Chipotle (NYSE:CMG) has paid the price for its two E. coli outbreaks, which forced it to close stores, change safety procedures, and generally work to try to win back public confidence.
Even though the Centers for Disease Control has said that two outbreaks "appear to be over" -- the last new case of someone falling ill from food eaten at the fast-casual Mexican chain happened on Dec. 1 -- that doesn't mean consumers will return quickly. The public was clearly spooked by the outbreaks, the larger of which led to 55 infected people in 11 states, 21 of whom were hospitalized.
With fearful customers staying away, the company reported that comparable restaurant sales fell nearly 15% in the fourth quarter, which caused a revenue drop of 6.8% for the period. The company was upfront about the cause of its sales woes in its earnings release.
"We are pleased to have this behind us and can place our full energies to implementing our enhanced food safety plan that will establish Chipotle as an industry leader in food safety," said co-CEO Steve Ells. "We are extremely focused on executing this program, which designs layers of redundancy and enhanced safety measures to reduce the food safety risk to a level as near to zero as is possible."
The stock has clearly suffered due to the food safety problem, plummeting during December and early January before bouncing back from those lows a bit:
But Chipotle is clearly taking the issue seriously and has gone to unprecedented lengths to not only stop it from happening again, but also to reassure the public.
What has Chipotle done?
Since the beginning of the first outbreak, Chipotle has been aggressive and forthcoming in addressing it. The company closed stores in affected markets for deep cleaning, and it moved quickly to implement new food safety procedures. Chipotle even did something that few restaurants ever voluntarily do -- it closed every store across the United States on Feb. 8, during the lunch rush, to hold a companywide meeting to discuss the changes.
The company described its new food safety program as "the product of a comprehensive reassessment of its food safety practices." Chipotle, according to a press release, worked with industry-leading experts to assess the safety risks of every ingredient on its menu "with an eye toward establishing the highest standards for safety."
Employees have been working on implementing the new system in every store already, but they learned about it in more detail during that meeting. Its components include:
- High-resolution DNA-based testing of many ingredients before they are shipped to Chipotle locations, which "far exceeds requirements of state and federal regulatory agencies, as well as industry standards," according to the company.
- Changes to food preparation and handling practices, including changing how some items are washed, as well as shredding cheese before it reaches the stores. In addition, some produce items will now be blanched (dipped quickly into boiling water), and there are new rules for marinating chicken and steak.
- New internal training on safety standards for all workers.
- Paid sick leave designed to ensure that ill employees stay home when they are sick.
In addition to all of these changes and the enhanced procedures and training, the company also plans to spend up to $10 million to help local farms meet its food safety standards, and to make more local ingredients available across the country.
Will it be enough?
At some point, nearly every restaurant chain suffers some sort of food-poisoning incident, but most do not suffer as much as Chipotle. Starbucks (NASDAQ:SBUX), for example, had to recall sandwiches tainted with E. coli from its stores in December. Even though the coffee chain's action involved over 1,000 stores, it benefited from the fact that nobody got sick directly from its sandwiches (though the infected celery was linked to 19 illnesses in seven states, which occurred at other eateries served by Starbucks' supplier, according to The Los Angeles Times).
Starbucks also avoided the sort of backlash Chipotle received, for the same reason that most fast food and casual eateries have emerged largely unscathed in similar situations: It does not tie its brand identity to the sanctity of its ingredients. Even though the coffee company has a reputation for quality, it does not use that as a pillar of of its brand in the same way Chipotle does.
But while Chipotle will suffer longer than most restaurant chains because it's being penalized for hubris, I agree with Motley Fool co-founder David Gardner; he pointed out on a recent Industry Focus podcast that brands have come back after much worse than what has befallen Chipotle.
"I think this is going to be kind of like the Tylenol scare, which really depressed Johnson & Johnson for a little while -- then, of course, we all look back and forget," he said. "Or BP. People said, 'I'll never go to BP again,' but I think a lot of us are going back to BP to fill our cars."
Chipotle got some people sick, which garnered it some terrible publicity, and scared consumers to a certain extent. But since then, the company has done everything right. It took the crisis seriously, made profound changes, and ultimately ate a whole lot of humble pie. Ultimately, while it may take a while for consumers to forgive and/or forget, those move should be enough to allow it to put its E. coli problems in the past.
Daniel Kline has no position in any stocks mentioned. He has not eaten at Chipotle any less since the scandal and probably goes there at least twice a month. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Johnson & Johnson. 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.