Do Chipotle’s Food Safety Problems Still Matter? — The Motley Fool

Chipotle Mexican Grill‘s (NYSE:CMG) E. coli catastrophe will doubtless develop into a case research in disaster mismanagement if it hasn’t already.

The burrito chain had a bulletproof model again in 2015, with common unit volumes round $2.5 million and a market worth of as a lot as $23 billion. It was a mannequin for the restaurant trade after having primarily disrupted quick meals and pioneered the quick informal mannequin with its fresh-food, assembly-line format.

That all modified with the 2015 E. coli outbreak. The foodborne sickness sickened round 60 of its prospects throughout the nation, and that, together with a weak response and a gross sales slide that adopted, ultimately slashed as a lot as two-thirds off the inventory worth. The outbreak took the shine off the previous market darling.

Under new CEO Brian Niccol, the inventory has surged this yr, as buyers are as soon as once more optimistic concerning the burrito curler’s prospects. Shares are up 78% this yr, however that rally was put into jeopardy by one more well being scare.

The exterior of a Chipotle restaurant, showing the brand's logo.

Image supply: Chipotle.

Here we go once more

On July 31, reviews emerged that there was one other foodborne sickness outbreak, this time at a location in Ohio. More than 100 folks had been reported sick, and Chipotle quickly shut the restaurant. The news sent shares down as much as 7% in a single day, as investors feared that the news could cause a subsequent decline in traffic, much like a similar outbreak that closed a Chipotle in Virginia the year before

However, Niccol had a novel strategy for coping with the problem, which was considered a norovirus outbreak on the time however was later confirmed to be Clostridium perfringens, a illness attributable to meals being left at an unsafe temperature.

Instead of confronting the information immediately to supply a proof and even apologize, Niccol doubled down on a guacamole promotion that Chipotle was providing on the time, extending it by an additional day. In a press launch, the corporate mentioned that July 31 was its largest summer season gross sales day ever, and it thanked its prospects by extending the free guacamole promotion an additional day.

Doing this completed two issues. First, it lined up the destructive information concerning the food-poisoning incident and, extra importantly, it signaled that prospects merely did not care about an incident at a single restaurant. They had been busy stuffing their faces with free guacamole. Chipotle adopted up that supply with a free supply supply with Doordash over that weekend and introduced it was testing bacon, nachos, and late-night bites at a number of eating places the week after, reinforcing the concept that the corporate was rewarding prospects and bettering its providing.

Since the foodborne sickness report, Chipotle inventory is now up 20%, seemingly because of the initiatives above and an analyst upgrade.

A postcrisis Chipotle

Since the information broke concerning the outbreak, Chipotle has introduced extra steps to mitigate the dangers of one other foodborne sickness. The burrito chain mentioned it is retraining its total employees, about 70,000 workers, on meals security this week, and it’ll check workers’ information of meals security requirements quarterly. 

However, the market’s response within the aftermath of the ordeal appears to sign overwhelming satisfaction with the corporate’s response to the outbreak, because the inventory is now at a postcrisis excessive. That response was significantly completely different than final yr, when the inventory fell after the norovirus outbreak and even dropped below $300 after the corporate mentioned gross sales progress slowed following it as nicely.

Now it appears the concern amongst buyers and prospects is gone. There are a couple of attainable the reason why.

First, any buyer that was already delicate about foodborne sicknesses has most likely already stopped consuming at Chipotle. Average unit volumes are nonetheless down about 20% from earlier than the E. coli outbreak, which doubtless represents the shoppers who have not returned or have considerably reduce their visits. The Chipotle loyalists nonetheless inhaling burritos are unbothered by the meals security issues, or they perceive that greater than 1 million folks eat on the firm’s eating places every single day, so the precise threat to them of getting sick is sort of zero.

Also, Steve Ells’s departure as CEO removes a lot of the blame for the sooner incidents from the corporate, as he was primarily the scapegoat. Niccol is beginning with a clear slate and bears no duty for previous outbreaks, permitting buyers to be extra optimistic about the issue being resolved. 

The lesson appears to be that the corporate can overcome the sorts of abnormal meals security incidents that usually plague eating places. At McDonald’s (NYSE:MCD), for instance, about 400 folks in 15 states have gotten ailing from consuming salads there, however that information has been principally ignored, as there is not an underlying concern about meals security the best way there was at Chipotle. The neatest thing for Chipotle can be for the monetary media to return to ignoring such single-store closings the best way it does with different eating places, and that appears warranted contemplating the investor response the previous few weeks.

Should the corporate expertise one other E. coli outbreak or one thing of that seriousness, the inventory would doubtless nosedive and prospects would flee once more, but it surely appears as if Chipotle buyers are lastly protected from the sorts of abnormal foodborne sickness dangers that occur throughout the restaurant trade.

 



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