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1 Reason to Think That Chipotle Mexican Grill Is Getting Desperate

By John Maxfield – Nov 4, 2016 at 4:17PM

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Chipotle’s long-claimed aversion to marketing is no longer a luxury it can afford.

A Chipotle burrito bowl. Image source: Chipotle Mexican Grill.

Let me be clear from the outset: I'm bullish on Chipotle Mexican Grill's (CMG -0.51%) stock. Yet it's impossible for even someone who's optimistic about the burrito chain's prospects to deny that its executives seem to be getting desperate.

This was the thing that kept running through my head when I listened to its executives offer remarks and respond to questions on Chipotle's third-quarter conference call last month.

Between Co-CEOs Steve Ells and Monty Moran, and head of marketing Mark Crumpacker, the team announced a dizzying array of new initiatives designed to repair the damage to its reputation after multiple food safety issues came to light over the past 12 months.

They introduced a plan to cut $100 million in costs and capital expenditures, hinted at new menu innovations such as dessert, said that they'll soon be rolling out new equipment in their restaurants to reduce the time customers stand in line, and discussed the results of its recent promotional campaign, Chiptopia, the first loyalty program in its history as a company.

But the thing that caught my attention most was Chipotle's decision to invest heavily in marketing, something it hadn't previously done.

Chipotle ran three marketing campaigns during the third quarter, Crumpacker explained on the call, the last two of which will continue to run through the end of the year:

  • The first revolved around food safety advancements, designed to communicate what Chipotle has done over the past few months to ensure the safety of its food.
  • The second involved an animated short film, distributed digitally and over social media to rebuild trust in the Chipotle brand.
  • And the third campaign, run across a variety of media channels, spoke to Chipotle's core value proposition of using quality ingredients.

Beyond these, Chipotle said that it's testing a new marketing campaign, which will include television commercials -- another first for the burrito chain. According to Crumpacker:

In order to accelerate that momentum, we are considering a national television advertising. Because our ingredients-range campaign tested positively in terms of customer perception and brand trust, we are running a 30-second ad from that campaign in multiple test markets. If the test reveals that television advertising delivers the results we want, we may begin to integrate national television buys into our advertising campaigns.

To say that this heavy focus on marketing is new to Chipotle would be an understatement. Here's Crumpacker on Chipotle's first-quarter conference call last year boasting about the fact that it didn't need to invest in marketing because word of mouth did the heavy lifting for the chain:

The marketing we do at Chipotle is unlike that of any other fast food brand. The reason for this is simple: Very early on we decided to spend more on our ingredients and less on our marketing.

It's always been our belief that better quality food prepared by hand and served by excellent teams would be the most powerful marketing of all. In fact, we were serving better ingredients, including pasteurized dairy, local produce, and meats without antibiotics or hormones long before there was even significant customer demand for such things.

Over time, this has created powerful differentiation between Chipotle and other fast food brands. This approach has served us well and our ongoing marketing research makes us confident that this is the case. Chipotle has become quite buzz-worthy with awareness coming from social medial, public relations, advertising, and our local and event marketing programs.

My objective here isn't to point out the abrupt about-face performed by Chipotle in a little over 18 months' time, but rather to note how this could impact the chain's returns going forward. To this end, if Chipotle will now have to start marketing heavily where it once didn't feel the need to, this will compress its profitability margins and thereby weigh on shareholder returns.

In sum, while I'm still bullish on Chipotle's stock, it'd be foolish to suggest that all of this shouldn't impact one's investment thesis.

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