Chipotle Mexican Grill, Inc. (CMG – Analyst Report) was once the darling of Wall Street with revenues showing a phenomenal CAGR of more than 23% (till 2014), since it went public. This stunning performance was supported by solid comparable restaurant sales (comps) growth. However, the Colorado-based fast casual restaurant fell from grace toward 2015-end, as a series of E. coli and norovirus contamination issues wrecked its growth story. In fact, shares plunged more than 29% in 2015.
Negative Publicity
Chipotle has been reeling under the negative publicity related to the E. coli outbreak which began in Oregon and Washington at the end of Oct 2015. It later spread to seven other states namely, Illinois, Maryland, Pennsylvania, California, Minnesota, New York and Ohio. In December, a norovirus outbreak at a Chipotle outlet in Boston’s Cleveland Circle affected around 136 diners, including 30 students of Boston College. As a safety measure, the fast casual chain closed several outlets which were linked to these incidents.
Toward the end of December, the U.S. Centers for Disease Control and Prevention (CDC) announced that it was probing the restaurateur’s links with a another E. coli outbreak (with a rare DNA fingerprint) in three states, namely, Kansas, North Dakota and Oklahoma.
Though the negative publicity cannot be discounted, what’s more alarming is that as soon as Chipotle reopens a store, it’s forced to close another because of fresh incidents of contamination. Ever since the E. coli outbreak, traffic has been severely hit and the company is still bearing the brunt.
Shift from Main Selling Point
The fact that Chipotle has used only healthy ingredients has long been its marketing strength and attracted customers despite the comparatively high prices. With the negative publicity associated with the health scares, the restaurateur is likely to fall out of favor with health-conscious diners.
Chipotle has also reportedly enforced stricter guidelines for suppliers in the wake of these outbreaks and management is unsure whether all its local suppliers will be able to comply with those. So changing suppliers would in turn raise the costs and be a major shift away from the company’s marketing policy of using locally produced ingredients.
