Steve Ells, the founder and CEO of fast-casual chain Chipotle (NYSE:CMG), plans to step down once the company completes its search for a new CEO. Ells will become executive chairman, leaving the task of engineering Chipotle's comeback to a new leader. The food safety crisis of 2015 still casts a shadow over the burrito chain, and missteps since then have derailed the company's progress in winning back the trust of its customers.
A new leader is exactly what Chipotle needs right now. There are two things that need to be done to fix the company.
1. Double down on food safety
"It takes 20 years to build a reputation and five minutes to ruin it," according to Warren Buffett. Chipotle built its entire brand over the past 20-odd years on the idea that its food was better than the rest. That image was shattered in short order in 2015 when cases of E. coli, norovirus, and salmonella popped up across the country at Chipotle restaurants.
Other restaurant chains have dealt with outbreaks in the past, but the scope of Chipotle's outbreak coupled with its image as a purveyor of high-quality meals destroyed the customer loyalty that had previously driven its impressive results. It took steps to improve its food safety procedures, but additional incidents have further shaken the trust in the brand.
In July of this year, a Chipotle restaurant in Virginia shut down after a norovirus outbreak. This was limited to a single store, but it strengthened the narrative that the company still doesn't have a handle on food safety. At a location in Dallas around the same time, a customer recorded a video of rodents in the dining area. Anyone on the fence about going back to Chipotle had their decision made for them by these two incidents.
Chipotle hasn't been serious enough about food safety. It shows in its numbers -- comparable sales rose by just 1% in the third quarter, despite a 21.9% decline in the prior-year period. Customers just aren't coming back.
The new CEO needs to change the culture around food safety at Chipotle. Any incident, however minor, will push customers out the door. Better to take a hit on earnings now to ensure that these issues are truly in the past, rather than let new incidents knock down the bottom line down the road.
2. Dump the queso
The nationwide launch of its highly anticipated queso was meant to drive people back to its restaurants. Instead, it made the company a laughingstock. Its all-natural cheese dip got torn apart on social media, hit for a grainy texture and unpleasant taste. Queso just doesn't work without some sort of processed cheese. Chipotle learned that the hard way.
Chipotle's queso is an embarrassment for the company at a time when it can't afford any more negative press. I'm not sure how it got past the testing phase, but the new CEO needs to make sure this kind of thing never happens again. Testing out new menu items is necessary, but you don't roll out a terrible product nationwide and then build a major marketing campaign around it.
The company is going to have to try out new menu items in order to get customers interested in it again. That could mean a breakfast launch or new alcoholic beverages beyond the margaritas it serves now. It may mean major changes to the menu that the current management is unwilling to make. What it absolutely can't mean is another overwhelming dud like its queso. Chipotle's image can't take another hit.
Still a long road ahead
Shares of Chipotle rose on the news that Ells was stepping down, but the new CEO faces a difficult challenge. It may take years of incident-free operation to regain enough trust to drive sustained comparable sales growth, and that will require the kind of culture shift that's always difficult to achieve in a large company.
Investors are now a little more optimistic, rescuing the stock from its prison of multiyear lows. But a full recovery is probably still a long way off, even if the new CEO does everything right.