Washington Insider-- Tuesday

Chipotle's Struggles Continue

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

US to Suspend $450 Million in Tariff Concessions for India

The Obama administration wants to suspend $450 million worth of tariff concessions for India in retaliation against New Delhi's failure to lift restrictions on potentially hundreds of millions of dollars in U.S. poultry exports.

The World Trade Organization's (WTO’s) dispute settlement body will hold a July 19 meeting where the U.S. will request "to authorize the imposition of trade countermeasures in response to India's failure to bring its ban on various U.S. agricultural products into compliance with WTO rules," said Roya Stephens, a deputy press secretary for the U.S. Trade Representative.

The WTO in 2014 ruled that India's restrictions on imports of U.S. poultry, eggs, live pigs and other products, because of bird flu concerns, violated trade rules. India appealed the ruling, but the initial decision was upheld in 2015. India was given until June 19 to comply with the ruling, raising hopes that some action would be announced during Indian Prime Minister Narendra Modi's visit last month to Washington. But no such announcement came.

If India as likely objects to the U.S. request to impose countermeasures, a WTO arbitration panel will decide on the amount of retaliation the U.S. can impose. Those proceedings could stretch into late 2016 or early next year, sources advise.

Imports of Chinese Fertilizer Closer to Countervailing Duties

Imports of ammonium sulfate from China, often used as a fertilizer, are now closer to facing antidumping and countervailing duties following a finding by the International Trade Commission (ITC).

According to preliminary findings, ITC said it uncovered signs the imports materially injure the domestic U.S. industry. The Commerce Department will continue to investigate whether the imports are sold in the U.S. at less than fair value, and whether they receive unfair subsidies from the Chinese government.

The U.S. imported an estimated $62 million worth of ammonium sulfate from China in 2015, according government figures. However, the U.S. exports nearly five times as much ammonium sulfate as it imports and the product is closer to the lower end in terms of U.S. fertilizer imports, accounting for just under 8% of total U.S. fertilizer imports in 2012.

Still, the potential for duties on imports of the product from China could still end up as a trade friction point between the two countries.

Washington Insider: Chipotle’s Struggles Continue

The large urban dailies have long been fascinated by the success, or lack thereof, of unusual marketing strategies for food. This may be partly because these markets are so large, but also because there has been some success by firms who use themed advertising to ease long standing reliance on price competition, which typically weakens the bottom line for investors.

For several years, the New York Times says, Chipotle used an extremely aggressive marketing campaign based on social themes, including a claim to “food integrity” to boost sales. Now, however, the company is dealing with a number of lingering problems.

For example, last year, hundreds of people fell ill after eating Chipotle products contaminated with E. coli bacteria or noroviruses. In response, its stock price fell by double digits.

Then, it rolled out a new marketing push to remind customers of their “quality” attraction and also instituted a “temporary” loyalty plan to rewards repeat customers with free food, a strategy the firm had long resisted, the Times says.

However, within days of the kick-off for the new program the company’s chief creative and development executive, Mark Crumpacker, was charged with drug possession and named by the police as a repeat buyer of cocaine from a New York delivery service.

Now, the Times wonders if these problems might mean that a “significant percentage of frequent Chipotle customers are unlikely to return anytime soon,” according to a recent review by UBS Financial Services. Food safety concerns are unlikely to turn away confirmed fans, UBS said, but “lighter users” may pull back, the research found.

Yet another problem, the Times say, is a new vulnerability to competitors who have “stepped right up to try to take advantage of Chipotle’s misfortunes,” perhaps a form of payback for Chipotle’s earlier efforts to suggest superior quality at the expense of competitors.

Chipotle now is attempting to generate new interest through an animated marketing film, “A Love Story,” which features young entrepreneurs Evie and Ivan, who set up rival juice stands, but are forced by competition to use ways of preparing and offering food products that undermine their original intentions. Eventually, they return to use of high-quality ingredients prepared simply — à la Chipotle, although the brand’s logo is only flashed on screen at the end.

“We think ‘Love Story’s’ message will galvanize our loyalists and remind people of the Chipotle they love,” Mark Shambura, Chipotle’s brand marketing director, said. Chipotle’s four-minute animated video will be shown at movie theaters and on YouTube.

However, the Times notes that the food industry is skeptical that this campaign will answer the questions that surround the company. “Chipotle is trying to reassure its connection to wholesomeness and quality, but if it does not address the fundamental issue here, which is a breakdown of trust between the brand and the target audience, it risks leaving issues unresolved,” said William G. Daddi, president of Daddi Brand Communications, which has restaurants among its clients.

“By not focusing more on what has been done to overcome this crisis for a brand built on raw, fresh ingredients, Chipotle takes a risk that if food-safety issues should come up again, they have exhausted their credibility with their customers,” Mr. Daddi added.

Despite recent turmoil, the company is sticking to use of stories with animated characters, said Todd Hunter, an executive at CAA Marketing, because “animation makes issues a lot more approachable. We have a happy, but restrained, ending,” Mr. Hunter said.

Like previous commercial shorts from Chipotle, “A Love Story” will be shown in movie theaters, before the main feature, and posted on YouTube and other social media sites.

So, the company is pulling out many stops. But with sales down around a third at established stores (those open for at least a year), it also is turning to “Chiptopia” programs that reward customers based on the frequency of their visits, rather than the amount of money they spend. Typically, customers who visit a store often will be awarded a free burrito after purchasing three.

In addition, the Times suggests that this pilot may lead to a continuing loyalty program if the company heeds UBS’s conclusion that, among other challenges, the chain’s lack of new food offerings may result in “Chipotle fatigue” as customers tire of its too-familiar entrees.

So, there is a suggestion that the company still has substantial work to do to regain its former market strength. And, the Times concludes somewhat ominously, “whether the chain has made progress in regaining its customers will be disclosed when the company releases its second-quarter earnings report on July 21.” In addition, the Chipotle story suggests strong lessons about food safety that likely will be useful to the larger industry, Washington Insider believes.

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