Supply Chain Matters provides an update on the ongoing brand and supply chain related challenges that have impacted Chipotle Mexican Grill, specifically a past series of food related illnesses including E-coli and salmonella tied to the chain. Subsequent government investigations could not determine any specific causes of prior multiple outbreaks, which presented a challenge in-itself. Last week, Chipotle reported its latest quarterly financial results and there remains evidence that consumers seek more definitive evidence of food safety responsiveness before they return. 
In a previous February commentary, we observed that the restaurant chain had entered what we believed was a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices were re-addressed across the supply chain and within its individual restaurants. In a mid-March commentary, we highlighted reports that seemed to put a different twist to the ongoing crisis. At the time, The Wall Street Journal citing informed sources reported that the restaurant chain considered stepping back from the food safety changes touted back in February. Rather than conduct high-resolution DNA testing on a multiple of inbound supply ingredients, the plan was apparently to test only certain foods. Further reported was that the chain’s beef and produce supplies would be pre-cooked in centralized kitchen facilities to insure that E.coli was eliminated, and then packaged in vacuum-sealed bags and shipped to local outlets where the product could be marinated and grilled. That decision was apparently subsequently changed. In April, we highlighted the financial impacts of the ongoing crisis affecting bottom line results and management attention.
At the core of this ongoing crisis is the time-tested tenet that consumer trust is hard won, and hard to get back when consumers believe that trust has been violated. If there is any question of a lack of food safety practices at any point along the food supply chain, efforts need to be re-doubled to explore and address any and all such issues.
Readers may have sensed frustration in that our perception was the Chipotle senior management was placing too much emphasis in addressing the ongoing crisis as that of a sales and marketing challenge, one of providing consumers economic incentives to return, while taking what we perceived as a more lean expense towards food safety integrity across the supply chain. The chain embarked on new loyalty and incentive programs offering free burritos and chips to lure back previous customers.
Last week, the “food with integrity” chain reported its latest quarterly financial performance for the June-ending quarter that mostly invoked mixed Wall Street expectations. Although the restaurant chain has returned to some profitability, it has not managed to recover a significant portion of its prior loyal customers. Same store sales were reported as down 24 percent. According to a report published by The Wall Street Journal, equity analyst firm JP Morgan cited a recent survey indicating that about 25 percent of the chain’s customers have stopped visiting, or are not visiting as frequently. These same analysts, according to this report, now indicate that a full recovery for Chipotle could take years.
Further disclosed was that full testing for any food pathogens in central kitchens, such as bell peppers, was changed because doing so resulted in lower perceived quality from restaurant patrons. The new food safety expert brought in to address food safety needs has reportedly developed other interventions to identify and eliminate pathogens such as now blanching bell peppers and lettuce at the local restaurant.
For the current year thus far, the decline in the value of the restaurant chain stock is approaching 40 percent. Last week executives indicated that upwards of 30 percent of transactions are now tied to the new customer loyalty program which by our lens may be just as troubling since a new culture of visit dependence can be increasingly tied to availability of monetary promotions as opposed to prior loyalty tenets of food taste, integrity and quality of food.
Last week Chipotle executives stressed that revised marketing efforts will now shift to providing wider visibility on food safety and the chain’s supplier traceability program. We do not know how much monetary and staff resources have been allocated to marketing initiatives as contrasted with supply chain food safety. Perhaps that will be forthcoming. Suffice to state here that this may well be another case of opportunity lost.
What seems to be so prevalent in today’s food industry is this notion that consumers have short memories, and that customer retention equates to smart and innovative brand marketing. Often this is driven by Wall Street’s relentless pressures for near-term stockholder monetary rewards vs. long-term brand integrity. Call us old-fashioned, but we remain in the belief that supply chain wide quality, oversight and responsiveness to consumer needs, particularly when any of these tenets is challenged, matter much more in the allocation of management and organizational-wide attention.
As for our personal household, we remain as previous loyal customers who have suspended our visits to Chipotle pending more definite data on overall food safety and integrity. When any company turns to short-term crisis management and stock recovery vs. systemic root cause, it should be a flag of caution. Convince and prove to consumers that supply chain wide measures have been definitively addressed. While consumer tastes are certainly personal in-nature, speaking individually, this author is willing to trade-off some taste for assurances of safety and quality.
Bob Ferrari
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