On Chipotle's latest earnings call, CEO Steve Ells acknowledged the belagured company had a long road ahead, but painted a positive picture for investors.
Though Chipotle's 2015 fourth quarter earnings were as depressing as expected, and though the burrito giant's January same store sales were down more than ever before — 36 percent year over year — the company believes its new systems (many of which are already in place) and robust marketing plan (at a cost of at least $50 million in the first quarter of 2016) will put it back on track to avoid continued losses by quarters two and three of 2016.
This is all despite the company's internal research (divulged during the earnings call earlier today) that says 60 percent of Chipotle's most loyal, longtime customers — which can represent as much as 20 percent of total sales — are avoiding or likely avoiding the chain right now, and that newer customers are grabbing lunch elsewhere too.
Though the Denver-based chain is reporting low same store sales and lower than average foot traffic, it plans to "staff restaurants for a swift turnaround." But with less than a month's worth of practice on new food safety protocol and audits, how can the company be so confident customers will flock back for burritos and bowls?
CFO John (Jack) Hartung is putting all of his faith in the new food safety systems (described below) and notes, in terms of "execution risk, a lot of the procedures are not happening in the restaurants... [and] the procedures are not hard to implement. It's a very clear step that will make each ingredient absolutely safe."
Here's Chipotle's multi-pronged turnaround plan that it hopes will guide loyal customers back into its restaurants and attract new customers:
1. New food safety protocol
Chipotle executives said new protocols will put the company in a position to become "industry leaders in food safety." Among those protocols involve having staff prep and marinate proteins like steak and chicken after vegetable or other raw food prep happens. Additionally, Chipotle is having staff in its restaurant kitchens blanch (briefly submerge in boiling water and then cool) avocados, citrus, and onions before they are used.
And perhaps the most intriguing aspect of Chipotle's food safety plan is the implementation of bar codes for each food item, allowing the company to trace ingredients — and therefore potential outbreaks of disease — back to the source immediately. Systems such as these require full cooperation between growers, purveyors, delivery personel, kitchen staff, and management. These systems also require a sort of checks and balances approach from staff in house and out, and could mean higher labor costs.
2. Increased store audits by in-house management and third party inspectors
Chipotle said it has stepped up internal audits, which internally now take place on a weekly basis. Independent restaurants across the U.S. already abide by these guidelines. The departments of health in LA, NYC, and other cities affected by Chipotle's recent outbreak require them. The company has also hired a third party auditor to inspect restaurants every quarter.
3. A $50 million marketing and promotion campaign
To be executed between marketing, promotion, and public relations efforts, Chipotle expects to spend at least $50 million in the first quarter of 2016 trying to win customers back. Public relations messaging and a new website devoted to food safety will focus on Chipotle's new food safety procedures, described above. Marketing (both direct marketing and social media marketing, including a new video-type game) will focus on value and quality with no mention of foodborne illness or safety. Chipotle's marketing team explained that the total spend could climb higher than $50 million if consumers redeem promotions. Chipotle's upcoming Super Bowl promotion is the first test of this plan.
4. Continued expansion
Chipotle's real estate partners are still scouting new locations and plan to continue opening stores throughout the year. This gave at least one investor on the call pause. Executives, however, say they are confident a recovery will happen this year and have no plans to slow down.
5. Aggressive investments in staff and management
Executives said management at each store has been directed to "staff each restaurant as if it's a steep recovery," and to "be aggressive" with staffing so that when the recovery happens — whether it's swift or slow — the stores will be ready. Chipotle's thinking is that when new customers wander into stores or old customers come back, they should all get great customer service.