Article

Brand resurrection? Chipotle might just pull it off

Norovirus outbreak and rat infestation behind it, Chipotle's leadership says the brand is moving on.

July 26, 2017 by S.A. Whitehead — Food Editor, Net World Media Group

With the Norovirus outbreak and a rat infestation behind it, Chipotle's leadership said the brand is moving on. In fact, an hour-long call with investors Tuesday night could best be summed up in the words of Chipotle CFO Jack Hartung:

"We're confident that strong execution of our strategies will result in long-term profitable growth," he said.

Indeed, that's what the brand appears to have been in the process of during the quarter that ended June 30 this year, just before the widely publicized negative news events of the last 10 days involving a restaurant's illness outbreak, another's rodent infestation and at least four class action suits. But up until that point, the company reported these results:

• Net income up from $25.6 million to $66.7 million.
• Diluted earnings per share up from 87 cents to $2.32.
• Revenue up 17.1 percent to $1.17 billion.
• Comparable restaurant sales up 8.1 percent.
• Restaurant-level operating margin up from 15.5 to 18.8 percent.

Additionally, over the last half-year, revenue is up 22.1 percent to 2.24 billion, with comparable restaurant sales up 12.5 percent and diluted EPS now at $3.92 from a diluted loss per share of 3 cents.

But then just two weeks after that quarter ended, the new one brought on a whole new set of extraordinary challenges for the much-beleaguered chain. 

... And then all hell broke loose

On July 14, as hundreds of worldwide news reports have now made clear, diners at a Sterling, Virginia location told the retail and restaurant food poisoning reporting website, iwaspoisoned.com, that they became severely ill after eating at the Sterling location. 

In total, the health department covering Sterling had last reported 60 reports of similar sickness by customers at the restaurant, while the iwaspoisonedwebsite reported more than 130 individual reports on its site. Shortly after that story became major news, a video was posted on social media of a rat infestation at a Dallas-area Chipotle, along with a diner's reports that "rats we falling from the ceiling" of the restaurant. And finally, a series of class actions suits were filed, alleging securities violations by Chipotle and its leaders in relation to the two previously described events. 

The result? Chipotle's trading value went into free-fall, after all that progress in the quarter that ended just days later. During yesterday's call, CEO Steve Ells, took on the subject of the negative news for the first time publicly. 

"Unfortunately, we had a norovirus incident ... unrelated to our food supply chain," Ells told investors. "It's commonly spread within closed environments. ...

"We're disappointed that we failed to prevent it from affecting our customers and employees.... We deeply regret that anyone became ill and I'd like to apologize to those who were affected. ...We know that our procedures work when executed properly, but compliance in each restaurant is essential. 

"In order to reduce the risk of this happening again, we are undertaking an additional comprehensive communication and training effort to ensure that every manager and every field leader understands and execute these norovirus prevention procedures." 

Ells also said that the brand's recent hiring of former Arby's executive, Scott Boatwright, to the new position of chief restaurant officer was a key move to making these new strengthened and almost military-like compliance standards executed with near-perfect precision. Or, as Boatwright told investors, the brand will now take a "maniacal focus on how we operate our business."

"We conducted a thorough investigation of what transpired here in Sterling, and we found out it was very clear that procedures were not being followed as prescribed by Chipotle's rigorous standards," Boatwright said on Tuesday's call. 

"I assure you that we've taken swift action on what's transpired there and making it clear to the entire organization that not following our procedures will have severe consequences. Beyond that, we're putting in stronger measures in place to uncover when our procedures break down, and we will - we have and will continue to reinforce our zero ...  tolerance policy to our standards. 

"I've talked to Steve and the officers here, and what I plan to bring to the organization here at Chipotle is a maniacal focus on the fundamentals of our business. More specifically, ensuring the integrity of our training programs to lay a strong foundation for the organization's success. This type of rigor and discipline has been absent from the brand for some time and we will re-instill, again."

The path forward paved with queso

Whether the approach will work as hoped remains to be seen, but clearly the brand's overall approach to handling the negative news of the last 10 days is working. Essentially that policy has been virtual silence. 

While that "closed door policy" might not make the brand great friends with members of the media, the public seems to be okay with it and as a result, investors are too. In fact, the stock was up again Tuesday after last week's death spiral. 

Leaders during yesterday's call made it clear that their strategy is moving forward with the hope that negative events of the last 10 days or so will soon fade away like memories of a nightmare after waking. The brand itself is moving on — lawsuits or not — and even pinning their future on some new innovations in product and service, including: 

• Queso:The brand's NYC-based Next Kitchen has been testing this mild, creamy cheese dish as a possible new player on the Chipotle menu and the results have been even better than management had hoped. As a result of those reactions, Chipotle is rolling out the cheese as a new menu item to more than 350 restaurants in California and Colorado on Aug. 1 with possible national rollout "as early as mid-September," according to Chipotle CMO Mark Crumpacker. 
• Drive-thrus:This fall, leadership said the "first ever Chipotle vehicular pickup window" will open in Ohio as a test of drive-thru ordering and pick-up. Depending on results, the drive-thrus could then become options at locations nationwide, he said. 
• Customer experience/digital enhancements:Making the items on the Chipotle menu easier to access, order from and eat, is a central focus moving forward at Chipotle for both online customers and those in stores. That's one reason the brand has a new mobile app coming online and recently introduced a new traffic-driving program called SAVOR.WAVS in partnership with hip-hop artist, RZA. They are building an interactive experience that customers' can use to "translate" their selections into visual music compilations, which can then be accessed on Spotify. 

Photo: iStock

About S.A. Whitehead

---

Pizza Marketplace and QSRweb editor Shelly Whitehead is a former newspaper and TV reporter with an affinity for telling stories about the people and innovative thinking behind great brands.