Chipotle Mexican Grill's (NYSE:CMG) comparable sales fell 24% in its second quarter, but you would hardly know why from the earnings call. Management made reference to the "food safety events" of last year and discussed its food safety efforts several times, but there's a bit of a that-which-must-not-be-named feel about last year's series of foodborne illness outbreaks in Chipotle's marketing and on its earnings calls.
Management, no doubt frustrated with the customer exodus following those outbreaks, has repeatedly blamed the media for exacerbating the company's sales decline by scaring customers away. On the recent call, CFO Jack Hartung noted that sales briefly dipped after the company closed a Boston-area store as part of its new protocol when an employee reported that they had contracted norovirus. No customers got sick, and the company was making a conservative decision to close the store, but it still led to a slight decline in sales nationally.
Previously, Hartung had blamed the incremental reporting of the CDC, saying it gave an inaccurate perception that the window of the E coli outbreak was longer than it really was.
If you can't beat 'em, join 'em
After seeking first to control the negative reaction to the food safety problems, Chipotle finally placed the blame with itself last December, publishing a full-page apology ad in major newspapers, while CEO Steve Ells went on TV news shows to express regret for his customers' getting sick.
Chipotle also explained how it would improve its food safety, but in the subsequent months that message seems to have been lost. The company's marketing has focused on rewards such as free burrito and chips & guac giveaways, as well as its new Chiptopia loyalty program. Its social media feeds are full of images of delectable burritos, but no mention of new food handling procedures or food safety initiatives.
The company released its latest animated short film in early July, "A Love Story," but it echoed the themes of its earlier films. While it was well-received, it did nothing to bring back customers who have been avoiding Chipotle because of the food safety crisis, or communicate any message toward them. Chipotle seems to want to change the subject instead of addressing the food safety crisis, but with nearly a quarter of its sales still missing, that strategy isn't working.
To management, the crisis is over, but to disappointed customers, it endures. Ignoring the opportunity to confront it directly and explain how the company has raised its food handling standards to ensure no more customers will get sick is a mistake.
Jack in the Box (NASDAQ:JACK), which experienced the worst E coli outbreak in modern restaurant history, was driven to the brink of bankruptcy following hundreds of infections and four deaths in 1992-1993, but this commercial was instrumental in changing the brand's perception, sparking its recovery.
Like Jack in the Box, Chipotle is facing an image problem today, not an operational one. That's not something that can be fixed by new menu items or a loyalty program.
Taking the burrito by the horns
There are a few steps the company could take to help reassure those lost customers and bring them back in the door.
- Chipotle has hired several food safety experts, making the smart move of bringing on one who criticized the company during the E coli outbreak. But beyond implementing new protocols, these people should be out giving interviews to the media to explain what the company has done to improve its food safety and why it's safe to eat there.
- Local health departments regularly visit restaurants and grade them based on their cleanliness and food safety. How is Chipotle doing with these inspections? I would think the scores would be much better than a year ago, given the urgent need to improve food handling, but that's just a guess. Chipotle could make these public if it wanted to, and doing so could let customers know that their local Chipotle has been deemed safe by the health department.
- The company has a page devoted to food safety on its website , but it feels hidden. It could repost it on social media outlets and link to it in Twitter responses to better explain the enhancements it's made.
The bottom line is that a significant minority of customers still do not fell comfortable eating at Chipotle. Six months after the CDC ruled the E coli outbreak over, customers are still asking whether it's safe to eat there.
Has @ChipotleTweets food gotten safe again? I used to eat there ALL the time but I don't wanna get sick. Lol-- Nicholas Taylor (@ShadyNT) July 24, 2016
Is it safe to eat Chipotle we are having a office party and Chipotle is catering....-- Sean Mensah (@seanmensah) July 28, 2016
Ironically, Chipotle is probably one of the safest places you can eat these days given the effort it has made in food safety following the outbreaks. But it needs to communicate that to its customers. As those comments and the sales decline make clear, Chipotle still has a lot of work to do on that front. Until it succeeds in getting that message across, the company's "Food with Integrity" motto will ring hollow, and its performance will continue to drag.
Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. 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.
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