How Chipotle Bounced Back After Food Safety Scares

Summary

Chipotle, a Mexican-style food chain, faced a significant drop in profits in 2016 due to food safety issues that sickened hundreds and led to store closures. Despite losing customer trust and Wall Street's favor, the company rebounded with a new CEO, improved food safety measures, and a focus on digital sales. By 2019, Chipotle's stock reached an all-time high, and the brand continues to explore expansion and menu innovation to meet investor expectations.

Takeaways

• 📉 In 2016, Chipotle faced a 95% drop in profits due to food safety issues that affected hundreds and led to a significant stock price decline.
• 🏥 The E. coli outbreak was particularly damaging, forcing the temporary closure of Chipotle restaurants and eroding customer trust.
• 🔄 Despite the setbacks, Chipotle managed to recover, largely due to the appointment of a new CEO who helped to restore consumer confidence.
• 🌯 The brand's resurgence was also attributed to its focus on Mexican-style food, which remained popular among consumers.
• 📈 By July 2019, Chipotle's stock reached a new high, peaking at $857.90 on September 9th, indicating a successful recovery.
• 🤔 The script raises the question of how Chipotle can sustain its growth and prevent future declines, highlighting the importance of strategic planning.
• 🍽️ Chipotle's origins trace back to 1993 when founder Steve Ells opened the first restaurant in Colorado, inspired by the Mission burrito from San Francisco.
• 💼 McDonald's played a pivotal role in Chipotle's early growth, investing in the company and eventually becoming its majority stakeholder before selling its stake in 2006.
• 📊 The company's market share and sales were significantly impacted by the recession in 2009, leading to a strategic shift and the introduction of a co-CEO structure.
• 🚫 Food safety issues in 2015, including an E. coli outbreak, norovirus, and salmonella incidents, severely damaged Chipotle's reputation and financial performance.
• 🔄 Under the leadership of new CEO Brian Niccol, Chipotle implemented changes such as menu additions, a loyalty program, and a focus on digital sales to regain customer trust and boost sales.

Q & A

What was the impact of food safety issues on Chipotle's profits in 2016?

In 2016, Chipotle reported that its profits had fallen by 95% after a series of food safety issues that sickened hundreds of people and sent its stock price plunging.

How did Chipotle's stock perform after the food safety incidents?

Chipotle's stock hit a new record in July 2019 and kept climbing, peaking at $857.90 on September 9th, showing a significant recovery from the lows caused by the food safety incidents.

What was the origin of Chipotle's business model?

Chipotle's founder, Steve Ells, started the restaurant to make quick cash for his real passion project of launching a fine dining restaurant, inspired by the Mission burrito from San Francisco's Mission District.

How did McDonald's involvement influence Chipotle's growth?

McDonald's investment in Chipotle in 1998 helped the chain expand across the United States, diversifying McDonald's business and competing with rivals like Taco Bell.

Why did Chipotle abandon the franchise model?

Chipotle abandoned the franchise model in 2006 to take back control of all restaurants, as they didn't want to hand over operations and some of their profits to franchisees.

What was the significance of Monty Moran's role in Chipotle's leadership?

Monty Moran, promoted to co-CEO alongside Steve Ells in 2009, brought a traditional restaurant background to the company, complementing Ells' culinary expertise.

How did Chipotle's 'food with integrity' policy affect its reputation during the food safety crises?

The 'food with integrity' policy, which emphasized the quality of ingredients and sustainable sourcing, was damaged by the food safety incidents, leading to a decline in customer trust and revenue.

What changes did Chipotle make in response to the food safety issues?

Chipotle changed its food safety protocols, altered its sick leave policy for employees, and gave away many free burritos to regain customer trust after the food safety issues.

Who is Brian Niccol, and what was his strategy to revive Chipotle?

Brian Niccol, former CEO of Taco Bell, became Chipotle's CEO in 2018. His strategy included improving digital sales, launching a loyalty program, and testing new food items to expand Chipotle's limited menu.

How did Chipotle's digital sales perform under Brian Niccol's leadership?

Under Brian Niccol's leadership, Chipotle's digital sales nearly doubled in the second quarter of 2019, making up 18% of total sales, showing a significant growth in the digital sector.

