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How Chipotle Bounced Back After Food Safety Scares - YouTube
Channel: CNBC
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In 2016, Chipotle reported that
its profits had fallen
[4]
95% after a series of
food safety issues that sickened
[8]
hundreds of people and sent
its stock price plunging.
[12]
E. coli outbreak that caused
Chipotle restaurants to shut
[15]
down. Investors aren't the only
ones steering clear of
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Chipotle. I mean, it just
keeps happening to Chipotle and
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nobody else. Even if it's not
associated with their food this
[27]
time...it's happened again.
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They've had to close the
store because customers get sick.
[32]
It had lost customers' trust
and Wall Street's adoration.
[36]
Its future was uncertain.
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Would Chipotle ever be able to
return to its high-growth days?
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But the Mexican-style food chain has
come back from the brink
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with the help of a new CEO.
[46]
Consumers are once again returning
to the place that
[49]
popularized burritos the size of a
baby and helped the avocado
[53]
become one of
America's favorite fruits.
[56]
Analysts say that its food safety
woes are now firmly in the
[59]
past, and its stock hit a new
record in July 2019 and has kept
[64]
climbing, peaking at $857.90
[68]
on September 9th. Now, there's
just one question for the
[71]
chain. How can it keep
soaring and avoid another fall?
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Chipotle was never supposed
to take off.
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Its founder, Steve Ells, only
started the restaurant to make
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some quick cash to pay
for his real passion
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project...launching his very own
fine dining restaurant.
[94]
Ells got the idea for Chipotle
from his time in San Francisco,
[97]
where he was working as a
line cook for celebrity chef
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Jeremiah Tower.
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The Mission District in the California
city is known for its
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taquerias. That's also where the
Mission burrito was invented.
[108]
The burrito is oversized, stuffed
with rice and other
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ingredients, and wrapped
in foil.
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Sound familiar? With a loan from
his dad, Ells moved to
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Colorado and opened the first
Chipotle Mexican Grill near the
[120]
University of Denver
campus in 1993.
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I think one of the most
amazing things about Chipotle is that
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the stores today don't look
that different from the original
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location by the
University of Denver.
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Really, the structure is very
much the same, customized,
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assembly line process, very
simple but aesthetically pleasing
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locations.
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Chipotle's now quintessential minimalist
layout wasn't a
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deliberate design decision.
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It came from a
need to be cheap.
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In that very first Chipotle, the
table bases were pipes and
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the counter where you paid
was made from barn metal.
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Ells kept the menu and
operations simple because Chipotle was
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still his backup plan.
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Chipotle
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became profitable within a few months
and Ells was able to
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quickly repay his
father's loan.
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A year and a half after
opening his first restaurant, Ells
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opened a second, then
a third in 1996.
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In the early days, your options
for Mexican food were so
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limited and so to see this
assembly line burrito company come
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up and out of nowhere.
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Yeah, it was amazing how quickly
word spread among the Denver
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market and how quickly this
company really rose to prominence,
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at least in Denver
during the mid-nineties.
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He kept going with additional funding
from his dad and small
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business loans. Then he got a
little help from a name you
[197]
might recognize: McDonalds.
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Under the leadership of longtime
CEO Mike Quinlan, the fast
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food giant started investing in
Chipotle in February 1998.
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Three years later, it
was Chipotle's majority stakeholder.
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The investment helped McDonald's branch
out of burgers and
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diversify its business.
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It also helped the fast-food
chain compete directly with a
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rival on the rise:
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Taco Bell. The money from
McDonald's helped Chipotle expand
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across the United States.
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Most restaurant chains, including
McDonald's, turn to
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franchising for quick
and widespread growth.
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But Chipotle didn't want to.
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Handing over the operations of
its restaurants would have also
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mean handing over some
of its profits.
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Ultimately, pressure from McDonald's
led Chipotle to franchise
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a few restaurants to several
McDonald's franchisees at the end
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of 2002.
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In January 2006, the
burrito maker went public.
[252]
Chipotle's IPO gave McDonald's the
opportunity to refocus on
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its core brand at the time.
