Chipotle continues to lose customers

But the company is investing $50 million on store remodels while planning a new loyalty program.

Chipotle Mexican Grill is planning to invest millions on store improvements and technology, while using tax cuts to give workers bonuses, additional benefits and improved training as the chain works to regain customers lost over the past two years.

The Denver-based burrito chain, which is currently looking for a new CEO, said on Tuesday that its same-store sales increased 0.9% in the fourth quarter ended Dec. 31.

But that modest increase includes the impact of price increases, as well as the addition of queso last September that is now ordered on about 10% of customer checks and had a 200-basis-point impact on same-store sales—meaning the chain lost customers in the last three months of 2017.

Those declines continued into January, executives said, despite a 3.4% increase in same-store sales during the month.

Chipotle began increasing prices last year, adding the increases at more locations. Total menu prices systemwide rose 240 basis points in the fourth quarter.

CFO Jack Hartung said on the company’s fourth quarter earnings call that traffic began declining in July and has been down ever since. He expects traffic declines to continue this year until the company begins comparing against those weak traffic numbers.

“The past couple of years have had their challenges,” CEO Steve Ells said on the company’s earnings call. “But the changes we made are the right ones to achieve our full potential.”

Revenue in the fourth quarter increased 7.3% to $1.1 billion, while net income nearly tripled to $43.8 million, or $1.55 per share, from $16 million or 55 cents. The company said that changes in U.S. tax law improved earnings by 21 cents per share.

Chipotle’s stock plunged on Wednesday, falling 11%.

Chipotle’s same-store sales have declined a cumulative 15% the past two full years, including a 6.4% increase for the full year of 2017, following a series of food safety incidents in 2015. The company’s sales improvement slowed significantly the last six months of 2017 — ultimately leading to the announcement in November that Ells would step aside as CEO.

To fix the problem, Chipotle plans to increase capital spending on existing stores, including new technology and store remodels.

Hartung said that 2018 will represent the first time that the company will spend more money on existing restaurants than in building new locations.

That includes a $50 million investment on a new refresh and maintenance program that will include improved lighting and equipment. The improvements, which will be in addition to typical maintenance, are expected to amount to $20,000 per location.

While some of the changes are “small in scope,” executives said that early tests have found that “modest investments can have significant improvements” in the customer experience, Hartung said.

The company is also investing in technology—including the addition of “digitally enhanced” second makelines inside 1,000 additional locations to improve throughput while more aggressively increasing mobile ordering.

Digital sales now make up 8.6% of total sales at the chain, and the company made improvements to its app.

The company expects to spend $50 million improving IT infrastructure.

One of the changes Chipotle is planning for 2018 is a new loyalty program. The company had a temporary loyalty program in 2016, called Chiptopia, but this appears to be a permanent program similar to what other large chains like Starbucks, McDonald’s and Dominos’ have done.

Mark Crumpacker, chief marketing and strategy officer, said on the call that the company expects to launch the program in the second half of the year.

Exactly how that program will look remains to be seen—whether it would be a “surprise and delight” program or whether it would allow customers to earn points. “Everything is on the table with regard to that,” Crumpacker said.

Helping to fund some of its investments this year will be an expected $40 million to $50 million in tax savings from the tax reform act passed in December.

Chipotle says it plans to give out one-time bonuses to employees, of as much as $250, while general managers could get up to $1,000. The company also plans to improve benefits in a bid to help attract more workers at a time of low unemployment.

The company is also improving training and incentives so workers are focused more on the customer experience. That includes more classroom training for employees, in addition to on-the-job training. Chipotle hadn’t had classroom training before.

Chipotle also views the training as an ability to help improve throughput and get customers through faster.

Scott Boatwright, the company’s chief operating officer leading the effort to improve operations, said the chain has started to see results. But it also has more to go.

“I feel we’re regaining consumer confidence with the steps we’ve taken to shore up operational deficiencies,” he said, but he added that “to be the best in class,” the company would need to improve customer satisfaction scores by 600 to 700 basis points.

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