How Chipotle Bounced Back After Food Safety Scares

How Chipotle Bounced Back After Food Safety Scares

In 2016, Chipotle reported that
its profits had fallen 95% after a series of
food safety issues that sickened hundreds of people and sent
its stock price plunging. E. coli outbreak that caused
Chipotle restaurants to shut down. Investors aren’t the only
ones steering clear of Chipotle. I mean, it just
keeps happening to Chipotle and nobody else. Even if it’s not
associated with their food this time…it’s happened again. They’ve had to close the
store because customers get sick. It had lost customers’ trust
and Wall Street’s adoration. Its future was uncertain. Would Chipotle ever be able to
return to its high-growth days? But the Mexican-style food chain has
come back from the brink with the help of a new CEO. Consumers are once again returning
to the place that popularized burritos the size of a
baby and helped the avocado become one of
America’s favorite fruits. Analysts say that its food safety
woes are now firmly in the past, and its stock hit a new
record in July 2019 and has kept climbing, peaking at $857.90 on September 9th. Now, there’s
just one question for the chain. How can it keep
soaring and avoid another fall? Chipotle was never supposed
to take off. Its founder, Steve Ells, only
started the restaurant to make some quick cash to pay
for his real passion project…launching his very own
fine dining restaurant. Ells got the idea for Chipotle
from his time in San Francisco, where he was working as a
line cook for celebrity chef Jeremiah Tower. The Mission District in the California
city is known for its taquerias. That’s also where the
Mission burrito was invented. The burrito is oversized, stuffed
with rice and other ingredients, and wrapped
in foil. Sound familiar? With a loan from
his dad, Ells moved to Colorado and opened the first
Chipotle Mexican Grill near the University of Denver
campus in 1993. I think one of the most
amazing things about Chipotle is that the stores today don’t look
that different from the original location by the
University of Denver. Really, the structure is very
much the same, customized, assembly line process, very
simple but aesthetically pleasing locations. Chipotle’s now quintessential minimalist
layout wasn’t a deliberate design decision. It came from a
need to be cheap. In that very first Chipotle, the
table bases were pipes and the counter where you paid
was made from barn metal. Ells kept the menu and
operations simple because Chipotle was still his backup plan. Chipotle became profitable within a few months
and Ells was able to quickly repay his
father’s loan. A year and a half after
opening his first restaurant, Ells opened a second, then
a third in 1996. In the early days, your options
for Mexican food were so limited and so to see this
assembly line burrito company come up and out of nowhere. Yeah, it was amazing how quickly
word spread among the Denver market and how quickly this
company really rose to prominence, at least in Denver
during the mid-nineties. He kept going with additional funding
from his dad and small business loans. Then he got a
little help from a name you might recognize: McDonalds. Under the leadership of longtime
CEO Mike Quinlan, the fast food giant started investing in
Chipotle in February 1998. Three years later, it
was Chipotle’s majority stakeholder. The investment helped McDonald’s branch
out of burgers and diversify its business. It also helped the fast-food
chain compete directly with a rival on the rise: Taco Bell. The money from
McDonald’s helped Chipotle expand across the United States. Most restaurant chains, including
McDonald’s, turn to franchising for quick
and widespread growth. But Chipotle didn’t want to. Handing over the operations of
its restaurants would have also mean handing over some
of its profits. Ultimately, pressure from McDonald’s
led Chipotle to franchise a few restaurants to several
McDonald’s franchisees at the end of 2002. In January 2006, the
burrito maker went public. Chipotle’s IPO gave McDonald’s the
opportunity to refocus on its core brand at the time. McDonald’s was in the middle of
a turnaround after years of turbulence that started soon after
it initially invested in Chipotle. After the IPO, McDonald’s
started selling off its 91 % stake in Chipotle. By the end of 2006, it no
longer owned a piece of Chipotle. Just 8 months after McDonald’s sold
its stake in Chipotle, the burrito chain killed the franchise
model and took back control of all restaurants. The investment had paid
off for McDonald’s. Investors loved Chipotle. And the economy was booming. By 2007, its annual sales were
more than a billion dollars. Then the recession hit. Like most restaurants,
Chipotle felt it. In 2009, it held the second
largest market share, 11% of the entire Latin American limited
service restaurant industry, according to Euromonitor. Yet the company had its slowest
year ever of same store sales growth that year, and
its stock tumbled. In 2009, Chipotle decided that
it needed a change. Besides building the company, Ells
didn’t have any business experience. The company promoted
Monty Moran, its chief operating officer, to serve
as co-CEO alongside Ells. Obviously Steve was the visionary for
Chipotle and had a very much a culinary background. But I think Monty brought
