On the Menu at Chipotle: TV Spots, Technology and Dessert

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Chipotle's 'Ingredients Reign' billboard touts avocado.
Chipotle's 'Ingredients Reign' billboard touts avocado. Credit: Chipotle
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Chipotle Mexican Grill's shares sank to their lowest level in more than three years as its weakness persists and the chain plans to shake up everything from marketing to its menu as it tries to grow again.

Nearly a year after food safety concerns came to light and shattered the fast casual chain's food with integrity positioning, Chipotle posted its fourth consecutive quarterly declines in both same-store sales and overall revenue.

Executives on a Tuesday afternoon conference call sounded optimistic about the recent national launch of chorizo, which now accounts for roughly 7% of entree sales and which it plans to advertise more heavily this quarter. They also signaled Chipotle may soon get into the dessert business, as it is testing two items and hopes to pick one to sell in the near future.

The menu is not the only area going through some major changes. Chipotle decided to pursue strategic alternatives for the 15-unit ShopHouse Southeast Asian Kitchen chain it launched in 2011, after seeing weaker than anticipated results. Still, it remains optimistic about its small scale pizza effort, Pizzeria Locale, and its upcoming burger-focused chain.

Back at Chipotle, the struggling chain began running TV commercials in three test markets on Oct. 21, only its second time on the air. Now it is considering a national TV buy after years of downplaying the effectiveness of TV for the once high-flying brand.

"Television isn't a panacea," Chief Creative and Development Officer Mark Crumpacker told analysts and investors on the call.

He said running TV spots has "huge potential" to help bring in new customers, but stressed Chipotle would include TV as part of larger campaigns, along with plans including updated technology and new restaurant designs meant to improve the customer experience.

"The company is finally doing the things that other restaurant companies would have long done to maximize brand value," J.P. Morgan analyst John Ivankoe, one of the more bullish analysts on the stock with an "overweight" rating, said in a note to clients. He pointed to efforts such as better use of additional prep space for online orders, traditional media, new products "and a greater attention to being cost effective and efficient. The forced maturity of Chipotle is now a year in progress and as the first news of the crisis is lapped (Oct 31), efforts to grow again can at least be attempted."

After the current TV test in Minneapolis, San Diego and Austin, Texas, ends on Nov. 20, Chipotle will evaluate the results and may start running TV spots at a national level. It might run some selective TV spots in the near future, with bigger plans to use TV spots in a spring 2017 campaign, executives said.

At the same time, Chipotle plans to decide which advertising agencies will handle its upcoming marketing by the end of the year, in time for the launch of a new campaign next spring.

The company is also still digesting the results of its Chiptopia summer rewards program, which saw more than 2.5 million people earn rewards. More than 75,000 customers hit a level that gives them free catering for 20 people. Mr. Crumpacker said the effort helped the chain "nearly" return to pre-crisis levels with its most loyal customers.

Chipotle said it is doing more with customer data to target those lapsed customers and potential new ones. Chipotle can identify more than half of its customers and reach out to them with specific offers, Mr. Crumpacker said.

Chipotle, which now has more than 2,100 locations, is also pulling back on its new restaurant openings. This year it is targeting openings at or above the high end of its prior forecast of 220 to 235 restaurants. But next year it plans to open fewer, with a target of 195 to 210.

Chipotle expects same-store sales will decline again in the fourth quarter, but by a less severe low single-digit percentage. For 2017, it forecast high single-digit same-store sales growth and a profit of $10 per share.

Jefferies analyst Andy Barish, who has an "underperform" rating on Chipotle, said the profit forecast "seems optimistic."

Shares of Chipotle slipped 7.1% to $376.83 in late morning trading Wednesday.

The food safety crisis was not the only issue in the marketing department this year. Mr. Crumpacker began his commentary on the call by apologizing "for recent events in my personal life," a reference to his arrest this summer for cocaine possession. Mr. Crumpacker appeared in Manhattan Supreme Court as scheduled on Oct. 18 and was told by Judge Ellen Biben that his next court date will be Dec. 13. He has been charged with seven counts of criminal possession of a controlled substance.

-- Additional reporting by Suman Bhattacharyya

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