The Chipotle Question


Chipotle remains a corporate talking point right now, in fact the most common question I receive is …………. “is now a good time to buy Chipotle shares”?

So lets take a look……….

Chipotle has been dogged, since fall 2016, with recurring incidents of E-Coli. By December 2015 the CDC confirmed 52 reported cases, in nine states, of E. coli since the outbreak was first discovered in late October 2015. Since then further outbreaks have occurred.

Chipotle isn’t the only chain food supplier to have a major outbreak of food-poisoning. What sets the company apart is that it has experienced inordinate share value elevation and is one of the most talked about success stories in the Fast Casual restaurant sector.

Remarkably, while Chipotle successfully delivers on the 4 essential restaurant success quadrants; Price, Quality, Environment and Service, Chipotle’s marketing has mainly been based on the idea that it’s food product is somehow higher in quality than the average. Indeed, this has been its downfall; the ‘Food with Integrity’ statement seems somewhat ironic, given media commentary is now laced with e-coli reports whenever discussing Chipotle.

As usual, when a business fails in its promise, customers walk the other way – Sales in Chipotle’s same-store sales, dived 14.6 percent in the quarter that ended Dec. 31 2015. Profits plunged 44 percent to $67.9 million, or $2.17 a share, compared with $121.2 million, or $3.91, in the same quarter last year. 2016 looked worse, in its first quarter, the company reported a net loss of $26.4m (122% decrease from 1qtr in 2015), and same store sales decline of 29.7%.

Since last summer, shares have largely plummeted, and the company doesn’t predict a fast turnaround in its fortunes. During a recent conference call with investment analysts, Jack Hartung, Chipotle’s chief financial officer, informed Investors that it typically took restaurant companies that suffered a food safety scandal, as many as six quarters to regain their footing. Mr. Hartung also said the company was cooperating with investigators, but did not elaborate much on what he meant.

Chipotle’s answer to their problems was a promotional campaign with an approximate budget of $50 million, more than three times the amount the company spent on such programs in the first quarter of last year. However the Marketing Campaign relies on free food – normally a totally appropriate and relevant marketing tactic. Yet given Chipotle’s situation, the last thing they should have done is give away their product, when the primary issue is to assure the public that the food is safe. Its some what basic – no one wants bad food, free or not; and broadly speaking, in the consumer’s eyes, Chipotle only reconfirmed the lack of true value in respect of their product.

The latest evidence for this arrived at their last securities filing where they reported that sales at restaurants open at least 13 months dropped 26.1% in February. That’s actually an improvement from January, when those sales plunged 36.4%, thus Chipotle is terming performance a “recovery.”

“The sales recovery began the week of Feb. 8, 2016, when we launched an aggressive marketing campaign … to invite customers to dine at Chipotle via a free burrito offer,” the company said. The recovery “continued into March” with same-store sales down ‘only’ 21.5% for the week ended Mar. 7. However, sales reversed course over the next seven days after a  norovirus scare at a Boston-area restaurant (weekly same-store sales fell 27.3%).

The February and March results underscore how shaky things remain for Chipotle following a series of health scares that devastated its stock and sales late last year and early 2016.

Chipotle seems to have been caught naked at the beach with their clothes stolen – the reality is they have not handled the food borne illness incidents well at all. Executives can possibly be forgiven, as these incidents are, so they say, risks generated through their commitment to using fresh food. However, that excuse seems light given Wholefoods supermarkets, a grocery chain committed to naturally produced foods, has not encountered the same woes as Chipotle. Statistically; based on Chipotle’s experience, given the comparability in size to Wholefoods,  Wholefoods should be dealing with these types of problems daily, however events illustrate otherwise.

Chipotle is not new to problems; in 2010 – 2012 it became the government’s highest-profile target in its campaign against employers of illegal immigrants. For two years, Chipotle was the subject of a probe by the U.S. Attorney’s office in Washington and the U.S. Immigration and Customs Enforcement. Then the Securities and Exchange Commission was looking into Chipotle’s statements and disclosures for possible criminal wrongdoing, as revealed by Chipotle in a regulatory filing.

