Martyn Jones

Chipotle: an investment standoff

Martyn Jones

This article was first published by Alliance Trust Investments on 13 May 2016.

Investment analyst Martyn Jones outlines the investment case for Mexican fast food chain Chipotle, considering whether the firm can regain the trust of its customers following a recent E-Coli outbreak.

Chipotle Mexican Grill is a fast food restaurant based in the United States and is a holding within our global funds. Chipotle’s offering is differentiated from its competitors as it claims to sell 'fast food with integrity’. Essentially, this means fast food that is made with fresh local produce, prepared on site and with a focus on natural and organic ingredients.

In our previous hub article “Changing Diets” we highlighted the growth rate of natural foods. This was in reference to packaged products sold by food retailers; however this shift in eating habits also extends into the hospitality industry as people are choosing to eat more natural food when eating out, as well as at home. This shift in sentiment is demonstrated by a current campaign against the excessive use of antibiotics in livestock in the US, and the associated move by companies such as Subway, which is setting a deadline of 2025 to offer antibiotic-free meat across its menu.

We see Chipotle as being well ahead of the curve and its unique offering has resonated with consumers. The company has had fantastic success in establishing new restaurants throughout the US, driving footfall in stores and delivering growth that was the envy of the industry.

So all good?

Well, no. Last November there were two outbreaks of E.Coli at a number of Chipotle restaurants. In the initial, larger outbreak, 55 people from 11 states were infected. Later that month there was a second smaller outbreak, where five people were infected with a different strain of the infection. In total 22 people were hospitalised in the two incidents, making this a very serious and systemic incident for the company.

The epidemiologic evidence collected during the US Centre for Disease Prevention investigation suggested that a common meal item or ingredient served at Chipotle Mexican Grill restaurants was a likely source of both outbreaks. However, the investigation did not identify a specific food or ingredient linked to the infections.

People infected with the outbreak strain of E. coli O26, by state of residence, as of January 27, 2016

Source: Centers for Disease Control and Prevention, 2016

The company took immediate action, initially shutting 43 restaurants linked to the outbreaks. The management team have since completely overhauled the company's food safety policies, including the following actions;

• Changing food preparation procedures, including blanching a number of key ingredients, marinating meat at night (reducing potential for contamination with other ingredients)

• Expanding high resolution testing of key ingredients

• Working with two renowned food safety scientists to assess all of its food safety programs from the farms that provide its food to its restaurants

As a consequence of Chipotle’s focus on local produce sourcing, it has a complex supply chain that makes it more difficult to narrow down the source of an infection or disease. That said, Chipotle has now put in place some of the most rigorous food safety procedures that has been praised by many public health experts.

After the first outbreak we stood firm on our investment in the company. However, as the seriousness of the incident escalated with the second more systemic outbreak, we took the decision to reduce our position so we could better understand the steps the company was taking to rectify the situation.

Traffic through Chipotle restaurants has fallen dramatically since the incident, but we are encouraged by the food safety measures the company has taken. We are now in the process of re-evaluating the long term prospects of the company, with a decision ultimately hinging on whether we believe the brand can regain the trust of its customers.


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Thursday, May 12, 2016, 11:00 PM