Industry News | July 25, 2017 | By Danny Klein | QSR Exclusive Brief

Chipotle Addresses Recent Food Safety Scare

Chipotle Mexican Grill
Chipotle reported another strong quarter Tuesday. Chipotle Mexican Grill
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Steve Ells cut right to the chase. While Chipotle’s second-quarter earnings came back rosy Tuesday afternoon, the fast casual’s CEO, chairman, and founder quickly addressed a rash of recent incidents that put Chipotle’s still-tender reputation under the microscope.

More than 130 customers reported falling ill from norovirus-like symptoms at a location in Sterling, Virginia, last week. This, coupled with cellphone video showing rodents falling from the ceiling in a Dallas-area restaurant, stirred up unpleasant sentiments regarding the burrito giant.

“No matter how advanced our systems are, it is not possible to completely eliminate all risk,” Ells said in a conference call Tuesday. “And, unfortunately, we had a norovirus incident in one of our restaurants in Virginia last week. Norovirus is a common and highly contagious illness affecting nearly 20 million Americans each year and is unrelated to our supply chain. … We’re disappointed that we failed to prevent it from affecting our customers and employees in our Virginia restaurant. We deeply regret that anybody became ill and would like to apologize to those who were affected.”

READ MORE: Can queso bring back Chipotle customers?

Ells then spoke about Chipotle’s quick correction of the issue, which shut down the store for two days.

“We quickly reached out to our employees and customers to provide assistance and ensure their well being. Our safety systems are designed to provide very fast detection and rigorous procedures to quickly remedy the situation. … We have isolated the failure that occurred. It was a failure in one restaurant to comply with our procedures to prevent norovirus.”

Chipotle disclosed Wednesday that it received a follow-up subpoena requesting information related to the Virginia illnesses. The chain said it didn't know whether it would incur fines or penalties related to the investigation. It also received a subpoena in 2016 in connection with a criminal investigation by the U.S. Attorney's Office for the Central District of California and the Food and Drug Administration. This latest subpoena is part of that ongoing investigation looking into the E. coli, salmonella, and norovirus outbreaks at the company's restaurants in 2015.

Ells said Chipotle believes an employee came to work sick and did not follow the protocols. "We have a zero tolerance policy for not following these protocols,” he said.
 
These facts did little to quell investor unrest, as shares slipped to a 52-week low of $336.52. Shares have since recovered but were down 1.8 percent to $342.50 in afternoon trading Wednesday.

Chipotle’s comparable restaurant sales increased 8.1 percent year-over-year, and revenue grew 17.1 percent to $1.17 billion in the second quarter.

Restaurant-level operating margin improved to 18.8 percent versus 15.5 percent a year ago. Net income increased $25.6 million to $66.7 million and diluted earnings per share were $2.32—a sizable boost from 87 cents. Chipotle opened 50 restaurants and closed two during the quarter. In the past six-month period, it has opened 107 restaurants, closed or relocated 18, and shuttered 15 ShopHouse stores.

Perhaps most notably, Chipotle didn’t lower its outlook for the year, showing confidence in its ability to weather the recent public relations storm. The chain expects comparable restaurant sales to increase in the high single digits in 2017, and to open between 195—210 restaurants.

This optimism might also have something to do with a recent headline-grabbing announcement that Chipotle was testing queso at its NEXT Kitchen in New York City. Ells said in the call that the menu item will be piloted at more than 350 restaurants—mostly in California and Colorado—in August.

Food costs represented 34.1 percent of revenue in the quarter, a decrease of 10 basis points compared to the second quarter of 2016.

Addressing a recurring issue involving avocados, the brand says, “Higher avocado costs were offset by lower costs from bringing the preparation of lettuce and bell peppers back into our restaurants, as well as the benefit of menu price increases in select restaurants in the second quarter of 2017, and a decrease in paper usage and costs.”

“We saw encouraging signs in our improved financial results during the first half of the year. Recent events, however, have shown that we still have a lot of opportunity to improve our operations and deliver the outstanding experience that our customers expect,” Ells said in a statement. “We will continue to strengthen our teams, enhance our technology, and expand our menu offerings in order to delight every customer who visits us.”

Chipotle is still climbing its way back and has now strung together consecutive positive quarters following April’s announcement that comparable restaurant sales increased 17.8 percent year-over-year in the first quarter.

It was only two years ago that an E. coli crisis reached national conscious with 42 locations in the Pacific Northwest briefly shutting down. It ended up affecting 14 states and leading to a yearlong sales downturn that erased around half of Chipotle’s market cap.

The chain has wrestled with norovirus concerns as well. An outbreak in a Boston Chipotle sickened nearly 150 customers. Same-store sales plummeted 30 percent in December and 36 percent in January following those reports.