Therefore, while one could argue that the current problems are ‘unfortunate’, as stated by CEO Steve Ellis recently, one might also suggest that this darling company has some serious compliance and systems issues that are systemic, and form part of its engrained culture.

Remember; Chipotle’s tagline is ‘Food with Integrity’!

What makes Chipotle’s problems so dire is their inability to convey the reality of their problems.

The current probability of any particular customer becoming sick from eating at Chipotle is about 1 in 12,500 (based on 60 people made sick out of an estimated 750,000 daily customers based on Chipotle’s data). The probability of an American contracting food poisoning, even with all of our food safety regulations, is about 1 in 1,500 on any given day, (based on the fact that 1 in 4 Americans catch food poisoning every year).

So… while on average it is still statistically safer to eat at Chipotle, they have manifestly failed to communicate their mantra, and as such their shareholders have taken a beating – to the extent of around $338 a share / 44% in less than a year (Aug 2015: $755 vs April 2016: $417). Share Price at time of writing this article is $455, (-$300 per share).

So what now……………..??

Historically, and as previously indicated by Chipotle CFO, it does take a company of Chipotle’s size and prominence around 18 months to recover. Therefore it is reasonable to predict that Chipotle will start showing better results by 2018. However – this is not a statistical given. Jack in the Box is infamous for being the source of the worst E. coli outbreak at a restaurant chain ever. More than 700 people were infected in late 1992 and early 1993 due to contaminated hamburger meat. Four children died.

Shares of Jack in the Box dived as a result and did not return to their pre-outbreak levels until the spring of 1997.

Equally, the consumer landscape has changed vastly since 1997. Customers today are far better informed; a few years back, such an outbreak would be reported daily on TV, Radio and Newspapers, today; the same incident can expect the addition of cyber noise and chat on a second by second basis, therefore consumers are reminded each time they log onto their social media sites. In response, consumers will simply find another Chipotle type restaurant – and their preferred behavior changes forever.

Most of all, Chipotle’s problem, may just be, Chipotle. The company has manifestly failed to understand its customer at an emotional level. In a Poll executed by The Next Idea Restaurant Consulting Group, the most common consumer response to Chipotle’s e-coli crisis, was ‘loss of trust’, and the perceived ‘lack of honesty’ in respect to Chipotle’s actions and statements. Since the great recession, consumers have been demanding honesty from brands, and the concept of trust can only be generated through honest and transparent representation. Yet Chipotle produced a very corporate reaction to what is a very human concern; a $50m campaign of free food does not address the core concern of food safety from a consumer standpoint, and closing all stores for employee food safety training fails to postulate confidence when the Company had previously claimed the problem derived from their supplier base. Indeed, as the company transcends through its greatest challenge – it is generally positioning itself to customers as if nothing is wrong, meanwhile its financial performance is saying exactly how customers feel and how Wall Street is reacting.

Chipotle executes a very simple operating format, and successfully at that. The problem is that the issues they are facing are extremely complex, and deal with the deepest concerns their customers possess when it comes to their choice of food, one has to question, with their cultural simple approach to business, can Chipotle actually fix this, or has the damage penetrated too deep?

So back to the original question – Should I buy Chipotle Stock? The answer is as opaque as any other forward looking forecast  – how about a modification to Victor Kiam’s famous statement when advertising Remington Shavers – “When my wife bought me a Chipotle Burrito, I was so impressed I bought the company”. The question is how many people are truly impressed to push up their share price?

Author – Robert Ancill

11th May 2016

About The Author:

Robert Ancill is the CEO of TNI International and The Next Idea Group. Widely considered the ultimate restaurant authority on emerging and frontier markets, Robert is well known as one of America’s leading Global Restaurant Consultants.

Robert, sits on several Company and NGO Board of Directors, and is regularly quoted in the Media on global restaurant and food trends as well as food & restaurant opportunities in emerging and frontier markets. He is regularly speaking at conferences on topics relating to international growth opportunities, restaurant concepts, food trends and

consumer behavior.

Contact: The Next Idea Group – +1 818 887 7714 /