Chipotle is well known for their emphasis on healthy food, ethical treatment of workers, and the quality and consistency of their supply chain. However, the outbreaks of E. coli, and more recently, norovirus, at Chipotle restaurants has damaged the company’s previous stellar reputation in the fast food world. Analysts expect an 8% to 10% drop in same store sales over the next few months. The stock price (NYSE: CMG) has dropped more than 20%, from a recent high of 713 on October 15, 2015 to 538 on December 21, 2015. As of today, the source of the E.coli outbreaks has still not been determined, and it is possible more outbreaks could occur.
One of the company’s biggest challenges has been managing a huge supply chain with just 64 ingredients, while maintaining extremely rapid growth. Management says their food safety protocols exceed all national and state standards, but this simply raises the question: how low are those standards? Our current highly industrialized food production systems encourage huge outputs at the cost of safety. Low paid workers, overworked and under-appreciated food inspectors, and questionable sanitation at almost every stage of the national food supply chain, are all problems that go far above and beyond Chipotle. The question to me isn’t so much why Chipotle finally had food safety problems, but rather why it took so long, and why it wasn’t more widespread. The fact that so few people were affected probably argues in Chipotle’s favor.
Furthermore, Chipotle really does seem to take food safety seriously. According to Food Safety News, Chipotle is implementing even stronger safeguards than they had before, including testing and sanitizing and bagging food (“the commissary approach”) long before it arrives at each restaurant, greater oversight and controls over their supply chain, and enhanced DNA testing. Chipotle is also contracting with IEH laboratories, a well-respected microbial testing lab.
Beyond food safety, Chipotle is an extremely well run business. Chipotle has a simple business model, which has hardly varied since the company started operations over 20 years ago. The company has over $600 million in cash, and Chipotle restaurants each bring in an average of $250,000 in profit per year, compared to $131,000 for McDonald’s. Since the company split off from McDonald’s in 2006, the stock price has grown by 1,000%. Chipotle also has plenty of room to grow – McDonald’s has over 36,000 locations worldwide, compared to roughly 2,000 for Chipotle.
Beyond the numbers, the CEO, Steve Ells, made a recent appearance on The TODAY Show and issued a full page apology in national newspapers. Rather than playing spin and hide, he is facing facts and addressing problems in a responsible way.
Hopefully, Chipotle will quickly get their food safety issues behind them and continue setting a high standard in the fast food industry. They may have to slow down their growth a bit, but overall, their business does look sustainable, from several points of view.