So Crazy It Just Might Work: Chipotle Axes All Its Advertising
Chipotle (CMG) is embarking on the type of grand experiment that makes most brand managers tremble: It's giving up on advertising. Having cycled through four ad agencies in five years, the restaurant chain will now focus mostly on word-of-mouth promotions.
As such, Chipotle will become a case study of the Domino's Pizza (DPZ) type: Is this plan so crazy it just might work? We'll find out in a year when the new sales numbers are in, but I'm betting Chipotle will do just fine, and there's a way of demonstrating that axing ads had to happen at Chipotle anyway.
First, here's the company's internal logic, as expressed by the awesomely named chief marketing officer, Mark Crumpacker:
... the chain hasn't added a menu item in 17 years and it also does not have a regular cadence of pricing promotions. For those reasons, he said, agencies' experience with other fast food chains is irrelevant.
"[I told our CEO], if you're not going to let me do advertising, you're kind of making this job pointless," he said.There's a healthy debate going on in the comments section of Ad Age's story. It's a pro-advertising crowd, obviously, and here's a typical comment:
rockfanNYC | Bronx, NY: Watch how fast they start advertising once sales start dipping. My prediction.If you go digging around in Chipotle's financials it turns out that the company has no choice but to stop advertising because the marketing it does do doesn't work very well. The company previously spent less than $10 million a year on traditional ads, which really isn't enough to promote a 1,000-store chain.
More importantly, if we compare Chipotle with a company that's known to be a successful marketer like McDonald's (MCD), we find that Chipotle's marketing dollars are less effective. Here's a breakdown based on the most recent quarterly earnings reports of both companies.
- MCD
Sales: $5.9 billion
Total selling/marketing costs: $565 million
Sales yield on each marketing dollar spent: $10.53
Net income as % of sales: 21% - CMG
Sales: $467 million
Total Selling/marketing costs: $53 million
Sales yield on each marketing dollar spent: $8.81
Net income as % of sales: 10%
Sales at Chipotle went up 20 percent last quarter, so this is a company that already has momentum. The fact that its ad dollars are less effective than they should be suggests it's worth cutting them back -- they're a drag on earnings and they're not contributing efficiently to the company's overall growth.
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