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McDonald's was in the middle of
a turnaround after years of
[261]
turbulence that started soon after
it initially invested in
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Chipotle. After the IPO, McDonald's
started selling off its 91
[270]
% stake in Chipotle.
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By the end of 2006, it no
longer owned a piece of Chipotle.
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Just 8 months after McDonald's sold
its stake in Chipotle, the
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burrito chain killed the franchise
model and took back control
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of all restaurants.
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The investment had paid
off for McDonald's.
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Investors loved Chipotle.
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And the economy was booming.
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By 2007, its annual sales were
more than a billion dollars.
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Then the recession hit.
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Like most restaurants,
Chipotle felt it.
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In 2009, it held the second
largest market share, 11% of the
[306]
entire Latin American limited
service restaurant industry,
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according to Euromonitor.
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Yet the company had its slowest
year ever of same store sales
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growth that year, and
its stock tumbled.
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In 2009, Chipotle decided that
it needed a change.
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Besides building the company, Ells
didn't have any business
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experience. The company promoted
Monty Moran, its chief
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operating officer, to serve
as co-CEO alongside Ells.
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Obviously Steve was the visionary for
Chipotle and had a very
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much a culinary background.
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But I think Monty brought
more of a traditional restaurant,
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you know, background
to the equation.
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And sometimes with the right
mix of personalities, you
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can make a co-CEO model work.
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Chipotle started thinking up other
restaurant concepts with a
[353]
similar set-up. It created
ShopHouse, an Asian-inspired chain.
[353]
Soon after followed Pizzeria
Locale and Tasty Made.
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If those names sound unfamiliar,
it's for a good reason.
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Chipotle has since abandoned them
after they failed to catch
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on. It came down to
just competition and lack
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of simplicity and lack of brand
messaging when it came to
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ShopHouse. Even when experimenting
with offshoots, Chipotle
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didn't abandon its
core business.
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Between 2009 and 2015, the
company more than doubled its
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global total store count.
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New stores meant new customers.
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Unlike Taco Bell or McDonald's,
Chipotle wasn't relying on
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value meals or limited time
offers to get them.
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Instead, Chipotle rolled out a series
of ads in 2012 and 2013
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about how its sources ingredients
from sustainable farms, an
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initiative it started in 2001.
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Investors cheered for Chipotle's expansion
and the stock, hit
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$758 .61
[419]
a share in August 2015.
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But it would be years before
it soared that high again.
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In October 2015, food safety
officials linked Chipotle to an
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E. coli outbreak that sickened
people across 11 states.
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It was not Chipotle's first
brush with foodborne illness.
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Earlier in 2015, the chain
had already been linked to
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norovirus and
salmonella incidents.
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But it caught
the public's attention.
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22 customers were hospitalized.
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The Centers for Disease Control
traced 60 cases of E.
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coli infection back
to Chipotle.
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In December, Boston health officials
linked an area Chipotle's
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to another foodborne
illness outbreak.
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At least 80 people had
symptoms consistent with norovirus.
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It started to seem like every
time Chipotle reopened a store
[468]
after a food poisoning incident, it
had to close another one.
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Chipotle
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co-CEO Ells apologized on The
Today Show, but that wasn't
[478]
enough. Sales at Chipotle locations
opened at least a year,
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plunged. So did
its stock price.
[485]
For the next few years, Chipotle
shares were worth only a
[488]
little more than half of
its all time high.
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But more importantly, the
incidents damaged Chipotle's
[494]
reputation with customers.
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The company had long boasted
about the quality of its
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ingredients. Its meat was
raised without antibiotics, its
[502]
produce was locally
grown and organic.
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Chipotle called this policy
"food with integrity."
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It had been part of its
advertising and marketing for years.
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Chipotle
[513]
sprung into action.
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It changed its food safety
protocols, it altered its sick
[518]
leave policy for employees, and it
gave away many, many free
[523]
burritos. Still, despite its
best efforts, revenue for
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2016 declined by 13%.
[530]
Same-store sales plunged
by 20 %.
