Chipotle is still digging out of its ditch.
Almost exactly a year ago, America learned of a nationwide E. coli outbreak at Chipotle, leading the burrito chain to shut down restaurants in several states for a few days.
It wasn’t a Halloween scare, it was real. And it was happening at the beloved chain that operates under the slogan “Food with Integrity.” Overnight, the long lunch lines at Chipotle that used to spill out the door evaporated.
The company still has a long way to go to fully regain the trust of customers — and investors. Chipotle’s reputation is damaged, according to YouGov BrandIndex, a firm that tracks a brand’s reputation.
YouGov regularly asks this survey question: Is Chipotle high or low quality? Before all the bad food outbreaks, Chipotle scored a very healthy 25 (on a scale of -100 to +100) for quality. It plunged to -5 by February. It has recovered to 9 recently, but that’s still far from where it was.
Translation: Customers don’t see Chipotle as the golden brand it was before the E. coli outbreak.
Investors don’t either. Chipotle had been an investors’ darling for years. Last October, Chipotle stock was changing hands at $750 apiece. Today it’s at $413 — down 45%. It was hard to find analysts who didn’t give Chipotle stock a “buy” rating. Today, the majority of experts have a “sell” or “hold” rating, according to FactSet.
“The road to recovery is long,” says Mark Kalinowski, a restaurant industry analyst at Nomura Holdings. “They face a major challenge — food safety issues really get at what the brand is supposed to be all about.”
Chipotle will report its latest results Tuesday after markets close. Everyone is focused on one thing: Are customers coming back?
The crisis escalated
A quick scan of social media shows some Millennials are returning. They take photos holding Chipotle burritos as if they were precious babies, or tweet thanks to their partners for bringing them a burrito bowl with extra guac. But as the YouGov data implies, the lines aren’t quite as long, and the 23-year-old brand has lost some sheen.
“Success to us is getting all the sales back,” said John Hartung, Chipotle’s chief financial officer, in July. “How long it will take, we just don’t know,”
Cases of food poisoning at Chipotle first surfaced in July 2015. The E. coli outbreak became rampant in October, hospitalizing several people was Chipotle’s central nightmare for months. In total, 55 customers across 11 states became ill, according to the Centers for Disease Control and Prevention.
The CDC never determined the exact cause of Chipotle’s E. coli outbreak but suggested that it originated during the food prep process.
The problem didn’t end there. In December, there was an outbreak of norovirus at a Chipotle restaurant near Boston College, which sickened 140 students, including some players on the school’s popular basketball team.
CEO and founder Steve Ells apologized to the nation two days later, saying “I’m sorry for the people that got sick. They’re having a tough time. I feel terrible about that.” He vowed the company would soon be “the safest place to eat.”
Can Chipotle win back enough customers?
By April, food safety issues had taken a big bite out of Chipotle’s bottom line. Chipotle reported its first ever quarterly loss in April after the company doubled down efforts to reform its food safety protocols and start a new round of advertising to lure back weary customers.
To entice customers, Chipotle introduced coupons, burrito giveaways and a loyalty program called “Chiptopia” so frequent customers could earn free food.
This time, getting people in the door came at a cost.
“We’re committed to exceeding our customers’ expectations and restoring their confidence that we will deliver upon our promises,” Ells said in July during a conference call.
The company has taken extensive measures to make its food and stores safer.
The problems keep coming…
Still, Chipotle’s awful year was made worse in other ways. In July, Chipotle’s chief creative and development officer, Mark Crumpacker, was arrested on seven counts of cocaine possession. He was suspended and reinstated to his position in September.
Chipotle faces another major expense: lawsuits. By August, nearly 10,000 workers sued Chipotle in a class action lawsuit accusing the company of “wage theft” where workers are forced to clock out but continue clean up and prep for the next shift without getting paid.
In September, Chipotle reached a settlement with 100 customers who got sick from last year’s food illnesses and had to pay a former worker $8 million after she won a sexual harassment case against the chain.
Even one year after Chipotle fell dramatically off its pedestal, the stock still too expensive for most investors. The stock trades at 61 times forward earnings, far above the 18 times forward earnings of the S&P 500.
“Usually you don’t want relatively expensive stocks to be risky stocks,” says Kalinowski, the analyst. “I would say this is a risky stock at this point.”