What was the outcome of Chipotle's loyalty program launched in March 2019?

The loyalty program grew to five million members within four months and drove customers to Chipotle's app, helping the company learn more about its patrons and cater its strategy accordingly.

Outlines

00:00

📉 Chipotle's Struggles and Recovery

In 2016, Chipotle faced a significant drop in profits due to food safety issues that led to widespread illnesses and a plummeting stock price. The company had to deal with E. coli outbreaks and other foodborne illnesses that resulted in store closures and a loss of customer trust. Despite these challenges, Chipotle managed to recover with the help of a new CEO, regaining consumer trust and reaching new stock highs by July 2019. The company's focus on food safety and quality, along with a return to its core values, played a crucial role in its resurgence.

05:02

🍽️ The Evolution of Chipotle's Business Model

Chipotle's founder, Steve Ells, initially started the restaurant chain as a means to fund his dream of opening a fine dining restaurant. Inspired by the Mission burrito from San Francisco, Ells opened the first Chipotle in Colorado in 1993. The company's minimalist design and efficient assembly line process were born out of necessity and simplicity. Despite early success, Chipotle faced challenges during the recession and had to innovate. After a series of food safety incidents, the company underwent significant changes, including a shift in leadership and a focus on digital sales and delivery to boost its performance.

10:03

🔄 Changes in Leadership and Strategy

Following a series of food safety incidents, Chipotle's co-CEO Monty Moran stepped down, and Steve Ells became the sole decision-maker. However, the company's performance did not improve, leading to Ells's resignation in November 2017. Brian Niccol, former CEO of Taco Bell, was appointed as the new CEO in March 2018. Niccol brought his experience from Taco Bell, introducing new strategies such as digital innovation, menu diversification, and a loyalty program. These changes aimed to regain customer trust and boost sales, which showed positive results as Chipotle's stock price began to rise again.

15:05

📈 Stock Performance and Future Expansion

Despite a foodborne illness incident in 2018, Chipotle's stock performed exceptionally well, becoming one of 2018's top-performing stocks. The company's market share in the Latin-American limited service restaurant industry grew, and its stock reached an all-time high in July 2019. Chipotle's focus on digital sales and delivery, along with menu innovation and a loyalty program, contributed to this success. Looking forward, the company plans to expand its presence, especially in Canada, and continue to grow its digital and delivery sales to meet customer expectations and maintain its stock performance.

Keywords

💡Chipotle

Chipotle is a chain of fast casual restaurants in the United States, specializing in Mexican cuisine. It is central to the video's narrative as it discusses the company's challenges and successes. The video outlines Chipotle's history, including its struggles with food safety issues that led to a significant drop in profits and customer trust. It also covers the company's recovery strategies and its return to growth under new leadership.

💡Food safety issues

Food safety issues refer to the problems related to the handling, preparation, and serving of food that can lead to illness. In the context of the video, Chipotle faced a series of foodborne illness outbreaks, including E. coli and norovirus, which had severe impacts on its business, causing store closures, a drop in stock price, and a loss of customer trust.

💡Stock price

The stock price represents the market value of a single share of a company's stock. In the video, Chipotle's stock price is highlighted as a key indicator of the company's financial health. It plummeted due to food safety scandals but later recovered and reached new heights, reflecting the company's turnaround and investor confidence.

💡Customer trust

Customer trust is the confidence that consumers have in a brand or company, which is crucial for maintaining a loyal customer base. The video discusses how Chipotle lost customer trust due to food safety incidents but had to work to regain it through improved safety protocols and marketing efforts.

💡Food with integrity

This term encapsulates Chipotle's commitment to sourcing high-quality, ethically produced ingredients. It is a marketing slogan that was central to the brand's identity before the food safety issues. The video mentions how this policy was part of Chipotle's advertising and how it had to live up to this promise after the scandals.

💡McDonald's

McDonald's is a global fast-food chain that was once a major investor in Chipotle. The video explains how McDonald's investment helped Chipotle expand but also pressured the company to franchise, a model Chipotle later abandoned to regain full control over its operations.

