Chipotle's plan to bring customers back

by Monica Watrous
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Chipotle burrito
Health officials have been unable to trace the E. coli cases to a particular ingredient in Chipotle's food.

DENVER – Chipotle Mexican Grill can’t seem to catch a break. On the heels of a high-profile E. coli outbreak that sickened dozens, this week more than 120 Boston College students who ate at the burrito chain fell ill with what health officials reported was a stomach virus.

“The incident … was erroneously reported sort of immediately as E. coli and has since then been shown not to be and probably is the common flu or norovirus,” said Monty Moran, co-CEO, during a Dec. 8 presentation at the Sanford C. Bernstein Consumer Summit. “And there are other restaurant brands there that were shut down before Chipotle, and there’s sort of an outbreak there… 

Monty Moran, Chipotle
Monty Moran, co-CEO, Chipotle Mexican Grill

“But because the media likes to write sensational headlines, we’ll probably see when somebody sneezes that they’re going to say, ‘Ah, it’s E. coli from Chipotle,’ for a little bit of time. And so that’s unfortunate, but I think we’ve taken all the right measures internally … to show that we’re going to do the best we can not to have any of these be real outbreaks.”

The Centers for Disease Control and Prevention has identified more than 50 cases of E. coli in nine states linked to the fast-casual restaurant as of Dec. 4. The illnesses occurred between mid-October and early November. Since the incident, Denver-based Chipotle has pledged to become an industry leader in food safety with aggressive actions under way to prevent future outbreaks. The company partnered with an epidemiologist to develop an enhanced food safety program.

“We immediately started dicing our tomatoes in a commissary, so that they could go through a sanitizing kill step and then hermetically sealed in containers and delivered to the restaurants,” said Steve Ells, founder, chairman and co-CEO. “We found it impossible that we could test every tomato coming into the restaurants. So we went with an abundance of caution to make sure that we’re testing that way. A similar protocol for cilantro, where the amount of testing assures that there are no pathogens coming into the restaurant.”

These changes won’t be cheap, said Jack Hartung, CFO.

“It’s going to be a significant investment,” Hartung said. “We’re not going be very efficient at doing this right now. What’s most important is that we get this done, that food safety is the most important thing that we focus on right now, and we’ve got to act with a sense of urgency, which is what we’re doing, to get it done.”

Last week, the company said it expected the E. coli incident will lead to a decline in fourth-quarter same-store sales by as much as 8 percent to 11 percent. Moran said the chain has lost some of its loyal business since the beginning of November. The first cases were reported at the end of October and prompted the company to temporarily close 43 restaurants in the Pacific Northwest.

“There has been some degradation in loyalty with some of our frequent customers,” Moran said. “Not huge numbers, but they’re important customers to us… And of course there’s been a little bit of decline in share of future occasions, as we call it, for new customers as well. But that’s to be expected. If you’re not really familiar with Chipotle, you’re going to take a hit with those folks. And so they’re probably people that it’s just going to take time to get back.”

Although health officials have been unable to trace the E. coli cases to a particular ingredient, the company is confident the outbreak has been contained. However, the CDC continues to announce cases as they are reported by local health agencies, feeding a perception that Chipotle’s food remains unsafe.

Chipotle menu board featuring prices
Chipotle may raise prices by as much as 3 percent in 2017.

“Basically what we need is for there to be a clear period of time when no more cases are announced,” Moran said. “The CDC’s not yet told us when they are going to do that. The exposure period’s over, but there may be a lag and they may put another case out. And then we’ve all seen what headlines get written when that happens.

“As soon as we’re confident that that’s no longer going to happen, then we’ll do what we did after the reopening of the restaurants in the Pacific Northwest, which was full-page open letters in newspapers, as well as some critically placed interviews, to basically say, ‘Hey, this is over. This is what we’ve done. And now, moving forward, we invite you back into our restaurants.’”

The company also plans to increase direct mailings with buy-one-get-one offers and share a video on social media explaining the incident.

“If there’s a silver lining in this from a marketing perspective, which is really kind of hard to imagine — this is kind of the worst thing you could have — it would be us being as transparent, or perhaps more transparent, than any other company has ever been with regard to what happened and what we did,” Moran said.

To offset costs related to new food safety protocols, Chipotle may raise prices by as much as 3 percent — but not until 2017, Hartung said.

“The worst thing we could do is go ahead, implement these procedures and then turn around and say we're going to charge you more,” Hartung said. “It’d be crazy.”

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