Impact of Food Safety Issues on Chipotle Bigger than Expected

The impact of food safety issues on Chipotle have been much more than expected.  They estimate that 7% of customers may never return.  Then there are the "costs to address food safety, increased staffing needed to serve free food and the volume of fresh produce wasted due to lower traffic and testing were all higher than expected."  Chipotle shares are still off 28% from last year.

Wall Street Journal
http://blogs.wsj.com/cfo/2016/03/17/chipotle-food-safety-problems-may-cost-it-up-to-7-of-customers-cfo/
Chipotle Food-Safety Problems May Cost It Up To 7% of Customers: CFO
1:13 pm ET
Mar 17, 2016 
By Maxwell Murphy    

Jack Hartung, Chipotle Mexican Grill Inc. finance chief, said its recovery from food-borne illness concerns is underway, but as much as 7% of its customer base won’t ever return.

Mr. Hartung said at a conference Wednesday many other customers have told the company that they need more time before they are willing to return and the magnitude of the fallout caught him off guard.

“This is going to be messy,” Mr. Hartung said, referring to its near-term margins and earnings at the Bank of America Merrill Lynch Consumer and Retail Tech Conference. “It’s worse than I thought,” he added, because the costs to address food safety, increased staffing needed to serve free food and the volume of fresh produce wasted due to lower traffic and testing were all higher than expected.

Executives nevertheless struck an upbeat note about the costly promotions the company is using to entice diners.

Mark Crumpacker, its chief creative and development officer, said 5.3 million patrons asked for a “rain check” free burrito when it closed for lunch hours on Feb. 8 to discuss food protocols, more than double what it had expected. About two-thirds of those who signed up for the offer redeemed it, and Chipotle is considering similar future offers.

The Mexican-themed chain also will ultimately send 21 million direct mailings with offers for free food, with expiration dates up to May 15, but expects lower redemption rates because the coupons aren’t directly targeted to customers. Lastly, Chipotle launched the largest advertising campaign in its history, he said, a multi-media blitz in 31 of its top markets.

Mr. Hartung said the free offers helped buoy its recent weekly transaction counts, which are down by as much as 13% from a year earlier. Comparable-store sales are down by more than a fifth in recent weeks.

“Sales are recovering,” Mr. Hartung said. “We fully expect that, as we look back, this will look like a blip on the line.” He said the chain’s “recovery clearly started in earnest” with the rain-check offer last month.

Chipotle, in a slide deck to accompany its presentation, disclosed sales have been generally ticking up since late January, but dipped in mid-February thanks to the lunch closings and in the March 12 week because of the reports of an employee out sick with norovirus at a Boston-area store. No customers reported contracting the illness.

Mr. Hartung said number of free burritos is “going down, down, down, down,” while paid-burrito transactions are “going up, up, up.”

One analyst was more circumspect. “If they’re just giving away burritos, even if there is a sales recovery, you can’t read much into it,” said Nick Setyan, an analyst with Wedbush Securities. He said the promotion is making it difficult for investors to forecast sales volumes, thereby increasing investor uncertainty. He cautioned as well that the promotion doesn’t seem to be working very well. “Even with the free burritos, we’re not seeing much of a recovery.”

A Chipotle spokesman didn’t return phone calls seeking additional comment.

Chipotle stock has suffered under a string of foodborne-illness scares since last summer, and shares are off about 28% over the past year.

Mr. Hartung said a main goal of the promotions was to make the restaurant look busy again with its trademark long lines. “Letting our 2,000 restaurants look like Chipotle again was very, very important in this,” he said, referring to the sight of empty stores as “kind of eerie.”

-Vipal Monga contributed to this article