more of a traditional restaurant, you know, background
to the equation. And sometimes with the right
mix of personalities, you can make a co-CEO model work. Chipotle started thinking up other
restaurant concepts with a similar set-up. It created
ShopHouse, an Asian-inspired chain. Soon after followed Pizzeria
Locale and Tasty Made. If those names sound unfamiliar,
it’s for a good reason. Chipotle has since abandoned them
after they failed to catch on. It came down to
just competition and lack of simplicity and lack of brand
messaging when it came to ShopHouse. Even when experimenting
with offshoots, Chipotle didn’t abandon its
core business. Between 2009 and 2015, the
company more than doubled its global total store count. New stores meant new customers. Unlike Taco Bell or McDonald’s,
Chipotle wasn’t relying on value meals or limited time
offers to get them. Instead, Chipotle rolled out a series
of ads in 2012 and 2013 about how its sources ingredients
from sustainable farms, an initiative it started in 2001. Investors cheered for Chipotle’s expansion
and the stock, hit $758 .61 a share in August 2015. But it would be years before
it soared that high again. In October 2015, food safety
officials linked Chipotle to an E. coli outbreak that sickened
people across 11 states. It was not Chipotle’s first
brush with foodborne illness. Earlier in 2015, the chain
had already been linked to norovirus and
salmonella incidents. But it caught
the public’s attention. 22 customers were hospitalized. The Centers for Disease Control
traced 60 cases of E. coli infection back
to Chipotle. In December, Boston health officials
linked an area Chipotle’s to another foodborne
illness outbreak. At least 80 people had
symptoms consistent with norovirus. It started to seem like every
time Chipotle reopened a store after a food poisoning incident, it
had to close another one. Chipotle co-CEO Ells apologized on The
Today Show, but that wasn’t enough. Sales at Chipotle locations
opened at least a year, plunged. So did
its stock price. For the next few years, Chipotle
shares were worth only a little more than half of
its all time high. But more importantly, the
incidents damaged Chipotle’s reputation with customers. The company had long boasted
about the quality of its ingredients. Its meat was
raised without antibiotics, its produce was locally
grown and organic. Chipotle called this policy
“food with integrity.” It had been part of its
advertising and marketing for years. Chipotle sprung into action. It changed its food safety
protocols, it altered its sick leave policy for employees, and it
gave away many, many free burritos. Still, despite its
best efforts, revenue for 2016 declined by 13%. Same-store sales plunged
by 20 %. Amid Chipotle’s troubles, Pershing
Square Capital Management, a hedge fund managed by investor
Bill Ackman, took a 9.9 % stake in the company. In September 2016, the news
lifted the stock temporarily. Ackman is known for building a
stake in a company and instigating changes that will boost
the company’s stock price. Ultimately, in December 2016, Ackman was
able to make a deal with Chipotle’s management to name
two directors to the board. Chipotle’s hand-picked an
additional two independent directors. Just two days before
the board changes, Moran had stepped down as co-CEO
and left the board. Chipotle’s founder was now the
only one steering the ship. He was too much at the center
of everything, whether or not it was strategic positioning, operational
decisions, media and industrial relations. He was trying to
cover it all instead of bringing in delegated expert talent
that you should start to have in the later life stages
of a business. That’s a problem we’ve seen a lot with Travis
Kalanick or maybe Elon Musk. The company debuted an ad campaign
and rolled out two menu additions, chorizo and queso. It was hoping to find its
footing again when there was another food safety issue. In July 2017, a Sterling, Virginia
location was tied to an outbreak of norovirus. In November 2017, nearly a year
after Ells became the chain’s sole chief executive,
he stepped down. And Chipotle started looking
for its next CEO. In this case, at least, the board
took the time to try to find somebody. Enter Brian Niccol
in March 2018. Before Chipotle, Niccol was chief
executive of a rival Mexican-food chain: Taco Bell. At Taco Bell, he introduced
popular limited-time offers like Nacho Fries, as well
as Taco Bell breakfast. Niccol also pushed Taco Bell
into the digital age. As this company matures, it was
always going to look a lot more like a traditional
quick service restaurant company. And that’s why I think
that’s somebody with that background like Brian certainly helped to
breathe new life into the company. While Chipotle poses a
threat to Taco Bell, the inverse is not
necessarily true. Fast-casual chains like Chipotle
appeal to more health-conscious consumers who have a
little extra cash to burn. The fast-casual segment of
the restaurant industry is growing the fastest. On the other hand, fast-food
chains, such as McDonald’s, are largely using price hikes
to boost sales. And Chipotle was now betting that
Niccol could do the same for them. Nicole’s primary mission was
to bring back customers who left during the
