Chipotle’s Health Crisis Shows Fresh Food Comes at a Price
Chipotle is in crisis. For months, a series of health scares have sent its stock tumbling, stalled sales, and triggered a federal investigation. On Feb. 8, the company said, it will close all its restaurants so employees can learn about the gravity of its foodborne illness outbreak. This week, company executives appeared at an investor conference in Florida in a bid to soothe unnerved shareholders, if not customers, and acknowledged 2016 would be a “messy” year for earnings. It helped. Shares in the company, once a darling of Wall Street, rebounded more than 12 percent and appear to be holding steady.
But investors, restaurant analysts, and food safety experts say Chipotle’s woes won’t disappear anytime soon. When it comes to the logistics of food safety, the company still has a lot to understand, and a lot to prove. As it turns out, when your business model is built on the premise of serving fresh food—often with a promise that it is ethically grown and sourced—your supply chain becomes much more complex. And more complexity means more risk.
“The more complicated your supply chain is, the more opportunity you have to introduce problems,” says Melinda Wilkins, director of the online master of science in food safety at Michigan State University. “[Chipotle’s] food sourcing is a laudable effort—and it’s what customers want. But they’re probably walking a fine line between offering fresh, local ingredients and decentralized food preparation and the risk of introducing foodborne pathogens because it is such a complicated food chain.”
In a testament to the fierce brand loyalty that Chipotle has fostered among customers, the first indications that there might be a food safety issue at its restaurants had little impact on share prices. In July, five people in the Seattle area contracted E. coli after eating at a local Chipotle. The cases drew little attention, and Chipotle shares closed at a record high of $757.77 on August 5—a mind-boggling increase from the company’s initial public offering price of $22 in 2006—and stayed high through October. At its peak, Chipotle was worth $24 billion.
The joy was short-lived. In August, more than 200 customers and employees at a Chipotle in Simi Valley, California, contracted norovirus—the leading cause of illness from contaminated food in the US. (Last week, Chipotle announced that a federal grand jury in California had subpoenaed the chain, ordering it to produce documents related to the Simi Valley outbreak.) A salmonella outbreak in Minnesota sickened 64 people in August and September; tomatoes served at 22 Chipotle outlets in the area were blamed. In October and November, dozens of E. coli cases sprouted in Washington, New York, Maryland, Oregon, Ohio, Illinois, Kansas and Oklahoma. Then norovirus hit more than 140 Boston College students in Massachusetts, including the men’s basketball team.
All told, health officials blame contaminated Chipotle food with sickening about 500 people in 13 states. Suddenly, customers weren’t feeling quite so loyal. Same-store sales shrank by 30 percent in December compared to the same time a year earlier. (“Future sales trends may be significantly influenced by further developments,” the company warned.) Even considering the company’s most recent stock bump, shares have fallen about 40 percent, cutting the company’s value by more than $10 billion.
What’s more, Chipotle still doesn’t know which ingredients caused most of these widespread contaminations. That may not be entirely its fault; multi-state foodborne outbreaks are notoriously hard to solve. The problem may be less any kind of specific neglect on Chipotle’s part. The cause may run, instead, to something more basic: the type of food Chipotle promises at the scale it offers simply carries more inherent risk.
“They’re more at risk than, say, a McDonald’s or a Taco Bell,” Wilkins says. “[Those chains] go with big, commercial sourcing and standardized product.”
Having a centralized food source makes quality control easier, since the supply is exposed to fewer outside elements. While that may not seem like the healthiest option, it makes fast-food chains cheap, efficient, and less risky—and it’s an edge Chipotle doesn’t have. The company, for its part, has said it has in its 22 years “never seen a series of incidents like this before.”
“During that whole time, all of our food safety and food handling practices were within industry standards,” Chris Arnold, a Chipotle spokesman, says. “These incidents have shown us what we need to do better in that area, and that is exactly what we are doing.”
The new food safety plan Chipotle drafted in response to the crisis includes what the company calls high-resolution, DNA-based testing of fresh meat and produce at the supplier level before the ingredients enter Chipotle’s supply system; changes to food handling and preparation procedures; and enhanced food training. “This plan should reduce the risk of similar risks to a level as near zero as is possible,” Arnold says.
But according to Wilkins at Michigan State University, it’s unclear that Chipotle’s internal practices were the problem in the first place. Given the nature of the Chipotle model, its food supply chain probably introduces more complicating factors.
Wilkins says contamination often happens with produce—and that can take place in the field, in processing facilities, or during handling at restaurants. In any case, it can be difficult to trace, and harder still when the company is constantly tweaking its procedures to get at just the right balance between taste and cost without compromising on ethical ingredients sourcing. For instance, The Wall Street Journal reports that at one point Chipotle employees shifted from pre-chopped tomatoes shipped in plastic bags to tomatoes diced on-site because they “tasted better.” After the contamination scandal, tomatoes will again arrive pre-packaged.
With Chipotle’s plan for rehabilitation is in place, the next step will be seeing whether that will truly help the ailing food chain weather the storm.
Survival of the Safest
Can Chipotle survive the scandal? John Stanton, a professor of food marketing at St. Joseph’s University, thinks the chain can rebound, albeit slowly. He points to the loyalty of the customers as one edge the company has over the competition. “They’ve made themselves special, different from the likes of, say, Taco Bell,” he says. “I don’t think there will be a lot of Chipotle consumers switching to Taco Bell because of this.”
But Stephen Anderson, a restaurant analyst at Maxim Group who was at the Chipotle investor conference, says that he thinks customer loyalty has taken a significant hit, at least in the near term. Anderson says that while the mood at the conference was one of long-term optimism, the bad headlines and lawsuits loom large over the company. “Those risks still have to be factored in,” he says.
Wilkins, for her part, says she thinks the question of whether the company will get past the debacle in a competitive market will be something that’s ultimately decided by what consumers are ultimately willing to pay for. Increasing oversight of the supply chain will likely come at a cost to Chipotle, and someone will have to pay it. “Consumers may need to put their money where their mouth is,” she says. “If you want organic, locally sourced, and all of this new age of ‘knowing your food,’ it is going to cost more.”
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