Is Chipotle's Free Burrito Handout Strategy Working? Don't Ask Management; They Don't Even Know

If a company doesn't know how effective a marketing campaign is going, how should investors react?

This is a legitimate question Chipotle Mexican Grill, Inc. (NYSE: CMG) should be asking. According to Bloomberg Gadfly's Shelly Banjo, the casual fast food chain has been handing out millions of dollars' worth of free burritos to lure customers into its stores after seeing its reputation plummet from last year's food-safety crisis.

Chipotle released on Wednesday correspondences it had with the Securities and Exchange Commission. The SEC's letter asked for clarification on Chipotle's promotional activity, including coupons issued for free products.

The SEC asked Chipotle to "revise your revenue recognition policy to describe your accounting for such promotions and sales incentives."

Related Link: Chipotle Mexican Grill In Lawsuits Over Treatment Of Pregnant Employees -NY Post

Chipotle noted in its response that it accounted for $4 million in costs associated with its free-food giveaways, but it couldn't quantify the impact the promotion had on driving sales because of the prior disruption to its business.

In other words, as noted by the Banjo, Chipotle is "spending millions of dollars on giving away free food even though it can't tell if promotions are driving revenue and probably won't in the future."

Banjo suggested that Chipotle's food handout would draw traffic into its stores for free food, but won't convince customers to visit again on their own dime. After all, Chipotle reported its sales fell 24 percent in its most recent quarter from a year ago.

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