E. coli recap
With Chipotle Mexican Grill’s (CMG) 4Q15 results coming up, we’ll take a quick look at some of the issues that have negatively impacted the company in the past three months.
In late October 2015, Chipotle was the subject of a significant food safety issue in Oregon and Washington. Restaurants in both states were linked to an outbreak of the E. coli bacterium, which infected 39 people. Of the 39 people affected, 14 were hospitalized.
The states highlighted in the above map are the ones that were affected. According to the company, the health and safety–related incidents were initially linked to Chipotle’s 11 restaurants in Oregon and Washington. However, as a preventive measure, the company temporarily closed 43 of its restaurants in both states. Shutting down restaurants is costly for brick-and-mortar businesses such as restaurants, as it significantly impacts revenue.
The health and safety concerns stemming from the E. coli incidents linked to several of Chipotle’s (CMG) restaurants was one of the worst events that the company faced in 2015. Generally, when events like this happen, customers choose to wait until the health and safety threat has subsided. Even after the threat subsides, a restaurant’s brand and customers’ perceptions of the food it serves can be negatively affected. This may overshadow a company’s performance for a few quarters.
You can mitigate such risks through diversification. The Consumer Discretionary Select Sector ETF (XLY) invests about 1% in Chipotle and includes other restaurant stocks such as McDonald’s (MCD), Yum! Brands (YUM), and Darden Restaurants (DRI).