💡Franchise model

A franchise model is a business arrangement where a company (the franchisor) allows another party (the franchisee) to operate a business under its brand. The video discusses how Chipotle initially resisted franchising to maintain control over its operations and profits but later adopted it under pressure from McDonald's before reverting to company-owned stores.

💡Digital sales

Digital sales refer to transactions conducted online or through mobile applications. The video highlights Chipotle's efforts to boost digital sales by improving its online ordering system, introducing pick-up shelves, and partnering with delivery services like DoorDash. These initiatives are part of the company's strategy to adapt to changing consumer preferences.

💡Loyalty program

A loyalty program is a marketing strategy designed to encourage repeat business by rewarding customers for their patronage. The video mentions Chipotle's launch of a loyalty program that offers free entrees for every $125 spent, which quickly attracted millions of members and drove customers to use Chipotle's app.

💡Menu innovation

Menu innovation involves introducing new food items or updating existing ones to keep the menu fresh and attract customers. The video discusses how Chipotle, under new leadership, began testing new menu items like carne asada and a new queso recipe to reinvigorate customer interest without drastically altering its core menu.

💡Market share

Market share is the portion of the total available market that a company captures with its products or services. The video notes Chipotle's growth in market share within the Latin-American limited service restaurant industry, indicating its competitive position and success in gaining a larger slice of the market.

Highlights

Chipotle's profits fell 95% in 2016 due to food safety issues that affected hundreds and caused stock prices to plummet.

E. coli outbreak led to Chipotle restaurant closures and a loss of customer trust.

Analysts believe Chipotle's food safety issues are in the past, with stock reaching a new high in July 2019.

Chipotle's founder, Steve Ells, initially started the restaurant to fund his passion for fine dining.

The first Chipotle opened in 1993 near the University of Denver, funded by a loan from Ells' father.

Chipotle's minimalist design originated from a need to keep costs low in its early days.

McDonald's investment in Chipotle in 1998 helped the chain expand across the United States.

Chipotle went public in 2006, leading McDonald's to sell off its majority stake in the company.

The 2009 recession impacted Chipotle, with its stock value and same-store sales growth dropping significantly.

Chipotle's food safety issues began in 2015 with an E. coli outbreak, followed by norovirus and salmonella incidents.

Chipotle's co-CEO Monty Moran stepped down in 2016, leaving Steve Ells as the sole decision-maker.

Investor Bill Ackman's hedge fund took a 9.9% stake in Chipotle in 2016, influencing board changes.

Brian Niccol, former CEO of Taco Bell, joined Chipotle in 2018 to revive the brand and regain customer trust.

Chipotle has been focusing on digital sales and delivery, with digital sales nearly doubling in Q2 of 2019.

Chipotle launched a loyalty program in March 2019, which quickly grew to five million members.

Niccol introduced new menu items, such as carne asada, to bring novelty to Chipotle's offerings.

Chipotle's stock reached an all-time high in July 2019, surpassing its previous record set in 2015.

Chipotle plans to expand further in Canada and is considering a slower expansion in Europe.

The company aims to meet high investor expectations through digital and delivery growth strategies.

Transcripts

In 2016, Chipotle reported that its profits had fallen

95% after a series of food safety issues that sickened

hundreds of people and sent its stock price plunging.

E. coli outbreak that caused Chipotle restaurants to shut

down. Investors aren't the only ones steering clear of

Chipotle. I mean, it just keeps happening to Chipotle and

nobody else. Even if it's not associated with their food this

time...it's happened again.

They've had to close the store because customers get sick.

It had lost customers' trust and Wall Street's adoration.

Its future was uncertain.

Would Chipotle ever be able to return to its high-growth days?

But the Mexican-style food chain has come back from the brink

with the help of a new CEO.

Consumers are once again returning to the place that

popularized burritos the size of a baby and helped the avocado

become one of America's favorite fruits.

Analysts say that its food safety woes are now firmly in the

past, and its stock hit a new record in July 2019 and has kept

climbing, peaking at $857.90

on September 9th. Now, there's just one question for the

chain. How can it keep soaring and avoid another fall?

Chipotle was never supposed to take off.

Its founder, Steve Ells, only started the restaurant to make

some quick cash to pay for his real passion

project...launching his very own fine dining restaurant.

