Chipotle's trust challenge
Jan. 14, 2016
by Monica Watrous
To improve food safety and regain trust, Chipotle is changing how its food is sourced and served.
ORLANDO, Fla. – Chipotle Mexican Grill has a long year of recovery ahead. Executives of the Denver-based burrito chain told investors Wednesday they don’t expect a return to growth until 2017. The company said it lost many of its customers after the recent high-profile outbreaks of E. coli and norovirus in some of its restaurants. To improve food safety and regain trust, Chipotle is changing how its food is sourced and served, which will result in “messy” margins and earnings in the meantime.
|Jack Hartung, CFO of Chipotle
“We’re not going to be the efficient business model that everyone has come to know Chipotle has become during 2016 because our primary focus is food safety and bringing our customers back and delighting them,” said Jack Hartung, CFO of Chipotle, during a Jan. 13 presentation at the ICR Conference in Orlando. “We know, though, if we are effective at this, and we are confident that we will get our customers back and can look forward to 2017.”
Chipotle has been at the center of a food safety crisis since October, beginning with an E. coli outbreak that started in the Pacific Northwest and sickened 53 in nine states. Weeks later, more than 150 customers near Boston fell ill with norovirus after eating at a local Chipotle restaurant. The company disclosed in a Jan. 6 Securities and Exchange Commission filing that it has been served with a federal grand jury subpoena in connection with an official criminal investigation tied to a norovirus outbreak in a Simi Valley, Calif., location last August.
|Steve Ells, chairman and co-CEO of Chipotle
“We face these difficult times now and need to reassure our customers that this can’t happen again and that we are going to reduce the risk of this kind of an outbreak from occurring again to near zero,” said Steve Ells, chairman and co-CEO, during the conference. “In order to do this you have to take extraordinary measures, but we are used to that. We are used to taking extraordinary measures and have been for years and years.”
Chipotle’s action plan is twofold. First, the company is implementing new food safety procedures with suppliers and in its central kitchens and restaurants to reduce the risk of foodborne illness. Second, Chipotle is preparing a marketing push in February to invite customers back to its restaurants.
|Mark Crumpacker, chief creative and development officer of Chipotle
“This is a very unusual case, as you may know, just simply because we really had two events; we had the E. coli incidents in the Pacific Northwest… On top of that we had the norovirus incident in Boston,” said Mark Crumpacker, chief creative and development officer. “Consumers have conflated those two things and are somewhat confused about what happened where and when, and so we’re going to extra measures to make sure that we’re very clear about what happened.”
Added Hartung: “Once we have our customers back — let’s look ahead to, let’s say 2017 — we will have some additional, ongoing costs to support this food safety, this heightened food safety approach. There is going to be costs at the supplier level for all the testing, there is going to be costs at the central kitchen because there are a few ingredients that we will make at the central kitchen, and there is going to be additional procedures that we are going to be following in the restaurants. That is all going to attract costs.”
The company expects ongoing costs related to food safety will add 100 to 200 basis points to margins, which may be offset by future menu price increases.
Chipotle Mexican Grill has a long year of recovery ahead.
“In the future — not in 2016, maybe not even in 2017 — we believe that we will build pricing power back up and we will be able to, at some point, take a relatively modest incremental price increase, and we can cover that,” Hartung said. “So we think we have the potential to have our model be at our peak margins and at our peak returns that we’ve had in the past. We just have to be patient.
“One thing we are going to do, we are not going to take this current sales level and try to squeeze as much margin out of this sales level as we can.”