Supply Chain Matters features an update commentary regarding Chipotle Mexican Grill, specifically ongoing efforts to address a food-safety challenge that not only threatens the restaurant chain’s value to its brand and to its investors, but on perceived quality risks in its farm to fork supply chain.  Chipotle logo

In our February commentary, we observed that the restaurant chain had entered a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices are re-addressed from farm to fork. We opined that the quality and safe food perception crisis remains ongoing and that Chipotle must now convince it’s once loyal customers that it serves safe food with integrity.

Current developments put a different twist to the crisis. This week, The Wall Street Journal citing informed sources, reported that the restaurant chain is considering 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 is apparently to test only certain foods, according to this report. The chain’s beef supplies are now being pre-cooked in centralized kitchen facilities to insure that E.coli is eliminated, and then packaged in vacuum-sealed bags shipped to local outlets where the product is then marinated and grilled. The firm’s website indicates that local outlet workers are to marinate beef and chicken in sealed bags after restaurants are closed to avoid possible contamination with any food prepared during the day.

Supply Chain Matters can speculate that the decision to scale back DNA testing may have been brought about by further process and supply chain focused analysis.  Yet, this week, the restaurant chain further announced the hiring of a noted meat industry food safety expert to be its new director of overall food safety.  We can only question whether such decisions for scaling back testing should have been made so early in the process of restoring consumer confidence. After all, this is an ongoing crisis of perceived trust in the overall safety as well as quality of food served.

On the financial front, the restaurant chain warned this week that it would likely book its first quarterly loss as a public company with sales at existing outlets dropping slightly over 26 percent last month. This sales drop came while the chain was offering a wide-scale free burrito promotion to lure customers back to Chipotle. According to business media reports, many equity analysts are now scaling back 2016 and 2017 earnings estimates for the firm, signaling a prolonged process of restoring sales and profit growth.

Another concerning development was a recent securities filing indicating that senior executive future compensation plans would be directly tied to share price performance, specifically a stock price of above $700 for 30 consecutive days in order to trigger additional stock awards.  We cite a specific paragraph in the firm’s Schedule 14A SEC filing:

“In light of the challenges we faced during the second half of 2015 and the resulting decline in the price of our common stock, in February 2016 the Compensation Committee of the Board awarded performance shares to our executive officers that will be tied solely to highly challenging absolute stock price performance goals over a three-year performance period. We believe this will align executive officer compensation with restoring and further enhancing shareholder value.”

As we pen this commentary, the chain’s stock price closed slightly over $485 which implies that the stock has to rise by approximately 44 percent over the next three years to trigger executive stock awards.

Further, according to a prior WSJ report, the firm’s two co-CEO’s have already felt the implication of the incurred brand crisis with total compensation having declined by more than 50 percent with no bonuses being rewarded.  However, according to the report, the base salaries of both executives increased by roughly $100,000 in 2015.

Supply Chain Matters reviewed the Compensation Plan outlined in the latest Schedule 14A security filing and could not find any specific indication of other operational metrics tied to executive compensation, other than stock performance.  We noticed a response to a recurring shareholder proposal calling for additional measures related to the firm’s sustainability and food with integrity metrics with a Compensation Committee response indicating that such an effort would involve too much time and expense and a diversion of management resources.

At face value, we find the revised executive compensation plan troubling in its sole emphasis on stock performance without any indication of cited metrics related to either customer value or the firm’s food with integrity core mission.  Then again, this seems to be evidence of the continued over emphasis on stock and shareholder value that is apparent in so many industry settings today, an emphasis whose impact cascades down and up respective industry supply chains.

Our belief remains that restoring consumer trust in a badly damaged brand is not a one-time marketing challenge, but rather a systemic management challenge to address quality and food safety practices among all farm to fork processes and activities. These latest developments related to early scale-back in testing efforts coupled with revised executive compensation plans tied directly to stock price performance reinforce the perception that the sole mission is one of accelerated growth.

Bob Ferrari

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