Chipotle takes a hard look at customer loyalty programs

Loyalty cards and programs have been taken as a given success in the restaurant business. Chipotle's deeper look into the matter says things may be more complicated.

CHIPOTLE GOES THE OTHER WAY

The headline? Chipotle is not adding a customer-loyalty program.

Chipotle's recent quarter-ending conference call with analysts provided an illuminating window into the company's consideration and ultimate decision not to mount a customer loyalty program.

The presence of customer-loyalty programs has been axiomatic for modern US chains. Dunkin Donuts program has some 3 million participants; California Pizza Kitchen's has 1 million. The list of companies with programs in-the-works reads as a who's-who of the chain restaurant business.

Some, such as Starbucks, have gone well beyond traditional "count-up" loyalty cards to form complete, integrative systems that are similar to rewards programs offered by major credit cards. Lisa Jennings of Nation's Restaurant News referred to Starbucks' program as a "growing digital ecosystem". Chipotle looked at the matter and felt differently.

THE REASONS FOR THE CHANGE

Chief Creative and Development Officer Mark Crumpacker stated on the call "We've studied this in-depth, and we don't believe the general supposition that loyalty will make less frequent customers more frequent." He went on to add that their research indicated that a customer loyalty program only rewards current customers for their current purchases. According to analysis from Restaurant Business magazine, Chipotle's results showed not "even one additional visit per program participant."

Nation's Restaurant News quoted Mr. Crumpacker in even more interesting detail:

After studying it, he said, "We don’t believe the general supposition that loyalty will make less-frequent customers more frequent." In the past, he said, the thinking was that "if you can take an infrequent or lapsed customer and make them come to your restaurant just one more time, you would pay for the program." Chipotle’s research, however, found that "there are virtually no loyalty programs that actually achieve that."

A TOUGH NUT TO CRACK

Chipotle is not the first big business to question the thinking on customer loyalty programs - even among long-time adherents. In 2013 the holding company that runs supermarket brands such as Albertsons, Shaw’s and Acme Markets announced the elimination of all loyalty programs.

Chris Wilcox, a spokeswoman for Albertsons LLC, explained part of the decision in Supermarket News with reasoning that would sound familiar to most restaurant owners:

“We found that tracking individual shopping habits isn’t as critical to our overall strategy as knowing what our customers in our neighborhoods are shopping for. Getting to know our customers in neighborhoods, learning each store like it’s our only store, and offering best-in-class customer service is as much of a differentiator.”

Michael Schrage, writing in a recent Harvard Business Review echoed many of the same sentiments, writing pointedly about customer loyalty programs:

"Loyalty is a mutual investment, not just an exchange. That’s why improving the loyalty of bargain hunters rarely delivers sustainable value. Promotions acquiring customers who care more about momentary transactions than ongoing relationships is bad business. Retaining costly customers who stress out customer service staff usually proves a money-losing proposition."

And, if proof were needed, some of the most successful food companies - from Whole Foods to McDonalds to Trader Joe's - and now Chipotle - show that customer loyalty can be cultivated well outside of the transactional nature of the programs designed to encapsulate it.

Those looking for a deeper, more academic look at the foibles of customer loyalty can read a fascinating case-study also from HBR. One of their findings? "The relationship between loyalty and profitability is much weaker— and subtler— than the proponents of loyalty programs claim."

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