Ells got the idea for Chipotle from his time in San Francisco,

where he was working as a line cook for celebrity chef

Jeremiah Tower.

The Mission District in the California city is known for its

taquerias. That's also where the Mission burrito was invented.

The burrito is oversized, stuffed with rice and other

ingredients, and wrapped in foil.

Sound familiar? With a loan from his dad, Ells moved to

Colorado and opened the first Chipotle Mexican Grill near the

University of Denver campus in 1993.

I think one of the most amazing things about Chipotle is that

the stores today don't look that different from the original

location by the University of Denver.

Really, the structure is very much the same, customized,

assembly line process, very simple but aesthetically pleasing

locations.

Chipotle's now quintessential minimalist layout wasn't a

deliberate design decision.

It came from a need to be cheap.

In that very first Chipotle, the table bases were pipes and

the counter where you paid was made from barn metal.

Ells kept the menu and operations simple because Chipotle was

still his backup plan.

Chipotle

became profitable within a few months and Ells was able to

quickly repay his father's loan.

A year and a half after opening his first restaurant, Ells

opened a second, then a third in 1996.

In the early days, your options for Mexican food were so

limited and so to see this assembly line burrito company come

up and out of nowhere.

Yeah, it was amazing how quickly word spread among the Denver

market and how quickly this company really rose to prominence,

at least in Denver during the mid-nineties.

He kept going with additional funding from his dad and small

business loans. Then he got a little help from a name you

might recognize: McDonalds.

Under the leadership of longtime CEO Mike Quinlan, the fast

food giant started investing in Chipotle in February 1998.

Three years later, it was Chipotle's majority stakeholder.

The investment helped McDonald's branch out of burgers and

diversify its business.

It also helped the fast-food chain compete directly with a

rival on the rise:

Taco Bell. The money from McDonald's helped Chipotle expand

across the United States.

Most restaurant chains, including McDonald's, turn to

franchising for quick and widespread growth.

But Chipotle didn't want to.

Handing over the operations of its restaurants would have also

mean handing over some of its profits.

Ultimately, pressure from McDonald's led Chipotle to franchise

a few restaurants to several McDonald's franchisees at the end

of 2002.

In January 2006, the burrito maker went public.

Chipotle's IPO gave McDonald's the opportunity to refocus on

its core brand at the time.

McDonald's was in the middle of a turnaround after years of

turbulence that started soon after it initially invested in

Chipotle. After the IPO, McDonald's started selling off its 91

% stake in Chipotle.

By the end of 2006, it no longer owned a piece of Chipotle.

Just 8 months after McDonald's sold its stake in Chipotle, the

burrito chain killed the franchise model and took back control

of all restaurants.

The investment had paid off for McDonald's.

Investors loved Chipotle.

And the economy was booming.

By 2007, its annual sales were more than a billion dollars.

Then the recession hit.

Like most restaurants, Chipotle felt it.

In 2009, it held the second largest market share, 11% of the

entire Latin American limited service restaurant industry,

according to Euromonitor.

Yet the company had its slowest year ever of same store sales

growth that year, and its stock tumbled.

In 2009, Chipotle decided that it needed a change.

Besides building the company, Ells didn't have any business

experience. The company promoted Monty Moran, its chief

operating officer, to serve as co-CEO alongside Ells.

Obviously Steve was the visionary for Chipotle and had a very

much a culinary background.

But I think Monty brought more of a traditional restaurant,

you know, background to the equation.

And sometimes with the right mix of personalities, you

can make a co-CEO model work.

Chipotle started thinking up other restaurant concepts with a

similar set-up. It created ShopHouse, an Asian-inspired chain.

Soon after followed Pizzeria Locale and Tasty Made.

If those names sound unfamiliar, it's for a good reason.

Chipotle has since abandoned them after they failed to catch

on. It came down to just competition and lack

of simplicity and lack of brand messaging when it came to

ShopHouse. Even when experimenting with offshoots, Chipotle

didn't abandon its core business.

Between 2009 and 2015, the company more than doubled its

global total store count.

New stores meant new customers.

Unlike Taco Bell or McDonald's, Chipotle wasn't relying on

value meals or limited time offers to get them.

