Chipotle is giving away a massive amount of free food to lure customers back to its restaurants in the wake of E. coli outbreaks that sent the company’s sales plunging.
The chain says the offers are driving up traffic.
But investors aren’t celebrating quite yet.
It’s going to take the brand a long time to dig out of this sales slump, and no amount of free food will significantly speed up the process, according to analysts.
The strategy of giving away free food “is born out of desperation rather than choice,” Neil Saunders, CEO of retail consulting firm Conlumino, told Business Insider.
The promotions are “nowhere near a holistic solution to Chipotle’s issues,” Saunders said. They might draw some loyal customers back to the chain but probably won’t succeed in luring any new customers, he added.
Matthew Tuttle, CEO of asset management firm Tuttle Tactical Management, also called the promotions “desperate.”
“Chipotle is in a very tough spot because they lost their customer’s confidence and trust,” Tuttle said. “They have one job: serve healthy food. They are not doing that and still have not ‘fixed’ the problem.”
The company is expected to spend roughly $70 million on free burrito offers between February and May 15, assuming the cost of a burrito is about $8. That’s about 16% of the company’s total sales last year.
Chipotle said recently that it has already redeemed about 2.5 million mobile offers — or about $20 million in free burritos.
The chain started giving out free food offers in February, after sales at restaurants open at least a year — or same-restaurant sales — plunged 36.4% in January. That metric fell another 26.1% in February.
Nomura analyst Mark Kalinowski says he expects the chain’s same-restaurant sales to continue to fall until the fourth quarter. He predicts declines of 19% and 14% in the second and third quarters of this year and a 1% increase in the fourth quarter.
“We continue to forecast that Chipotle’s same-store sales for 2016 as a whole will be down by double digits,” Kalinowski wrote in a recent note to clients. “All the free burrito giveaways in the world likely wouldn’t change the chances of that.”
He said only time will cure some of Chipotle’s woes.
“We believe that what Chipotle needs most — by far — to recover is time,” Kalinowski wrote. “But, time cannot be hurried. In the meantime, we cannot rule out the possibility of further setbacks (which may or may not be accompanied by national media attention).”
One recent setback had an immediate impact on sales.
In the first half of March, same-store sales were down about 22%. But after it was reported that a store in Boston closed because of sick employees, the declines dropped to 27%, according to the company.
In addition to the promotions, Chipotle has also made a number of changes to its cooking and food prep processes to reduce any potential for contamination.
For example, the company is blanching some of its ingredients before serving them to get rid of harmful microbes and using a new procedure for marinating meat to make sure it’s kept separate from produce.
Chipotle executives have said customer traffic and profit margins won’t fully recover until 2017. The company’s stock price has lost more than 32% of its value in the last six months.
“It’s going to be messy in terms of margins, it’s going to be messy in terms of earnings,” Chipotle Chief Financial Officer Jack Hartung said in January, referring to the rest of 2016. “We’re not going to be the efficient business model that everyone has come to know.”
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