In the past eight months, sales at fast-casual chain Chipotle Mexican Grill (NYSE:CMG) have been walloped by a damaging food safety scandal. In the first quarter of 2016, revenue plunged 23.4% year over year, and analysts are expecting another double-digit revenue decline in Q2.
Now that Chipotle appears to have gotten its food safety issues under control, the company is determined to win back lapsed customers and convince them to visit Chipotle frequently. To do this, Chipotle is turning to a limited-time loyalty program and a new menu item: chorizo.
Combating menu fatigue
The E. coli outbreak linked to Chipotle last fall was clearly the immediate catalyst for the chain's sharp sales declines. However, the CDC declared the outbreak to be over five months ago, and yet sales have not returned to anywhere close to normal. To many analysts, this suggests that there are deeper underlying problems at Chipotle.
The most frequently cited concern is menu fatigue. Chipotle's menu is extremely simple, with a handful of proteins and a handful of toppings or add-ons that customers can use to customize their meals. Furthermore, the menu hasn't changed much over the years, other than the addition of a new "sofritas" tofu protein a couple of years ago.
For many years, Chipotle has thrived despite its lack of menu innovation, thanks to the loyalty of many customers who had a Chipotle routine, so to speak. However, last year's food safety scare disrupted these routines, and many people haven't returned to their old habits.
That's why Chipotle has experienced a bigger decline in sales among what it calls "top-loyal" customers -- those who visit at least 25 times a year -- than among more occasional customers. The company's most critical priority right now is to motivate its biggest fans to start dining at Chipotle frequently again.
Chipotle's two weapons
In the past week, Chipotle has rolled out two initiatives to kick-start sales -- with a particular focus on getting its most loyal customers to visit more often.
First, it is adding a new protein to its menu: chorizo. Chipotle first began testing the spicy pork and chicken sausage last year, and it was extremely popular with loyal customers, according to marketing chief Mark Crumpacker.
Chorizo is now available at Chipotle's locations in Manhattan; Columbus, Ohio; Sacramento; and San Diego, as well as at a single restaurant in Denver and one at Washington Dulles International Airport. It will roll out nationwide by the fall. The new chorizo protein has the potential to generate some much-needed excitement for Chipotle.
Second, Chipotle will run a limited-time loyalty program -- Chiptopia Summer Rewards -- for the next three months. Customers who make a purchase of $6 or more at least four times a month can earn a credit for a free entree, with additional rewards available for people who visit even more frequently. (My Foolish colleague Daniel Kline has the full details here.)
Can these initiatives work together?
The Chiptopia Summer Rewards program is clearly aimed directly at boosting frequency among Chipotle fans. During the three months that the promotion is scheduled to run, it will be possible to earn free entrees very quickly -- but only if you visit at least once a week, on average.
Meanwhile, if chorizo becomes a hit, as the company hopes, it could keep customers visiting frequently even after the temporary loyalty program ends this fall.
Ideally, Chipotle would have chorizo available in all of its restaurants already, to maximize the chance that customers who participate in the Chiptopia program over the next few months try the chorizo and get hooked. Supply-chain constraints are likely forcing Chipotle to phase in the chorizo rollout over the next several months.
Nevertheless, the combination of the limited-time rewards program and the new menu item could help slow Chipotle's sales declines this summer, particularly in the markets where chorizo is already available. Longer-term, I expect Chipotle to develop a permanent app-based loyalty program to encourage customers to visit more often. (By contrast, Chiptopia is a low-tech punch-card scheme.)
There's nothing unfixable about Chipotle's problems. A commitment to gradual menu innovation and a rewards program for loyal customers could get the fast-casual chain on the road to recovery in short order.
Adam Levine-Weinberg owns shares of Chipotle Mexican Grill. 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.