×

Chipotle still struggling to lure back its most loyal customers

  • Chipotle's most loyal customers still aren't returning as frequently as they did before the outbreaks.
  • Successes have been overshadowed by a data breach, overtime pay lawsuits and drug charges being brought against a senior manager.
  • A price increase in some of its locations didn't live up to company projections.
Chipotle restaurant workers fill orders for customers on April 27, 2015 in Miami, Florida.
Joe Raedle | Getty Images
Chipotle restaurant workers fill orders for customers on April 27, 2015 in Miami, Florida.

Two years after a string of food safety incidents battered sales and scared away diners, Chipotle Mexican Grill still isn't on solid ground.

While the beleaguered burrito chain has returned to profitability and its same-store sales have begun trending in a positive direction, its successes have been overshadowed by a data breach, overtime pay lawsuits and drug charges being brought against a senior manager.

"While these things do not deter customers as much as a food poisoning outbreak, they do raise questions about how well the company is managed and suggest a lackadaisical approach," Neil Saunders, managing director of GlobalData, told CNBC via email.

In the hope of luring back lapsed customers, Chipotle continues to invest heavily in marketing and promotions. In an SEC filing last month, the chain said that it would be increasing its spending in these areas, saying expenses would rise as much as 0.3 percent as a result.

It began a new ad campaign in April, which includes national TV commercials. Using the tagline "As real as it gets," the campaign focuses on the quality of Chipotle's ingredients.

Despite these investments, Chipotle's most loyal customers still aren't returning as frequently as they did before the outbreaks, and new customers are skeptical about the brand.

A report by M Science found that the transaction frequency of the top 20 percent of Chipotle's most loyal customers dropped off significantly in the last quarter of 2015 and has yet to return to its pre-outbreak levels.

"The truth is that Chipotle never fully recovered from the E. coli outbreak," Saunders said. "The crisis caused a significant breakdown of trust between the company and consumers and led to many diners to find alternatives."

And Chipotle's price hikes aren't helping. The company bumped its prices up about 5 percent in April at about 440 of Chipotle's 2,200 locations, or 20 percent.

M Science found that customer resistance to the increase was much stronger than Chipotle's management had expected.

The chain had forecast the price increase would result in a 25 percent drag on how much customers spent, as some gravitated to less expensive menu items, and on how often customers visited. Their projection estimated that they would still make money off the price hike.

However, Troy Li, senior analyst at M Science, said that customer behavior changed enough during the first three weeks of Chipotle's price hike to completely offset any potential gains.

"We think it would be imprudent to call this a final conclusion," Li wrote, as customers may get used to the new prices. "It nonetheless reminds us that Chipotle's good old days of raising prices by 10 percent and customers still embracing the brand by topping it off with another 10 percent increase in traffic are in the rear view mirror."

Some analysts, however, are more optimistic about Chipotle's future.

Jeff Reeves, executive editor at InvestorPlace.com, told CNBC that he doesn't think that Chipotle has been "mortally wounded."

"Taco Bell had three rather messy food poisoning scares in about 10 years, Ford's explorer rollover issues are a distant memory and nobody even remembers when Netflix angered everyone with its ill-advised Qwikster plan," Reeves said via email.

"Brands always bounce back because consumers have a painfully short memory. In fact, if you look at the numbers Chipotle is already tracking a new record for revenue and double-digit sales growth next year."

In the first quarter, Chipotle saw same-store sales rise almost 18 percent, the first increase in more than a year for the company. Company execs said the rebound was a result of more customers returning to the restaurant and spending more during their visit.

However, the company was lapping easy comparisons as same-store sales a year ago were down almost 30 percent.

In late June, the company said that it expects same-store sales to be in the high-single digits.

"Let's not confuse a stock that fell from bubble-like level with a company that can't attract customers," Reeves said. "Chipotle will be fine, even if CMG stock has obvious issues with valuation."