Instead, Chipotle rolled out a series of ads in 2012 and 2013

about how its sources ingredients from sustainable farms, an

initiative it started in 2001.

Investors cheered for Chipotle's expansion and the stock, hit

$758 .61

a share in August 2015.

But it would be years before it soared that high again.

In October 2015, food safety officials linked Chipotle to an

E. coli outbreak that sickened people across 11 states.

It was not Chipotle's first brush with foodborne illness.

Earlier in 2015, the chain had already been linked to

norovirus and salmonella incidents.

But it caught the public's attention.

22 customers were hospitalized.

The Centers for Disease Control traced 60 cases of E.

coli infection back to Chipotle.

In December, Boston health officials linked an area Chipotle's

to another foodborne illness outbreak.

At least 80 people had symptoms consistent with norovirus.

It started to seem like every time Chipotle reopened a store

after a food poisoning incident, it had to close another one.

Chipotle

co-CEO Ells apologized on The Today Show, but that wasn't

enough. Sales at Chipotle locations opened at least a year,

plunged. So did its stock price.

For the next few years, Chipotle shares were worth only a

little more than half of its all time high.

But more importantly, the incidents damaged Chipotle's

reputation with customers.

The company had long boasted about the quality of its

ingredients. Its meat was raised without antibiotics, its

produce was locally grown and organic.

Chipotle called this policy "food with integrity."

It had been part of its advertising and marketing for years.

Chipotle

sprung into action.

It changed its food safety protocols, it altered its sick

leave policy for employees, and it gave away many, many free

burritos. Still, despite its best efforts, revenue for

2016 declined by 13%.

Same-store sales plunged by 20 %.

Amid Chipotle's troubles, Pershing Square Capital Management,

a hedge fund managed by investor Bill Ackman, took a 9.9

% stake in the company.

In September 2016, the news lifted the stock temporarily.

Ackman is known for building a stake in a company and

instigating changes that will boost the company's stock price.

Ultimately, in December 2016, Ackman was able to make a deal

with Chipotle's management to name two directors to the board.

Chipotle's hand-picked an additional two independent

directors. Just two days before the board changes, Moran had

stepped down as co-CEO and left the board.

Chipotle's founder was now the only one steering the ship.

He was too much at the center of everything, whether or not it

was strategic positioning, operational decisions, media and

industrial relations. He was trying to cover it all instead of

bringing in delegated expert talent that you should start to

have in the later life stages of a business. That's a problem

we've seen a lot with Travis Kalanick or maybe Elon Musk.

The company debuted an ad campaign and rolled out two menu

additions, chorizo and queso.

It was hoping to find its footing again when there was another

food safety issue.

In July 2017, a Sterling, Virginia location was tied to an

outbreak of norovirus.

In November 2017, nearly a year after Ells became the chain's

sole chief executive, he stepped down.

And Chipotle started looking for its next CEO.

In this case, at least, the board took the time to try to find

somebody. Enter Brian Niccol in March 2018.

Before Chipotle, Niccol was chief executive of a rival

Mexican-food chain: Taco Bell.

At Taco Bell, he introduced popular limited-time offers like

Nacho Fries, as well as Taco Bell breakfast.

Niccol also pushed Taco Bell into the digital age.

As this company matures, it was always going to look a lot

more like a traditional quick service restaurant company.

And that's why I think that's somebody with that background

like Brian certainly helped to breathe new life into the

company. While Chipotle poses a threat to Taco Bell, the

inverse is not necessarily true.

Fast-casual chains like Chipotle appeal to more

health-conscious consumers who have a little extra cash to

burn. The fast-casual segment of the restaurant industry is

growing the fastest.

On the other hand, fast-food chains, such as McDonald's, are

largely using price hikes to boost sales.

And Chipotle was now betting that Niccol could do the same for

them. Nicole's primary mission was to bring back customers who

left during the foodborne illness scares.

So far, Niccol has taken some tried-and-true methods from his

Taco Bell playbook to make that happen.

He even moved Chipotle's headquarters from chilly Denver to

sunny Southern California, right in the backyard of Taco

Bell's own HQ.

Chipotle

has also recruited several executives with Taco Bell

experience, like its chief marketing officer and the head of

its digital marketing.