foodborne illness scares. So far, Niccol has taken
some tried-and-true methods from his Taco Bell playbook to
make that happen. He even moved Chipotle’s headquarters
from chilly Denver to sunny Southern California, right in
the backyard of Taco Bell’s own HQ. Chipotle has also recruited several
executives with Taco Bell experience, like its chief marketing
officer and the head of its digital marketing. Brian is one of the most
talented people I’ve ever worked with. We have a good rapport. We were friends even outside of
work, and so having the chance to work with him again was a
great opportunity and being on a great brand like Chipotle, that
opportunity was hard to pass up. But Chipotle is still a
different company from Taco Bell. I think people associate Taco
Bell and Chipotle as they’re both Mexican, but that’s a lot
of where the similarities end. I think Chipotle is much more of
a food brand, Taco Bell was much more entertainment. I mean, we
had to come out with something every four to six weeks
and Chipotle isn’t that way. Niccol has also leaned into
the food delivery boom. Chipotle struck a deal
with third-party delivery service DoorDash. We’re lucky
at Chipotle. We have a very young consumer
base, and that is, frankly, how they want to consume food. What we’ve been surprised with on
delivery is how many new customers have really come to
Chipotle just for delivery. And in March 2019, the
burrito chain launched a loyalty program. For every $125 customer
spend, they earn a free entree. Within four months, it
grew to five million members. The loyalty program also drives
customers to Chipotle’s app. That lets the company learn more
about them and cater its strategy to what
its patrons want. Niccol has also tried to
improve the experience for digital customers. Stores have been adding
second assembly lines for digital orders, online order
pick-up shelves, and Chipot-lane drive thrus for digital orders. These additions are meant
to bring Chipotle’s trademark efficiency to
off-premise dining. These investments have helped
to grow Chipotle’s digital sales. In its second quarter
of 2019, digital sales nearly doubled. They made up 18% of
total sales in the quarter under Niccol. Chipotle has also been
testing new food items to expand its limited menu. Fast-food chains like Taco Bell
regularly roll out new limited time items to drive traffic. As chief marketing officer and
then chief executive of Taco Bell, Nicole regularly oversaw the
creation of new menu items. But Chipotle is different. Before Nicole, it rarely made
additions to its menu. Customers could return and order
their usual without thinking twice. But now Chipotle wants you
to think about changing up your order. We’re not going to
be launching, you know, five products a year or six products
a year, but we will sprinkle things in to bring news, to
bring interest, and to just kind of freshen up things. But we
have no intention of really expanding our menu in
any big way. The chain launched carne asada,
another steak protein option, in September 2019 for
a limited time. It’s the chain’s first new
protein in three years. It also happens to cost 50
cents more than steak, its most expensive protein. And it’s working
on a replacement for its queso, which launched in
2017 to tepid reviews. Even after tweaking the recipe,
it still wasn’t a hit. The chain began testing a Queso
Blanco in several markets in July. It’s expected to launch
the cheese dip nationwide in 2020. Nichols initiatives are
paying off for Chipotle. Despite a foodborne illness incident
in Ohio in 2018 that sickened hundreds, the company finished
the year up 49 percent, making it one of
2018’s top performing stock. Chipotle’s market share in
the Latin-American limited service restaurant industry also
grew to 22.4% in 2018, according
to Euromonitor. It remained in second place, but
it managed to steal share from other chains and
independently owned restaurants. Redemption came in July 2019 when
the stock hit an all time high, surpassing the record it
set way back in 2015. The stock went on to climb
even higher, but as October 2019 started, shares were up a whopping
88 % over the past 10 months. But so much love
from investors puts even more pressure on Chipotle. With a single share of Chipotle
worth more than $800, the company has to answer one question:
where does its stock go from here? Compared to the
stocks of other restaurant companies — like McDonald’s, Starbucks
and Yum Brands — shares of Chipotle are pricey. In
October 2019, Chipotle had a forward price-to-earnings ratio of 46.
Starbucks had the next highest price-to-earnings ratio of
27. Chipotle has nearly 2,500 locations in the U.S. It thinks it can add even more. The company also has a
limited international footprint, with only 39 stores open outside of
the U.S. Niccol told analysts on Chipotle’s third-quarter conference
call that the company could accelerate expansion in
Canada, if that business improves. Outside of North
America, however, expansion will likely be slower. Niccol said that
Chipotle is “in the earlier innings” in Europe. As for
stores that already exist, its focus is on digital and
delivery to drive sales growth. According to Deloitte, customers tend
to spend 20% more on online orders. Now all Chipotle has
to do is live up to investors’ high expectations.

