Impact of E. coli outbreak
The E. coli outbreak seriously dented Chipotle Mexican Grill’s (CMG) image. 1Q16 results showed that the company’s same-store sales growth declined by 29.7%, and for the first time in its history, the company reported a loss of $0.88 per share. Also, the same-store sales growth for the first three weeks of April was at -26%.
Measures adopted by Chipotle
To regain customers’ loyalty and establish testing and safety protocols that ensure the quality of the products supplied, Chipotle conducted a comprehensive reassessment of its supply chain and restaurant practices and implemented the following measures:
- fresh produce and meat will undergo high-resolution DNA-based testing to identify harmful bacteria
- new food handling and preparation processes, including the blanching of certain ingredients, preparation of tomatoes, lettuce, and bell peppers in central kitchens, and marination of chicken, steak, and other ingredients to enhance food safety
- enhanced food safety training program for the crew
- a third party will audit its food safety procedures
To communicate the safety measures adopted by the company and to increase traffic at its restaurants, Chipotle has set a budget of $55 million for marketing and promotional activities. Under the Chipotle Raincheck Giveaway promotion, customers were given over 6 million free burritos in 1Q16. The mobile offer was followed by direct mail promotions. More than 20 million households were contacted.
Earlier, Jack in the Box (JACK) and Taco Bell, which is owned by YUM! Brands (YUM), also experienced E. coli outbreaks at their restaurants. However, both companies recovered from the damage and have won their customers back. In the next article, we’ll see what effect these safety measures had on analysts’ estimates. Chipotle, along with Domino’s Pizza (DPZ), forms 0.8% of the holdings of the iShares Russell Mid-Cap Growth ETF (IWP).