[534]
Amid Chipotle's troubles, Pershing
Square Capital Management,
[538]
a hedge fund managed by investor
Bill Ackman, took a 9.9
[542]
% stake in the company.
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In September 2016, the news
lifted the stock temporarily.
[548]
Ackman is known for building a
stake in a company and
[551]
instigating changes that will boost
the company's stock price.
[554]
Ultimately, in December 2016, Ackman was
able to make a deal
[558]
with Chipotle's management to name
two directors to the board.
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Chipotle's hand-picked an
additional two independent
[564]
directors. Just two days before
the board changes, Moran had
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stepped down as co-CEO
and left the board.
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Chipotle's founder was now the
only one steering the ship.
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He was too much at the center
of everything, whether or not it
[578]
was strategic positioning, operational
decisions, media and
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industrial relations. He was trying to
cover it all instead of
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bringing in delegated expert talent
that you should start to
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have in the later life stages
of a business. That's a problem
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we've seen a lot with Travis
Kalanick or maybe Elon Musk.
[600]
The company debuted an ad campaign
and rolled out two menu
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additions, chorizo and queso.
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It was hoping to find its
footing again when there was another
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food safety issue.
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In July 2017, a Sterling, Virginia
location was tied to an
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outbreak of norovirus.
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In November 2017, nearly a year
after Ells became the chain's
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sole chief executive,
he stepped down.
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And Chipotle started looking
for its next CEO.
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In this case, at least, the board
took the time to try to find
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somebody. Enter Brian Niccol
in March 2018.
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Before Chipotle, Niccol was chief
executive of a rival
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Mexican-food chain: Taco Bell.
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At Taco Bell, he introduced
popular limited-time offers like
[646]
Nacho Fries, as well
as Taco Bell breakfast.
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Niccol also pushed Taco Bell
into the digital age.
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As this company matures, it was
always going to look a lot
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more like a traditional
quick service restaurant company.
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And that's why I think
that's somebody with that background
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like Brian certainly helped to
breathe new life into the
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company. While Chipotle poses a
threat to Taco Bell, the
[669]
inverse is not
necessarily true.
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Fast-casual chains like Chipotle
appeal to more
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health-conscious consumers who have a
little extra cash to
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burn. The fast-casual segment of
the restaurant industry is
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growing the fastest.
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On the other hand, fast-food
chains, such as McDonald's, are
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largely using price hikes
to boost sales.
[688]
And Chipotle was now betting that
Niccol could do the same for
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them. Nicole's primary mission was
to bring back customers who
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left during the
foodborne illness scares.
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So far, Niccol has taken
some tried-and-true methods from his
[701]
Taco Bell playbook to
make that happen.
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He even moved Chipotle's headquarters
from chilly Denver to
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sunny Southern California, right in
the backyard of Taco
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Bell's own HQ.
[712]
Chipotle
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has also recruited several
executives with Taco Bell
[716]
experience, like its chief marketing
officer and the head of
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its digital marketing.
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Brian is one of the most
talented people I've ever worked
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with. We have a good rapport.
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We were friends even outside of
work, and so having the chance
[728]
to work with him again was a
great opportunity and being on a
[732]
great brand like Chipotle, that
opportunity was hard to pass
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up. But Chipotle is still a
different company from Taco Bell.
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I think people associate Taco
Bell and Chipotle as they're
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both Mexican, but that's a lot
of where the similarities end.
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I think Chipotle is much more of
a food brand, Taco Bell was
[751]
much more entertainment. I mean, we
had to come out with
[753]
something every four to six weeks
and Chipotle isn't that way.
[757]
Niccol has also leaned into
the food delivery boom.
[760]
Chipotle struck a deal
with third-party delivery service
[763]
DoorDash. We're lucky
at Chipotle.
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We have a very young consumer
base, and that is, frankly, how
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they want to consume food.
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What we've been surprised with on
delivery is how many new
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customers have really come to
Chipotle just for delivery.
[777]
And in March 2019, the
burrito chain launched a loyalty
[780]
program. For every $125 customer
spend, they earn a free
[785]
entree. Within four months, it
grew to five million members.
