This Supply Chain Matters posting serves as another update on our now streaming commentaries related to the ongoing business and supply chain challenges involving Chipotle Mexican Grill. Specifically, we refer to the past series of food related illnesses including E-coli, salmonella, and norovirus that date back to 2015. This week there has been a new development, one that makes us wonder aloud if senior management really grasps the extent of the chain’s continuing challenges. 
Our last update commentary in late October reflected on the restaurant chain’s September-ending financial performance. Management appeared to reflect an upbeat perspective and announced several new initiatives directed at broadening menu options and fulfilling online orders including mobile ordering technology, along with consideration for airing more television commercials. To further efforts in improving food safety in restaurants and the supply chain, the chain’s CFO pointed to an establishing an independent Food Safety Advisory Council made up of some of the country’s foremost experts in food safety and food microbiology. There were indications that the chain was expanding regional executive leadership to help improve staff training and the individual guest experience. Our take was one that management may now have grasped that you do not manage a brand crisis solely via sales and marketing tactics to bring previous loyal patrons back. The elephant in the room has been consumer perceptions of ongoing food safety and whether this chain had taken all necessary measures to ensure that the series of incidents that occurred in 2015 would not be repeated, at least by controlled, network-wide management and quality focused practices.
This week, investors once again punished Chipotle stock after the firm’s co-CEO Steve Ells indicated at an investor’s conference that he was not at all satisfied with the rate of recovery and specifically: “I’m particularly not satisfied with the quality of the experience in some of our restaurants.” At face value, that might have been a positive statement by a senior leader in the early stages of addressing a quality crisis.
Mr. Ells apparently went on to declare that slow customer service threatens to turn off people if they come back to restaurants and that the current service experience is not perfect. In its reporting, The Wall Street Journal pointed out that employee turnover rates among Chipotle outlets, according to the firm’s CFO, was averaging 130 percent in July. An equity analyst was quoted as noting that workers were leaving for higher wage rates at other establishments.
In somewhat of a conflicting goal situation, declining sales, volumes and ultimately margins take away from the ability to pay higher wages and demand higher standards in food preparation and service. Now this week, a chain-wide hiring freeze has been imposed.
In one of our earlier Chipotle focused commentaries, we noted that a review of SEC documents indicated that compensation bonus performance payouts for the firm’s executives were solely based on meeting future higher stock price milestones. We questioned why operational performance milestones related to quality and service did not appear to be weighted as high. A few weeks ago, business media reported that a small group of activist investors were now pressuring management for change in board leadership and for greater value for the company’s stock.
Thus, the management vice impacting Chipotle tightens. Sales and stock growth comes from increased consumer loyalty, based on a fundamental tenant that the quality of the food and the overall experience is suburb. Restoring integrity in the quality and safety of food requires certain investment and remediation, and more importantly, continued training, audits, oversight and periodic testing.
Efforts directed at improved employee training and higher consciousness towards food safety likely has been for naught when high numbers of recently trained employees up and leave. The same holds true for local management. The long-term efforts of the Food Safety Advisory Council are now pressured by senior leadership concerns related to slower service. It could be that slower service comes from understaffed and under-compensated employees.
There are obviously many take-away learnings that can be derived from what is occurring at Chipotle but the chapters are still ongoing.
The questions raised are what comes next?
Bob Ferrari
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Hello Everyone,
In my above Supply Chain Matters update involving the Chipotle Mexican Grill restaurant chain, we closed with posing the question of what comes next. We now know what that could potentially mean.
Earlier this week, the chain announced the resignation of Co-CEO Monty Moran which in-effect abandons its dual CEO leadership structure. Mr. Moran joined Chipotle in 2005 and became co-CEO in 2009. He was a high school friend of the chain’s founder Steve Ells.
Ells will now assume sole leadership of the chain, which probably explains his direct public comments questioning current progress toward stated sales objectives and winning back previous loyal visitors. One could argue that Ells threw his high school buddy under the bus, or perhaps that Moran had taken the sword for current laggard sales and profitability performance.
In its reporting, The Wall Street Journal observed that each of the co-CEO’s had total compensation levels averaging $13 million and investors were questioning whether too much was being spent on executive compensation vs. added investments in the business.
According to published reports, other changes are expected at the board level as activist investor William Ackman, who’s Pershing Square Capital Management fund has amassed a nearly 10 percent ownership of Chipotle shares, continues to call for a refreshment of its board level leadership.
For his part, Ells seems to be communicating once again on a focus toward simplifying restaurant operations.
What that may mean for previous efforts to augment food safety practices at the local restaurant level, and to support additional staff to manage food safety practices and training remains an open question.
Bob Ferrari