The Chipotle E. coli nightmare
Pulsed-field gel electrophoresis (PFGE) results, a scientific lab technique used to identify bacterial isolates from contaminated people, food, or facilities, showed that numerous people had been infected with an unusual strain of STEC O26. PulseNet, a U. S. network of laboratories which identify, record and publish information from public health and regulatory agencies on foodborne illnesses affecting local and multiple state venues, in an effort to identify and address outbreaks early (“About PulseNet”), reported 55 persons affected (Clark).
The E. coli outbreaks begin
Although Washington and Oregon had the largest outbreaks, with twenty seven and thirteen illnesses, respectively, other states experiencing similar results included Ohio and California with three ill persons each; Delaware, New York, Kentucky, Illinois, and Maryland with one person each; and Minnesota and Pennsylvania both reporting two illnesses within their states. The ages of those experiencing illness from the outbreak spanned from one year old to ninety four years of age, with twenty one, the median age represented. The majority of those, where information was provided, were women. Just under half of the respondents had to go to the hospital for treatment (Clark).
A second outbreak of a different and unique strain of STEC O26 infected five people, which arose between the dates of November 18, 2015 to November 26, 2015. In this case ages ranged from six years old to twenty five years old, similarly with twenty two years old as the median age affected. Again, the majority of individual affected were women. In this case, though, only one person was reported to be hospitalized. Again, a menu item from Chipotle Mexican Grill was reported as the common denominator.
Epidemiologic information gathered by investigators did not identify a specific product or ingredient associated with the outbreak, yet a common meal selection was viewed as the likely source of both foodborne incidents (“Multistate Outbreak of Shiga”). In fact, after regulator interviews, the first outbreak showed about eighty seven percent of the responders stated they ate at a Chipotle restaurant. Among the sites were seventeen eateries in eight states. The second outbreak showed all of the respondents ate at Chipotle. In Oklahoma, three ate at the same restaurant, while one person from North Dakota had traveled to Kansas and was infected at the same Chipotle location as the Kansas person who was exposed. Infected individuals reported that they had eaten at Chipotle the week before, and had been infected by many of the same menu items (“Multistate Outbreak of Shiga”).
E. coli not the only nightmare for Chipotle
In response to the epidemic, Chipotle closed its stores on February 8th, 2016, in an effort to provide employees with information about food safety, including safety changes the company was implementing (Victor). Since the initial investigation, it appears that an estimated 234 people or more were also infected with norovirus at the restaurant in Simi Valley, California, and 136 in Boston, Massachusetts.
It is estimated that more than 500 people have been infected at the restaurant in the second half of 2015. The Feds have had enough. Authorities have issued a federal grand jury subpoena in relation to a norovirus outbreak at a Chipotle restaurant in California in August 2015 (Brunker). According to U. S. Security and Exchange Commission filings, the U.S. Attorney’s Office for the Central District of California, in response to a criminal investigation conducted by Food and Drug Administration’s Office of Criminal Investigations has requested the production of a massive amount of discovery documents (Brunker).
Norovirus, commonly known as the Winter Vomiting Bug, causes diarrhea, vomiting and stomach cramps (“Norovirus”). The infection is often seen on cruise ships, in schools and in close environments. The company says that the California and Massachusetts outbreaks were related to employees who violated company policy by coming to work when they were sick (Brunker).
This corporate response creates disturbing mental images that no customer wants to wrap their head around. Yet, Ventura County Public Health documents suggest that inspections conducted by public health officials showed sanitation violations, pest control problems and maintenance issues, including employees handling foods who did not have proper food handler certification documents required by the state. Ventura County Environmental Health Division, stated that Chipotle failed to notify the county of the outbreak in a timely manner (Brunker). Serving subpoenas associated with food public health issues is an unusual move on the part of the Feds.
Chipotle states that as a result of not being able to identify the exact culprit, they have examined every aspect of their ingredient usage practices and have developed an intensive food safety plan, in an effort to become a leader in food safety in the industry (Victor).
Chipotle investor reaction to E. coli nightmare
In addition to customers running from the restaurants, investors have been fleeing as well (Divine). Foursquare, a social media discovery app, that allows its members to share things they like to do and places they like to eat, is disclosing that Chipotle is suffering and cannot stop the bleeding. The company has over 50 million members and based on what its members are saying, people do not want to go back to Chipotle any time soon.
While Foursquare is not an official investor tool, because of the extent of its intelligent aggregate information, the company is able to disclose what people like and what they do not like (Divine). Adding insult to injury, in what could be called a social media virtual backslap to the business, Foursquare states that former Chipotle lovers are now flocking to McDonald’s, its former parent company, and Starbucks, instead. As well, these former patrons are likely to not come back, particularly in view of the fact that Chipotle has been unable to identify the specifics of the STEC O26 problem.
