Chipotle Sales Plunge as US Launches Criminal Investigation

Posted January 7, 2016 by Sheila Shayon

Chipotle-gate just got bigger. Sales at the fast-casual grill chain are in freefall as fears over their foodborne illness spread across the US. Sales at restaurants open at least one year were down 30% overall last year and fell 14.6% during Q4 alone.

The Denver-based company was just served a federal grand jury subpoena over an August norovirus episode in a Simi Valley California location after dozens of customers and 18 employees reported symptoms.

The criminal investigation is the latest twist in a growing crisis that cuts to the core of the Chipotle brand, which is positioned as a healthier option to fast food and was the first national chain to eliminate GMO’s from most of its menu in its more than 1,900 restaurants. Being anti-GMO, it turned out, didn’t keep customers safe any more than espousing sustainability didn’t prevent Volkswagen’s Dieselgate crisis.

The number of people taken ill after eating at Chipotle has grown steadily in recent months, reaching nine states and capped last month when a norovirus episode in Boston sickened over 120 college students. Norovirus is the most common cause of foodborne-disease outbreaks in the US, according to the CDC.

Last August, Minnesota health and agriculture officials reported a salmonella outbreak in customers of 17 different Chipotle restaurants in the Twin Cities metro area, citing tomatoes as the cause, sickening 64 customers, nine of whom were hospitalized.

The Simi Valley norovirus outbreak, which eventually sickened nearly 100 customers was traced back to a Chipotle employee who continued to work through the illness.

And this is where the plot thickens—and sickens. Doug Beach, a spokesman for the Ventura County Environmental Health Division that oversees restaurant inspections in Simi Valley said the agency received calls from the FDA and U.S. attorney’s office in October and November 2015 asking for information about the norovirus outbreak.

“Chipotle was having problems in other states, and they said they were interested in other incidents,” Beach told the Wall Street Journal. “It’s a total surprise to us that a federal agency would be interested in a case in Ventura County.…We’ve never gotten a call from the federal government that I’m aware of.”

Beach said Chipotle knew on August 18 that at least one employee in the Simi Valley restaurant had gastrointestinal symptoms, but continued to serve food for two days. Furthermore, Chipotle didn’t inform local health officials until Aug. 21 after it closed overnight Aug. 20 to sanitize the restaurant, discard all the food and open with a fresh crew the next morning.

CEO Steve Ells issued several public apologies in full-page ads and made the media rounds late last year to reassure customers. He promised that the company would amp up food safety by tweaking cooking methods and increased testing of meat and produce, but the company’s stock continues to plummet closing two weeks ago below $500 a share for the first time since 2014.

Following news of the subpoena, Chipotle’s stock reached its “lowest point in more than two years,” noted Bloomberg.

Chipotle responded to the US subpoena with the statement that “As a matter of policy, we do not discuss details surrounding pending legal actions, but we will fully cooperate with the investigation.”

“It’s pretty atypical for the FDA to get involved in a single store, albeit in a sizeable outbreak,” said Steve Kluting, regional director of the food and agribusiness group at Arthur J. Gallagher & Co., to the WSJ.

“It makes me suspect it’s part of a bigger investigation involving Chipotle’s supply chain or an intentional contamination by an outside party at that store. In the last five or six years, the FDA’s top priority has been food safety. They’ve started using criminal investigations as a way to regulate food safety, and they’ve been successful.”

Chipotle reports fourth-quarter financial results on Feb. 2, but results in the court of public taste are pretty much in already. Below, Bloomberg’s charts on Chipotle’s slides—and Jim Cramer’s take: