make four visits within a single month for a free entree.
This may sound self-evident, but loyalty schemes in the restaurant business work only when they drive profitable incremental traffic from committed customers. Poorly designed affinity programs can simply turn into discounting vehicles. Chipotle executives seem to grasp that it's much easier to give a person who regularly visits four times a month the incentive to tack on one additional visit than it is to entice a sporadic customer to complete two visits within the same month, let alone the same year.
Even after executives study the results of the summer test, they're likely to skew a permanent program toward frequency, and moreover, the uncommonly obsessed will still find opportunities to be rewarded. Chipotle has already seen how hard it is to persuade skeptics to give it another shot in the aftermath of its food issues. The company's first stab at an affinity concept, then, isn't so weird after all, once you understand its Chiptopian logic.
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Asit Sharma 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 .