Chipotle's Biggest Strength Is Suddenly Its Biggest Weakness

Boston Chipotle Closes Restaurant After 80 Fall Ill
  • E. coli outbreak sickens at least 52 people in nine states
  • Supply chain with scores of farms raises food-safety concerns

Chipotle is fresh -- and suddenly, that’s a problem.

After years of winning customers and investors with its promise of healthy fast-food and premium burritos, the chain and its business model have been upended by a far-reaching E. coli outbreak. Sales have plummeted. So has its stock price.

The E. coli outbreak linked to Chipotle Mexican Grill Inc. has sickened at least 52 people in nine states. And pinpointing the source of the contamination hasn’t been easy. Unlike the big burger-and-fries chains that deal with a handful of beef and potato suppliers and distributors, Chipotle depends on a more complex supply chain for its 1,900 outlets that includes scores of small, independent farmers. That can lead to ingredient shortages and questions about food safety.

When Chipotle can’t deliver on its healthy and fresh promise, its greatest strength can turn into its biggest weakness. In the latest sign of trouble, Chipotle temporarily closed a restaurant in Boston on Monday after several Boston College students, including members of the men’s basketball team, reported getting sick after eating there. In that case, health officials are leaning toward norovirus as the culprit, not E. coli, Chipotle said.

“It strikes deeper at their brand because so much of their story is based on the quality of their ingredients,” said Allen Adamson, a brand consultant and the former chairman of Landor North America. “This can clearly do long-term damage if they don’t get it under control.”

The fallout from the E. coli outbreak has been swift. Sales tumbled 16 percent in November, prompting Chipotle to rescind its 2016 forecast and announce a $300 million stock buyback to shore up the company’s sliding share price. Chipotle’s shares are down 22 percent over the last four months, the worst performance among restaurant companies in the Standard & Poor’s 500 Index. The shares fell an additional 5.6 percent to as low as $521.01 on Tuesday after the latest reports about Boston College.

Dealing with local farmers is not Chipotle’s only supply chain challenge. It’s also struggled at times to secure a reliable flow of the hormone and antibiotic-free chicken, beef and pork it uses to make burritos. The company has said that 95 percent of the pork raised in the U.S. does not meet its standards.

Carnitas Shortage

Earlier this year, the company suspended a pork supplier after an audit determined that its pigs weren’t kept in “deeply bedded barns” and didn’t have adequate access to the outdoors. Chipotle was forced to pull carnitas from about a third of its restaurants and it took the chain months to find additional pork suppliers. The gap in the menu dragged on sales and led to questions about the potential for the chain’s food standards to restrain its growth. 

Now in the wake of the E. coli cases, Chipotle is tightening its supplier standards and re-evaluating its local produce program, which dates back to 2008. The pullback hits at the the heart of Chipotle’s culture and marketing, which has touted its support of sustainable agriculture.

“You can never eliminate all risk, regardless of the size of suppliers, but the program we have put in place since the incident began is designed to eliminate or mitigate risk to a level near zero,” Chris Arnold, a spokesman for the Denver-based company, said in an e-mail.

Nonetheless, Chipotle has made itself vulnerable with its reliance on small suppliers, according to David Acheson, a former Food and Drug Administration official who now runs a food-safety consulting business.

Food Safety

“I worry about the small, local supplier who doesn’t have the resources to track the latest things to do on food safety,” Acheson said. “They’re small operators and you simply don’t have the infrastructure and the capacity to keep up with this stuff.”

Even before the health scares, Chipotle had been struggling with slowing growth. The company has faced higher food costs associated with sourcing GMO- and hormone-free ingredients. It has also stepped up its marketing spend to tout those benefits.

This isn’t time first Chipotle has hit a bump in the road. The company posted a meager 2.2 percent gain at established restaurants in 2009, leading to questions that the burrito chain may have plateaued after double-digit growth in two of the previous three years. But that, it turned out, was a rare off year. Chipotle’s sales surged 17 percent in 2014 and the company’s shares still trade at about 32 times earnings, second only to Starbucks Corp. among restaurant companies in the S&P 500.

E. Coli Outbreak

That said, Chipotle may be facing a more serious challenge now. What initially appeared to be an E. coli outbreak limited to the Pacific Northwest, where Chipotle closed 43 restaurants in Oregon and Washington, took on larger proportions when the Centers for Disease Control and Prevention said there were E. coli cases in additional states, including New York and California.

It’s been a rough few months for Chipotle. In July, a smaller E. coli outbreak occurred in Washington, sickening five people, though it was never reported by local authorities. Also over the summer, a norovirus outbreak at a Chipotle in California left about 200 ill. And in September, salmonella infected dozens of Chipotle customers in Minnesota. In that case, tainted tomatoes were to blame. 

E. coli poisoning has surfaced from time-to-time in the fast-food industry, notably in 1993 at Jack in the Box, where beef patties tainted with E. coli struck more than 700 people, including four who died. And in 2006, E. coli sickened more than 70 diners at Taco Bell restaurants. Still, it’s odd to see so many issues at one chain, said Benjamin Chapman, an associate professor and food-safety specialist at North Carolina State University.

"It’s not very common to see outbreaks linked to the same place, the same brand, in a couple of months with different issues," Chapman said. "It does make you wonder how they’re managing food safety as a whole."

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