Brian is one of the most talented people I've ever worked

with. We have a good rapport.

We were friends even outside of work, and so having the chance

to work with him again was a great opportunity and being on a

great brand like Chipotle, that opportunity was hard to pass

up. But Chipotle is still a different company from Taco Bell.

I think people associate Taco Bell and Chipotle as they're

both Mexican, but that's a lot of where the similarities end.

I think Chipotle is much more of a food brand, Taco Bell was

much more entertainment. I mean, we had to come out with

something every four to six weeks and Chipotle isn't that way.

Niccol has also leaned into the food delivery boom.

Chipotle struck a deal with third-party delivery service

DoorDash. We're lucky at Chipotle.

We have a very young consumer base, and that is, frankly, how

they want to consume food.

What we've been surprised with on delivery is how many new

customers have really come to Chipotle just for delivery.

And in March 2019, the burrito chain launched a loyalty

program. For every $125 customer spend, they earn a free

entree. Within four months, it grew to five million members.

The loyalty program also drives customers to Chipotle's app.

That lets the company learn more about them and cater its

strategy to what its patrons want.

Niccol has also tried to improve the experience for digital

customers. Stores have been adding second assembly lines for

digital orders, online order pick-up shelves, and Chipot-lane

drive thrus for digital orders.

These additions are meant to bring Chipotle's trademark

efficiency to off-premise dining.

These investments have helped to grow Chipotle's digital

sales. In its second quarter of 2019, digital sales nearly

doubled. They made up 18% of total sales in the quarter under

Niccol. Chipotle has also been testing new food items to

expand its limited menu.

Fast-food chains like Taco Bell regularly roll out new limited

time items to drive traffic.

As chief marketing officer and then chief executive of Taco

Bell, Nicole regularly oversaw the creation of new menu items.

But Chipotle is different.

Before Nicole, it rarely made additions to its menu.

Customers could return and order their usual without thinking

twice. But now Chipotle wants you to think about changing up

your order. We're not going to be launching, you know, five

products a year or six products a year, but we will sprinkle

things in to bring news, to bring interest, and to just kind

of freshen up things. But we have no intention of really

expanding our menu in any big way.

The chain launched carne asada, another steak protein option,

in September 2019 for a limited time.

It's the chain's first new protein in three years.

It also happens to cost 50 cents more than steak, its most

expensive protein. And it's working on a replacement for its

queso, which launched in 2017 to tepid reviews.

Even after tweaking the recipe, it still wasn't a hit.

The chain began testing a Queso Blanco in several markets in

July. It's expected to launch the cheese dip nationwide in

2020. Nichols initiatives are paying off for Chipotle.

Despite a foodborne illness incident in Ohio in 2018 that

sickened hundreds, the company finished the year up 49

percent, making it one of 2018's top performing stock.

Chipotle's market share in the Latin-American limited service

restaurant industry also grew to 22.4%

in 2018, according to Euromonitor.

It remained in second place, but it managed to steal share

from other chains and independently owned restaurants.

Redemption came in July 2019 when the stock hit an all time

high, surpassing the record it set way back in 2015.

The stock went on to climb even higher, but as October 2019

started, shares were up a whopping 88 % over the past 10

months. But so much love from investors puts even more

pressure on Chipotle.

With a single share of Chipotle worth more than $800, the

company has to answer one question: where does its stock go

from here? Compared to the stocks of other restaurant

companies -- like McDonald’s, Starbucks and Yum Brands --

shares of Chipotle are pricey. In October 2019, Chipotle had a

forward price-to-earnings ratio of 46. Starbucks had the next

highest price-to-earnings ratio of 27. Chipotle has nearly

2,500 locations in the U.S.

It thinks it can add even more.

The company also has a limited international footprint, with

only 39 stores open outside of the U.S. Niccol told analysts

on Chipotle's third-quarter conference call that the company

could accelerate expansion in Canada, if that business

improves. Outside of North America, however, expansion will

likely be slower. Niccol said that Chipotle is "in the earlier

innings" in Europe. As for stores that already exist, its

focus is on digital and delivery to drive sales growth.

According to Deloitte, customers tend to spend 20% more on

online orders. Now all Chipotle has to do is live up to

investors’ high expectations.