It's going to get worse before it gets better for Chipotle.
An E. coli outbreak linked to the fast-casual Mexican food chain has expanded to six states from two, the Centers for Disease Control and Prevention said Friday. Forty-five people have now been infected, with 16 people hospitalized, according to the CDC. There have been no deaths.
Chipotle shares declined 12 percent on Friday following the CDC's report. The stock has dropped 22 percent so far this year.
It's unlikely the closure of more than 40 locations in Oregon and Washington State after an outbreak last month -- about 2 percent of stores -- will really hurt the restaurant chain's bottom line. The closings could cause $2 million in lost sales a week, or an EPS impact of less than 1 cent, according to Bloomberg Intelligence analyst Jennifer Bartashus.
But don't look for shares to bounce back soon. Investors and customers are going to need time to digest the bad news.
American consumers have a high tolerance for scandal: They are often willing to keep shopping at a retailer even after, say, labor abuses come to light. Or they'll remain loyal to foods they love following a health scare. But data from YouGov BrandIndex show that Chipotle, which built a loyal following by using quality ingredients and cruelty-free meat, might have a real problem keeping customers coming back. Even before Friday's E. coli news, Chipotle's brand perception had sunk to its lowest point since at least 2007.
Meanwhile, Chipotle has a menu full of non-E. coli problems. It's wrestling with supply constraints, struggling to find enough of the non-GMO, locally-sourced ingredients that fill its gigantic burritos. And growth is slowing: Sales at established locations rose by 2.6 percent in the quarter ended in September, compared with 19.8 percent the year before.
Chipotle has grown its store base by roughly 14 percent a year since 2011 and has said it wants to open another 190 to 205 stores this year, while also working to develop two additional brands -- ShopHouse Southeast Asian Kitchen and Pizzeria Locale.
The chain might be biting off more than it can chew. It needs to spend more time figuring out how to keep the customers it already has.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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