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What the Jack in the Box and Taco Bell E. Coli Scandals Can Teach Chipotle Investors

By Jeremy Bowman - Updated Apr 11, 2017 at 3:09PM

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Jack in the Box and Taco Bell's E. coli scandals were worse from a health perspective, but Chipotle's business has suffered more.

Chipotle Mexican Grill, Inc. (CMG 1.75%) is still reeling from its E. coli outbreak at the end of 2015. Though the outbreak infected about 50 people, it was not as bad as the one experienced by Taco Bell in 2006, or Jack in the Box (JACK 3.50%) in 1993, which sickened around 700 people and resulted in four deaths. Chipotle's problems were compounded when 140 customers got food poisoning due to a Norovirus outbreak at a Boston location shortly after the E. coli news broke.

Though the burrito chain's stock has been gaining over the past week, it still has a long way to go to reach its former heights. After comparable sales fell 20% last year, it's not hard to see why. Still, both Jack in the Box and Taco Bell, which is owned by Yum! Brands (YUM 1.33%), recovered from their E. coli outbreaks and are now stronger than ever.

A Chipotle burrito

Image source: Chipotle.

Let's take a look at what Chipotle investors can learn from their experiences.

A near-death experience

Jack in the Box's outbreak, which began in November 1992 and lasted until the end of February 1993, generated national news when hundreds of customers were sickened as a result of undercooked ground beef. The majority of those infected were children, and four of them died as a result of complications from E. coli, which can cause kidney and liver failure. 

Unsurprisingly, there was a consumer backlash against Jack in the Box, whose stores were located primarily on the west coast. At its worst, comparable sales fell 22% in the quarter when the crisis peaked. That decline was mitigated by single-digit declines in the following two quarters as management responded proactively to the crisis, offering to cover medical expenses for the victims, identifying the tainted beef supply, and changing its procedures to eliminate the problem in the future. 

By the following year, same-store sales were growing again with the help of an ad that signaled to consumers that the company had changed its ways. 

Today, the company is thriving, and the E. coli incident is long forgotten.

Taco Bell rolls with it

Taco Bell's 2006 E. coli outbreak was less severe than Jack in the Box's, but nonetheless resulted in more than 70 people becoming infected in five states in the Northeast. Shredded lettuce was believed to be the culprit. As a result, same-store sales fell by as much as 11% the following quarter.

However, the Mexican chain recovered the following year. Comparable sales were up 8.5%, and the company had its best average sales volume to date that year. Today, Taco Bell is the best-performing of Yum's three domestic chains.

Chipotle has some disadvantages

With comparable sales falling 20% last year, Chipotle's food safety crisis is the worst from a business perspective. There are several reasons why this scare hit Chipotle harder.

The burrito chain had experienced limited foodborne illness outbreaks earlier that year, including Norovirus, Salmonella, and a previous E. coli outbreak that went unreported. Those issues seemed to be a result of a lack of effective food safety protocols, which the company has since corrected.

In addition, Chipotle's E. coli outbreak spread to various regions of the country, including the West coast, Northeast, and Midwest, putting all its restaurants at risk in the minds of customers. Also, neither management nor authorities figured out the cause of the outbreak, though they suspected produce. Perhaps most importantly, Chipotle's brand is based on serving a higher quality of food than chains like Jack in the Box and Taco Bell. The E. coli outbreak not only scared customers away, but tainted the brand and Chipotle's "Food with Integrity" mantra. Many of the customers who visited Chipotle chose it because it was better than conventional fast food, and that's a hard message to sell now.

At this point, investors can take solace in the fact that both Jack in the Box and Taco Bell recovered from their outbreaks, and Chipotle's same-store sales are projected to grow in the high-single digits this year. But the company needs a more aggressive marketing approach, and to improve its operations both digitally and in the store, as CEO Steve Ells noted when he highlighted basic problems like dirty soda fountains and slow service at a conference a few months ago.

If the company can handle that, sales and profits should eventually recover. We'll learn more when the burrito chain reports earnings on April 25. For now, the company has a low bar to overcome -- comparable sales fell 30% in the quarter a year ago.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,288.77 (1.75%) $22.13
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$115.02 (1.33%) $1.51
Jack in the Box Inc. Stock Quote
Jack in the Box Inc.
JACK
$70.94 (3.50%) $2.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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