Free burritos lure Chipotle loyalists, but will sales follow?

LOS ANGELES (Reuters) - Cesar Trejo broke his Chipotle habit after the chain’s string of food safety lapses last year. This week, a free food offer lured him back, along with the urging of three friends who had returned without getting sick.

Chipotle Mexican Grill is seen in uptown Washington, February 8, 2016. REUTERS/Carlos Barria

"I saw all the news. I thought, 'I have to wait'," said Trejo, 32. He used to eat at Chipotle Mexican Grill CMG.N outlet near his job in downtown Los Angeles two to three times a week, until highly publicized reports linking the burrito seller to E. coli, salmonella and norovirus outbreaks scared him off.

And wait he did. Monday marked the first time in three months that Trejo had set foot in Chipotle. He paid for a drink and used a coupon to get a free steak burrito bowl at the restaurant, which was relatively quiet during the lunch rush.

Free food is the backbone of Chipotle’s strategy to lure back Trejo and other “top loyal” customers, who dine at the chain at least 25 times a year and account for up to 20 percent of its sales.

ITG Investment Research analyst Joe Fersedi said free food coupon redemptions appeared to spike in the second week of February. That was when credit card transactions under $4, which would be the cost of a free entree with a paid drink or chips, briefly topped 10 percent before returning to their historical level of around 2 percent in late February, said Fersedi.

“We have to wait to see if management turns on the ‘promotion spigot’ again,” following last week’s brief closure of a Massachusetts restaurant due to sick employees, Fersedi said.

Chipotle has not said how many burritos it has given away and one analyst said its “unprecedented” food giveaways are training diners to wait for more freebies.

“Discounting and couponing is a drug. Consumers get addicted to it and it’s all they want,” said Howard Penney, who covers Chipotle for Hedgeye Risk Management.

Chipotle on Tuesday said February sales at established restaurants fell a steeper-than-expected 26 percent following a 36 percent drop in January. [L3N16N55Y]

Those sales were down more than 27 percent in March due to the closure of its restaurant in the Boston suburb of Billerica, Chipotle said in a regulatory filing.

Give a loyal customer a free burrito that does not make her sick and she’ll come back again and tell friends to do the same, said Tushar Parashar, marketing strategist at Vivaldi Partners Group.

“People who are seriously loyal are easy to win over,” Parashar said. Casual customers concerned about a brand’s health and hygiene are not so easy. “A free burrito is not enough to get you to come back,” Parashar said.

“Chipotle needs months and months of clean bills of health before they put this in their rear view mirror,” said Ashley McCown, president of Solomon McCown & Co, a crisis communications expert.

Reporting by Lisa Baertlein in Los Angeles; Editing by David Gregorio and Cynthia Osterman