Perhaps the biggest risk restaurants face is a health scare. Not only can they create loads of bad press, but they can also hit the company hard on the bottom line. Some have even forced once-prosperous chains out of business.
In 2003, a Hepatitis A outbreak at a Chi-Chi's Mexican restaurant killed four people and made more than 600 sick, leading to multiple lawsuits and the chain ultimately going out of business. Chi-Chi's had filed for bankruptcy shortly before the outbreak due to cash flow problems, but the lawsuits and customer response hastened its demise. All Chi-Chi's restaurants closed their doors on September 18, 2004, within a year of the outbreak.
Jack in the Box (NASDAQ:JACK) faced a similar crisis in 1993 when it experienced an eColi outbreak. Months of ugly press coverage ensued, and the company implemented a range of changes in operations that included cooking burgers to higher temperatures and random eColi sampling of beef deliveries. The chain survived, and today the stock is up more than tenfold since the end of that year.
More recently, Yum! Brands(NYSE:YUM) KFC saw sales drop more than 20% in China on concerns about chicken meat injected with excessive levels of antibiotics, rocking the stock price as well. The company responded by dropping over 1,000 suppliers and sales have begun to rebound, though they are not at the level they once were. The share price has also since recovered.
Now, Red Robin Gourmet Burgers (NASDAQ:RRGB) may face a similar crisis as health officials are afraid that up to 5,000 people may have been exposed to Hepatitis A at a Red Robin restaurant in Missouri after a worker there was diagnosed with the virus. The local county health department has responded to the incident, procuring enough vaccine to supply customers who visited the location between May 8 and 16. In a statement, Red Robin said, "Upon being informed of the incident, the Springfield Red Robin took all safety measures to ensure the well being of our guests and team members including arranging the inoculation of all Springfield team members with the immune globulin prophylaxis shot." Health officials also said the restaurant was now safe to eat at, and so far, it appears that the disease has not spread to any customers. Hepatitis A can affect the liver, and its symptoms include nausea, vomiting, fever, and yellowing of the eyes. Most victims recover from an infection within a few weeks.
Since the news was first reported on Wednesday, Red Robin stock has hardly flinched. Like many product recalls, the health scare seems not to have elicited any market response as no real damage has been confirmed, and investors seem to believe that there will be no material effect on the company. If the disease is found to have spread to customers, however, the company's reputation and financials could take a hit.
Red Robin shares have been flying high lately as the stock is coming off a strong earnings report with shares jumping more than 10% following its earnings release last Tuesday. Comparable sales rose 5.4%, and earnings per share jumped 24% to $0.82, flying past estimates at $0.72.
With the company in expansion mode as it plans to open 25 restaurants and acquire 32 others by the end of the year, Red Robin seems particularly vulnerable to a health scare, which could spoil any new store openings. For now, the Hepatitis alert seems to be a non-issue as there are no known infections, but it's a reminder of the many, often unseen, risks that businesses and investors face. The safety issue also gives investors an opportunity to assess Red Robin's management, which made the right move by alerting authorities. For now, the Hepatitis infection does not seem like a concern for investors, but they should still keep one eye on the issue as an outbreak could be damaging to the stock.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.