100 comments / Add your comment below

  1. "Chipotle is bouncing back , despite a foodbourne illness case that sickened hundreds" I started laughing out loud, like come on Chipotle fix your biggest issue please

  2. the only thing i miss is the burrito….their menu is simple and tastes good.wish we could expand that to asia-pacific.

  3. "Its meat was raised without antibiotics, its produce was organic" Gee…. its almost like antibiotics and pesticides serve a purpose.

  4. i really thought the one by my house would close down going thru the e. coli epidemic.

    it’s still there to this day. and a Taco Bell is on the next block lol.

  5. Hmmm…..moving the HQ from Denver to CA. Why move it to a high tax rate state? Why not move it to Texas or another state that is business friendly. I understand wanting to move it to your competitors back yard, but that's just silly. jmo

  6. The Chipotles in my area were never affected by the food safety problems and, unpopular opinion though it may be, I actually like Chipotle's food. Sure you can make 2x the amount of food for the same money, but when you live alone meal prep takes ages and it makes a big mess you have to clean up. Though I prefer food from Mexican taquerias, I still pop over at Chipotle from time to time.

  7. I started going to chipotle in 97 & was a regular until about 2015. I quit going because of the customer service, I never had issues with the food, I got tired of the attitude from the employees

  8. Wth is CNBC talking about with the end of food scares? I still get mildly ill every other time I eat there. The food is delicious but you get to suffer later. 🤒🤒🤒🤒

  9. I have no clue how they "bounced back." All of the Chipotles in my area (Northern VA) have terrible reviews on Yelp and their portions are getting smaller, but not their prices. The insides are always dirty and the staff never friendly.

  10. I remember when they made the bowls smaller and NO one noticed lol All they do is increase prices, and give less. Plus the quality has definitely gone down over the years, yet white people love their Chipotle!

  11. Its from SF… no wonder its so f*cking bland. How can "mexican" food with so many ingredients taste like absolutely nothing?? If you want better Mexican food go anywhere else in LA. Any runned-down taco truck in LA blows this sh*t hole out of the water.

  12. Never really been a fan of Chipotle. Never really busy, not really the best food for the money. I AM a fan of fast-casual as an alternative to fast-food or traditional dining but I like a little more atmosphere than an Ikea convention and friendlier people. Chipotle is too cold and sterile, and the food isn't great enough to make up for it.

  13. I was hospitalized after eating there in Charleston SC. I will never step foot in one. 🖕🖕🖕. I sued and got a little check though. 👌

  14. Don't think for a minute that this hasn't got me thinking, as I'm actually the actual person who actually came up with the concepts behind the Sport's Bar Franchises and literal name and was pushed out and given nothing financially since it's actual appearance to the public itself-"But I myself was never actually done with the concept and can literally improve upon it as they knew themselves as well,but weren't insightful to this."

  15. So…they just decided to ignore their food safety problems and still do well?

    I guess people didn't really care after all…

  16. The problem with chipotle is it’s food is high in calorie so for young and middle aged group who are trying to stay in shape and fit, this restaurant is not attractive!!!

  17. it never actually bothered me that chipotle had made hundreds i’ll, the only reason why i stopped eating there because they add excess sodium to much of it

  18. I mean moes I got real sick from like 30 minutes after it’s in my stomach. Taco Bell back in 2005-8 had like serious ecoli problem


  20. Food Handlers Permit…..
    What people dont know is 3,000 people die every year from mishandling food 🔎🙌🤣📽

  21. Pretty crazy. I go to the University of Denver and I didn't even know the local Chipotle is the first one until after I got here.

  22. They built a new chipotle’s in our town a year ago or so, they only lasted 6 to 8 month before they left. Building sits empty for the last 6 months. Not sure if it was just bad timing dew to the health scare or what, maybe to much other competition. I never got to eat their, but that’s ok.

  23. I never understood the hype around this place. Their food is bland boring and tasteless and the meat is like rubber if they went away i wouldn't care, Moe's Qdoba are a million times better

  24. Both Chipotle and Chick-fil-a have been my two favorite fast food chains I’ve never gotten sick from chipotle unless I pour a lot of Tabasco Chipotle hot sauce on my burrito bowl

  25. You know a company has gone to ruins if you have to pass the burden to someone else/ pass responsibility to another owner 😂
    Thumbs down btw for trying to fool more people 😔

  26. i only get the chicken bowl & chicken burrito. is around $9.48 tax around $10 something.
    i notice the staff all blacks co workers?
    i ate some times a week maybe 3 times
    i never get food poison from chipotle.
    do modells sporting goods..i think they're no more?

  27. 13:31 "off-premise" uggg it should be "premises" or if you are techy and want to shorten it, then "prem" is fine. "Premise" is a logical hypothetical, "premises" is a location.

  28. I've never been to Chipotle and frankly, I never intend to. I don't feel like spending time in the emergency room after eating a meal.

  29. I know exactly why so many people got sick. My friend worked there for one day because she was hired to be a cashier, but instead, they made her cook without any form of food safety training.

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