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Is Chipotle Repeating Starbucks' Mistake?

By Rick Munarriz – Jul 24, 2016 at 10:00AM

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Chipotle's temporary rewards program encourages check splitting, something that Starbucks learned was a problem earlier this year.

Image source: Chiptopia.

Chipotle Mexican Grill (CMG 0.07%) and Starbucks (SBUX -0.21%) posted disappointing quarterly results after Thursday's market close. Both stocks still managed to close higher on Friday after initially opening lower -- with Chipotle closing sharply higher -- but that's not the only thing the two companies have in common these days. With Chipotle rolling out Chiptopia earlier this month, both chains now offer loyalty programs that reward frequent visitors with discounted goodies.  

Chiptopia is a free program that offers a free entree after every four purchases in any given month. You only have to score three visits to land your third monthly freebie, but if you've been to Chipotle 11 times during the same month you may have a serious carnitas addiction you need to get checked out.

The new program won't last forever. Chiptopia is a temporary summertime promotion. It will be over by the end of September, though it wouldn't be a surprise if Chipotle rolls out a permanent loyalty rewards platform in October.

Chiptopia is based on the number of visits that are made, as long as a day's qualifying purchases top six bucks. Starbucks Rewards also used to be that way, until the baron of baristas realized that folks were splitting transactions to notch more freebies.

A latte changes going on

Starbucks announced in April that it will be making changes as to how it doles out bonus rewards. Instead of earning "stars" based on the number of visits it would dish out the reward points based on customer spending. The goal at the time was to end the practice of customers splitting their orders into multiple transactions to ring up more points, something that could potentially slow down the line and stick Starbucks with a lot of swiped micro-transactions. 

Chiptopia itself could slow down the process at Chipotle, a place that's known for its assembly line's speed. The chain has bragged that its most efficient units can process as many as 350 transactions in an hour, but is that bar still feasible as folks hand over their physical or digital Chiptopia cards that are then checked for potential rewards?

Then we get to the transaction-splitting problem that Starbucks is trying to eliminate with the springtime tweak to its loyalty program. The incentive is now there for groups to break out their orders.

"If my wife and I want to go to Chipotle, it doesn't make sense to put it on the same bill the way we have in the past," I argued earlier this month. "We're going to ask to be rung up as separate orders, doubling our freebies."

Time and punishment

Chipotle bears will argue that transaction splitting isn't an issue. Traffic has slowed considerably at the out-of-favor burrito roller. It just posted its third straight quarter with a double-digit year-over-year decline in comps.

One can also argue that what Starbucks did in April was a mistake. Its brand took a hit following the move based on the reputation tracking YouGov BrandIndex. Within a week of the Starbucks Rewards change, customers' intent to make their next purchase at the chain dropped from 80% to 71%. Its "buzz score" -- a metric that measures if respondents have been hearing positive or negative things about the brand -- also took a hit.  

Starbucks clocked in with weaker-than-expected sales in its latest quarter, but it's not fair to blame the tweak to Starbucks Rewards for the shortfall. It revealed on Thursday that the program has grown to 12.3 million active members, 18% higher than a year earlier. Starbucks also stands by the revamped program as a way to improve service. Chipotle's excited about the initial improvement in trends since Chiptopia kicked in this month, and that's what pushed the stock higher despite the otherwise dreadful quarterly report. Let's see if it still feels that way by the end of the program.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. 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.

Stocks Mentioned

Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
$1,509.46 (0.07%) $1.06
Starbucks Stock Quote
$101.87 (-0.21%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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