Shares of Chipotle Mexican Grill (NYSE: CMG) have fallen over 30% over the past 12 months due to slowing sales growth related to several outbreaks of E. coli and norovirus at its restaurants. The company has been trying to rebuild its public image with media appearances, a one-day shutdown of all Chipotle stores to address food safety, and a direct mail campaign offering free chips, guacamole, and burritos.
Image source: Chipotle
So far, the free food giveaway seems to be bringing customers back. A recent Cowen & Co. survey found that 41% of respondents who received the coupons visited Chipotle nearly three times more often than those who did not.
But free food is no magic bullet
The results of the survey seem positive, but Chipotle's first quarter earnings report indicated that the overall impact was minimal. Revenue fell 23% year-over-year to $834.5 million, compared to a 7% decline in the previous quarter. The company also posted a net loss as restaurant-level operating margins plummeted from 27.5% a year earlier to 6.8%.
The company's turnaround plans include introducing a limited rewards program, aggressive marketing campaigns, new menu items, and an expansion of its delivery service. But launching those services will cause operating expenses to rise, which could result in steeper losses ahead. Chipotle may be enjoying some success with its direct mail campaign, but it is unclear if the company can convert those diners into loyal, paying customers.
So who benefits?
Chipotle still faces a lot of challenges, but its headwinds could become tailwinds for rivals like Jack in the Box's (JACK +5.38%) Qdoba or Yum! Brands' (YUM 1.39%) Taco Bell, which has mimicked Chipotle with its upscale Taco Bell Cantina locations. Qdoba comps rose just 1.8% last quarter, while Taco Bell comps improved 1%. Those figures both represented sequential declines due to an overall slowdown across the restaurant industry, but their growth might accelerate if Chipotle's recovery fails to take hold.