[790]
The loyalty program also drives
customers to Chipotle's app.
[793]
That lets the company learn more
about them and cater its
[796]
strategy to what
its patrons want.
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Niccol has also tried to
improve the experience for digital
[801]
customers. Stores have been adding
second assembly lines for
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digital orders, online order
pick-up shelves, and Chipot-lane
[809]
drive thrus for digital orders.
[812]
These additions are meant
to bring Chipotle's trademark
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efficiency to
off-premise dining.
[817]
These investments have helped
to grow Chipotle's digital
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sales. In its second quarter
of 2019, digital sales nearly
[824]
doubled. They made up 18% of
total sales in the quarter under
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Niccol. Chipotle has also been
testing new food items to
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expand its limited menu.
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Fast-food chains like Taco Bell
regularly roll out new limited
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time items to drive traffic.
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As chief marketing officer and
then chief executive of Taco
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Bell, Nicole regularly oversaw the
creation of new menu items.
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But Chipotle is different.
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Before Nicole, it rarely made
additions to its menu.
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Customers could return and order
their usual without thinking
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twice. But now Chipotle wants you
to think about changing up
[858]
your order. We're not going to
be launching, you know, five
[861]
products a year or six products
a year, but we will sprinkle
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things in to bring news, to
bring interest, and to just kind
[866]
of freshen up things. But we
have no intention of really
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expanding our menu in
any big way.
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The chain launched carne asada,
another steak protein option,
[875]
in September 2019 for
a limited time.
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It's the chain's first new
protein in three years.
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It also happens to cost 50
cents more than steak, its most
[884]
expensive protein. And it's working
on a replacement for its
[887]
queso, which launched in
2017 to tepid reviews.
[890]
Even after tweaking the recipe,
it still wasn't a hit.
[894]
The chain began testing a Queso
Blanco in several markets in
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July. It's expected to launch
the cheese dip nationwide in
[901]
2020. Nichols initiatives are
paying off for Chipotle.
[905]
Despite a foodborne illness incident
in Ohio in 2018 that
[909]
sickened hundreds, the company finished
the year up 49
[913]
percent, making it one of
2018's top performing stock.
[918]
Chipotle's market share in
the Latin-American limited service
[921]
restaurant industry also
grew to 22.4%
[924]
in 2018, according
to Euromonitor.
[927]
It remained in second place, but
it managed to steal share
[930]
from other chains and
independently owned restaurants.
[933]
Redemption came in July 2019 when
the stock hit an all time
[937]
high, surpassing the record it
set way back in 2015.
[941]
The stock went on to climb
even higher, but as October 2019
[944]
started, shares were up a whopping
88 % over the past 10
[949]
months. But so much love
from investors puts even more
[952]
pressure on Chipotle.
[954]
With a single share of Chipotle
worth more than $800, the
[958]
company has to answer one question:
where does its stock go
[962]
from here? Compared to the
stocks of other restaurant
[962]
companies -- like McDonald’s, Starbucks
and Yum Brands --
[962]
shares of Chipotle are pricey. In
October 2019, Chipotle had a
[962]
forward price-to-earnings ratio of 46.
Starbucks had the next
[962]
highest price-to-earnings ratio of
27. Chipotle has nearly
[962]
2,500 locations in the U.S.
[985]
It thinks it can add even more.
[987]
The company also has a
limited international footprint, with
[987]
only 39 stores open outside of
the U.S. Niccol told analysts
[987]
on Chipotle's third-quarter conference
call that the company
[987]
could accelerate expansion in
Canada, if that business
[987]
improves. Outside of North
America, however, expansion will
[987]
likely be slower. Niccol said that
Chipotle is "in the earlier
[987]
innings" in Europe. As for
stores that already exist, its
[987]
focus is on digital and
delivery to drive sales growth.
[987]
According to Deloitte, customers tend
to spend 20% more on
[987]
online orders. Now all Chipotle has
to do is live up to
[987]
investors’ high expectations.
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