As it stands, the E. coli could be resident in anything (Divine). Investment pundits suspect that Chipotle’s Wall Street recovery will remind music aficionados of the Beatle’s oldie, The Long and Winding Road. Chipotle stock, trading as CMG, is down 41% from its position in the beginning of August 2015 (Gandel). Compared to Starbucks, with a gross profit margin (GPM) of 60%, Chipotle’s GPM is at 25%. In view of the fact that the company will need to institute extensive food safety programs in the near term, expenses are bound to increase, and profits are likely to plunge even more. The company has indicated that their safety issues have cost at least $15 million to date, and they have cut their earnings prognostications for the fourth quarter by 33 1/3% (Gandel). The company has already experienced a loss of approximately $6 billion in market value (Swamynathan & Baertlein).
In a recent letter, CtW Investment Group (CtW), affiliated with 55,000 shares of CMG, asked shareholders to refrain from supporting two directors facing re-election at the company’s annual meeting in May, citing the need for new blood (Steele):
The last three quarters’ onslaught of negative headlines, a federal criminal investigation and a nearly 40% share price collapse since October has reminded us that balanced leadership and independent board oversight are critical to sustainable, long-term value creation (Steele).
The shareholder group is asking for more diversity on the board, despite the fact that one of the board members they are rejecting is a woman, citing her presence as merely a modicum of diversity. CtW, affiliated with union-sponsored pension funds, holds 77% of Chipotle’s shares, with about 29.6 million shares outstanding (Steele). The majority investment group led a revolt against executive pay increases for Chipotle’s top brass in 2014, who together received a compensation package of close to $50 million the previous year. Such a rebuke could act as a bellwether indicating shareholder unrest, and could serve to inspire action on the part of disenchanted activist investors (Steele).
Chipotle safety reaction to E. coli nightmare
In a rush to address safety first, a Chipotle Mexican Grill in Billerica, Massachusetts, shut its doors immediately on March 8th, when employees reported feeling ill (Izadi). Billerica Board of Health reported that one of the employees tested positive for norovirus. The other employees will be tested. When four employees reported not feeling well (they did not show up to work) Chipotle immediately shut its doors. The store was sanitized and local inspectors gave the store a perfect grade indicating that the store was clean, consistent with the score it had received earlier the previous week. No customers reported illnesses (Izadi).
It looks like the newly initiated safety program, which employees attended in February, at least prevented employees from coming to work while feeling sick, and caused management to communicate with the health department and engage in facility sanitization practices immediately. The norovirus infection is not unique to Chipotle Mexican Grill, in fact most infectious outbreaks in the United States are caused by the foodborne disease, according to the Centers for Disease Control and Prevention. Norovirus is extremely contagious and under a thousand individuals die from the virus in the U. S. every year (Izadi).
Chipotle free burrito campaign
In attempt to change the winds of time, Chipotle has engaged in a free burrito campaign (The Associated Press). This advertising technique, an effort to turn around sales, prove that their food is fresh and safe, and get people back into their restaurants, will take place through the use of mobile offers and coupons. The company expects to give away over 20 million burritos in what it hopes will change the direction of its circumstances.
Customers are not visiting the restaurant in some areas, and stores have reported having no one in line at all, an abrupt change from a company that had long lines with patrons eagerly seeking their favorite Mexican fare (The Associated Press). In February, the free burrito promotion saw 2.5 million customers redeeming their free burrito coupons out of 5.3 million downloaded (Peterson). Chipotle has seen the biggest traffic drop in both the East and West coast. If the coupon promotion does not work, this could prove difficult for the company since the restaurants on both coasts boast the most expensive rents, as compared to their more central locations.
The company is planning to offer BOGO promotions (buy one, get one free) during the summer, in an ongoing effort to win back their customers or, if not, to at least create new ones (Peterson). Company executives are preparing themselves for the tough road ahead, predicting that GPMs will not completely recover until 2017. Chipotle Chief Financial Officer, Jack Hartung, acknowledges it is going to be a very “messy” rest of 2016.
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Clark, Bruce. “Chipotle E. coli Outbreak Tops 60 in 14 States.” Food Poison Journal. 27 March 2016. Web. 24 April 2016. .
Divine, John. “Chipotle Mexican Grill, Inc. Customers Flee to McDonald’s, Starbucks (CMG, MCD, SBUX).” InvestorPlace. InvestorPlace Media, LLC. 14 April 2016. Web. 24 April 2016. .
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Izadi, Elahe. “Chipotle just had another food safety incident.” The Washington Post. Nash Holdings LLC. 9 March 2016. Web. 24 April 2016. .
“Multistate Outbreaks of Shiga toxin-producing Escherichia coli O26 Infections Linked to Chipotle Mexican Grill Restaurants (Final Update).” CDC. U.S. Department of Health & Human Services. 1 February 2016. Web. 24 April 2016. .
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Victor, Daniel. “Chipotle Will Close Stores for Food Safety Meetings After Outbreaks.” The New York Times. The New York Times Company. 15 January 2016. Web. 24 April 2016. .