I’m sympathetic to Chipotle Mexican Grill, Inc. (CMG). I really am. Ditto to Chipotle stock owners, who’ve been tortured just as much as the company’s leadership has ever since its November E. coli problem turned into an outright debacle by December.
Although, it probably wasn’t management’s fault (these things are usually passed along by the vendor, and not every piece of meat or vegetable can feasibly be tested), Chipotle stock paid the price, down 25% since mid-November when the first cases started rolling in.
While operationally the company has made meaningful improvements in the way it sources its ingredients, the damage control it’s mustered on the publicity front has been ineffective at best, and arguably has done even more harm to the brand image.
How so? This week’s PR decision underscores the very thing the company would like consumers to forget. Specifically, the decision to give away as many as 21 million free burritos in an effort to win back some of its recently lost business may actually raise ire again.
The Underlying Psychology
The desire to do something, anything, to put out the fire is understandable. Thought the exact dollar amount of the adverse impact of the E. coli breakout in incalculable, we do know that sales at Chipotle stores at the height of the outbreak’s news were down on the order of 37%.
Even if only temporarily, that’s the kind of weak number that can prompt owners of Chipotle stock to put pressure on management to stop the bleeding, fast.
Thing is, just because shareholders want it doesn’t make it the right thing to do for the long haul. Like it or not, this is an ugly situation that may have been better off left to run its course.
As yours truly explained back in January, like every other corporate gaffe, the one that hit Chipotle had a two-tiered impact.
The first tier is the expected knee-jerk one — the “I won’t eat at Chipotle again until I know for sure I won’t get sick” mentality. This impasse can be, and was, resolved pretty quickly. As was noted above, its supply-chain standards were raised, and the organization closed its stores down for a few hours to facilitate in-store operation training.
The second tier of adverse impact is more troubling, though far more subtle … even subconscious. At this level, consumers associate the brand with poor quality, often without realizing they do it. This is an association that can only be broken with time, and the demonstration of quality/safety.
Timing Is Everything
The swath of free burritos is a sincere effort from Chipotle to win back customers it may have lost as of late last year. However, it may ultimately be an ill-advised one.
In the same sense the E. coli outbreak led to two layers of adverse outcomes for Chipotle, there are now two prevailing consumer views of the restaurant chain now.
One of those mindsets is favor from the crowd that assumes everything that needed to be fixed and can be fixed has been fixed, and as long as nobody’s getting sick right now, there’s no reason not to eat there.
The other mindset is a skeptical one that understands the risk of another E. coli outbreak is very low, but even so, worries that the ultimate sloppy (literally and proverbially) operation that allowed it to happen in the first place could take months if not years to resolve.
For this crowd, time — and only time — will resolve the concern, and even then mostly because consumers will eventually forget things like an E. coli outbreak altogether.
Giving away free burritos doesn’t appease the latter group of consumers; “free” doesn’t make food any safer. It also does nothing for the former group, who were willing to eat at Chipotle anyway.
If anything, the delivery of 21 million coupons for free burritos simply reminds consumers that Chipotle Mexican Grill was the centerpiece of a sizable food-poisoning mess late last year. Would-be patrons are willing to forget, and perhaps even trying to forget, but the company isn’t letting them.
In other words, the market has already punished the company — and Chipotle stock — enough. Chipotle doesn’t get any extra credit for beating itself up again or reminding consumers it made a mistake.
Sometimes you just have to take your lumps and move on.
Bottom Line for Chipotle Stock
With all of that being said, while the company has handled some things well and some things not so well in the wake of its E. coli disaster, things are not insurmountable for the company, and it’s not entirely crazy to be looking to step into Chipotle stock in the midst of the carnage. Companies have survived worse.
Just bear in mind, buying CMG now should be viewed as a very long-term commitment.
At least as long as it takes that second tranche of consumers to disassociate the brand name with food-borne illnesses.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
