Chipotle Faces No-Win Scenario as Crisis Taints Every Move

Chipotle Experiences First Quarterly Loss
  • Successful response to latest outbreak still hurt sales
  • Company now projecting its first quarterly loss since IPO

Chipotle Mexican Grill Inc. responded quickly when four of its workers called in sick last week with suspected cases of norovirus. The Boston-area restaurant was shuttered for cleaning, and no customers got ill.

The company’s management considers that a successful outcome -- a sign its updated health protocols are working. But customers, still wary of the chain after a string of outbreaks, didn’t see it that way.

Headlines about the Massachusetts restaurant closing once again sent Chipotle’s sales plunging. And while the company called that sales decrease a “blip” on its road to recovery, the incident illustrates just how difficult it will be for the chain to get its mojo back.

“It’s great that they caught it before anybody got sick, but how could it happen again?” said Christopher Muller, a restaurant and hospitality expert who teaches at Boston University. “They’re caught in a very bad cycle.”

Chipotle sales tumbled 26 percent in February, marking at least the third straight month of declines for a chain once known for intense customer loyalty. Sales had started to recover a bit in early March, but then sank 27 percent in the week following the Boston situation. The company called that incident a “nonevent” and said it only became public because parents of one of the workers called the media.

Bigger Spotlight

The company’s vigilance in closing the restaurant for a full cleaning only threw a bigger spotlight on the situation.

“We’re really proud of the protocol working perfectly,” Steve Ells, the company’s co-chief executive officer, said Wednesday during an investor presentation. “Unfortunately, it was spun to be a negative, but nonetheless we’ll still continue -- out of an abundance of caution -- to make sure that we’re going the extra steps to be safe.”

Chipotle executives reiterated Wednesday that they’re confident the company can restore its sales and profit. But it’s going to take time. Facing its second straight negative sales quarter, the company is now forecasting a loss of $1 or more per share in the first quarter. Costs for new food-safety measures and promotion are higher than predicted, said the company, acknowledging that fallout from the crisis is far more damaging than initially expected.

Safety Czar

The company has hired a new director of food safety and says its updated protocols will reduce the risk of a new outbreak to “near zero.” Still, it’s not clear that customers are getting the message.

The company hasn’t been strong enough explaining what it’s doing to improve food safety, said Richard Frisch, a partner at Forum Strategies and Communications. His two college-age sons -- once loyal Chipotle customers -- have stayed away from the restaurants since the crisis hit, he said.

“The message hasn’t gotten to them,” Frisch said. “They have to do more to get positive word of mouth and change the conversation.”

Free-burrito offers -- sent to customers’ mobile phones and through traditional mail -- have drawn some customers back to Chipotle’s restaurants. But the chain faces a deeper question about the strength of its brand. A generation of U.S. consumers grew up with Chipotle as the go-to option for better fast food, a place to grab a quick burrito made with the type of premium ingredients coveted by the foodie crowd.

‘It’s Deserted’

Getting that image back will be difficult, particularly as negative headlines and pictures of empty restaurants keep popping up on social media, said Allen Adamson, the former North American chairman of the branding firm Landor.

“They can solve the health issues, but getting that momentum back is very tricky,” he said. “There’s a fashion dimension to the food business -- when a place is packed, you want to try it. You see them now, it’s deserted. It looks like a bowling alley.”

Chipotle’s crisis began in earnest last November, when the Centers for Disease Control and Prevention said it was investigating an E. coli outbreak linked to the chain. That brought national attention to a series of previous illnesses among customers, including a norovirus outbreak in California that sickened more than 200 people. A month later, scores of Boston College students got the virus after eating at a local Chipotle.

Stock Hammered

By March, Chipotle had mostly been out of the news for the better part of a month. Then workers at a different Massachusetts location got sick. Once again, the company’s stock price fell.

The shares are down more than 28 percent over the last 12 months, a plunge that has wiped out more than $5 billion in market value. The shares dropped as much as 3.9 percent to $480.82 on Thursday, the third straight day of declines.

Norovirus is the most common foodborne illness in the U.S., according to the CDC. From 2009 to 2012, almost two-thirds of cases from food contamination were linked to restaurants.

Many restaurant chains have reduced the risk of norovirus over the years by eliminating opportunities for workers to touch food with their hands, said Ben Chapman, a food-safety expert and professor at North Carolina State University. Some of them insist on employees using tongs in food preparation, for instance.

Even so, it’s likely that other chains have had workers get sick with norovirus in recent months without generating media attention, Chapman said. Chipotle is under more scrutiny as it tries to restore its reputation, he said.

“This is norovirus season -- it’s really not that unusual,” he said. “But there’s heightened awareness with Chipotle because they’ve had so many incidents.”

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