Chipotle Mexican Grill‘s reputation suffered a major blow when the company had to close 43 of its restaurants in the greater Seattle and Portland areas for nearly a week starting October 31, after an E.coli food poisoning outbreak.  The company reported another incident of outbreak in four other states on November 20. Its stock price took a hit and has plunged nearly 25% in the last two months. We believe this incident will impact Chipotle’s sales in the next few quarters and have revised our price estimate for the company to $560. (Read Chipotle Mexican Grill : The Story Behind The Tumbling Stock). Historically companies facing food poisoning outbreaks have recovered quickly without a long-term impact. In 1993 fast food restaurant Jack In The Box had a major E.coli outbreak in which four children died, and in the quarter following this crisis comp sales had declined 22% y-o-y and 9% each in the next two quarters. However, in the fiscal year 1994, Jack In The Box posted a full year comp increase of 2.4%. However, in the current competitive environment and increasing consumer awareness towards food safety, we believe it might take Chipotle much longer to fully recover from the impact of this outbreak.

Regaining Consumer Confidence Will Be Key
Earlier in December, the company mentioned that it is taking aggressive actions to implement industry leading food safety and food handling practices in all of its restaurants and throughout its supply chain. While the company is trying to regain consumer confidence by detailing its food safety measures, the source of the E.coli outbreak in October could not be identified. This could be due to Chipotle’s strategy of sourcing ingredients from local producers, which leads to a high number of suppliers, thus making control difficult. Chipotle sources 64 ingredients from more than 100 suppliers. Chipotle’s consumer perception index fell from around 9 (positive) in September 2015 to a negative 12.5 in December 2015 and while the company is looking at measures such as discount coupons and letters in newspapers, managing customer perception will be key for the company. In 2014 when it was revealed that a Chinese meat supplier intentionally sold expired meat to restaurants including McDonald’s in Japan, McDonald’s took a huge hit on comparable sales in Asia Pacific, with a 10% decline in comparable sales in Q3 2014. It did not recover from this scandal quickly and showed negative comp sales in the next five quarters.
Chipotle has lowered its sales forecast following the outbreak, and the exact impact will be visible once the company reports its results. Its ability to regain customer confidence and remedial measures to ensure that there are no further outbreaks will be key for recovery. However, Chipotle’s reputation has taken a bad hit due to this outbreak, and it might be a long time before the company is able to fully recover from the impact.