At some point every restaurant chain suffers some sort of crisis related to its food.
Whether it's a health-related concern like the multistate E. coli outbreak Chipotle (NYSE:CMG) has been dealing with supplier-caused issues, or something even worse, being in the business of feeding people means something will eventually happen. Searching nearly any fast food/fast casual brand online will bring up various scandals -- many of which prove to not be true. These are just a few of the higher-profile ones:
- Restaurant Brands International's (NYSE:QSR) Burger King made news in 2013 for using a supplier which sold burger patties found to be laced with horsemeat.
- Yum Brands! (NYSE:YUM) KFC was dogged by pictures that went viral of what appeared to be a fried rat (it later was proven to be a chicken tender, according to Fox News).
- Wendy's (NASDAQ:WEN) was briefly hurt by a claim that a woman found a finger in a bowl of chili. She later admitted it was a hoax and served four years in jail, The New York Daily News reported.
- Yum's Taco Bell brand was tied to a Salmonella outbreak that sickened 68 people in 10 states in 2011, CBS News reported.
All of these -- like the current Chipotle E. coli problem -- were big news at the time. They all on some level damaged the chain's business and created some negative consumer reaction. In the long run however food-related scandals, even when they involve people getting sick, play out quickly.
The popular fast casual Mexican chain is and will continue to take a hit in both its stock price and its sales, but the impact will be temporary as long as the company gets the problem under control.
What happened at Chipotle?
E. coli is a "large and diverse group of bacteria," according to the Center for Disease Control. Most strains are harmless, but some can make you sick. Potential problems caused by the bacteria include diarrhea, urinary tract infections, respiratory illness, and pneumonia.
The CDC has linked an outbreak of a potentially harmful strain to 17 Chipotle Mexican Grill restaurants in six states. In a post on its website, the federal agency said that 45 people have been affected in California (2), Minnesota (2), New York (1), Ohio (1), Oregon (13), and Washington (26).
"The epidemiologic evidence available at this time suggests that a common meal item or ingredient served at Chipotle Mexican Grill restaurants in several states is a likely source of this outbreak," the CDC wrote. The specific food linked to the illness has not been determined and the investigation is ongoing.
This news, as you might imagine, has sent Chipotle stock tumbling.
Chipotle responds quickly
When the outbreak was first reported Chipotle moved quickly closing restaurants in the affected regions (they have since been reopened). The company also deep cleaned all the restaurants implicated, replaced ingredients, and changed food preparation procedures. The chain also said in a press release that it was "providing all necessary supply chain data to investigators." Chipotle was also monitoring its employees for related illnesses and had not found any who were ill because of E. coli.
It's going to hurt in the short-term
Though Chipotle has made all the right moves in addressing the outbreak, Stephen Anderson, senior equity research analyst, restaurants and consumer, of Maxim Group, called the issue a "worst-case scenario" that could lead to the company posting negative fourth same-store sales in the fourth quarter for the first time since it became a public company, Nation's Restaurant News first reported.
"We argue that the outbreak now threatens to depress CMG's traffic nationwide more profoundly for the next few quarters," Anderson wrote.
That sounds bad, but much like Burger King, KFC, Wendy's, and Taco Bell experienced, consumers will eventually move on -- perhaps relatively quickly in this case because Chipotle has a well-deserved reputation for food quality.
David Tarantino, associate director of research and senior research analyst of Baird Equity Research, also sees the chain taking a short-term hit, but he expects the company to emerge unscathed, NRN reported.
"We believe the issues related to the recent E. coli outbreak could turn out to be a temporary headwind," he wrote.
Sharon Zackfia, an analyst at William Blair & Co, also expects the impact to be short-term, Forbes reported.
"We would be very surprised if the dynamics unfolding right now around E coli have long lasting reputation damage to Chipotle," she said. "Customer memory is limited. My guess is that five years from now, people will look back and say, 'I should have bought Chipotle on the E. coli scare.'"
It really is about memory
In the case of all of the above scandals it comes down to the fact that at the end of the day consumers never believed that Wendy's was putting fingers in its chili on a widespread basis or that Burger King was intentionally serving horsemeat. Similarly, while the idea of a rat falling into KFC's fryer was plausible, few, if any, people believed the company was doing so intentionally.
Handling and serving food, even when it's done correctly can still have negative results. As Zackfia noted Americans have short memories. This is a nation which barely remembers the Tylenol murders of 1982 and takes the pain reliever without even a hint of worry.
Chipotle will recover because even if this incident was caused by the company or its supply chain, it was an anomaly. People may stay away for a while, but it's likely that even that period will be short.
Consumers will return to the chain for the same reason they went their previously. It offers good quality, fully customizable meals, quickly and at reasonable prices. This E. coli outbreak was unfortunate, but the right steps are being taken, and it's hard to imagine that people believe the problem is anything more than an unfortunate accident.
Daniel Kline has no position in any stocks mentioned. He ate at Chipotle recently and will do so again soon. 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.