Remember the old Peter Lynch term “diworsification”? that’s what the legendary fund manager described as actions by a company to “diversify” outside their core business to something the company thinks will improve its positioning, but in fact makes things much worse.
So it goes for Chipotle Mexican Grill, Inc. (NYSE:CMG). You see, Chipotle stock has been suffering from some of the worst food-borne illness PR I’ve seen in a long time. Chipotle stock has lost almost half of its value.
That’s the problem with high-flying restaurant stocks and why I always avoid them. Everything is fine, the stock is roaring until something happens and growth slows. Then the drop is catastrophic.
With Chipotle stock, the growth stopped because of the illness issue. People avoided the restaurant like, uh, the plague and revenues got hammered. Same-store sale declines were pushing 3,000 basis points, something I’d never seen before.
But Chipotle stock cannot seem to shake this bad news. That’s because management did not have a crisis protocol in place. They made it up on the fly, and the PR push has not helped the company.
The CMG Stock Answer
Instead, Chipotle is hoping to turn things around by launching an entirely new restaurant concept — burgers.
The new chain is called Tasty Made, and will mirror the limited menu concept that it carries its flagship chain. As management says, “We think there’s great strength in that original fast food model and wanted to create a restaurant built around that. Making only burgers, fries and shakes with really great ingredients, we think we can appeal to peoples’ timeless love of burgers, but in a way that is consistent with our long-term vision.”
No. Just … no.
The Chipotle burgers concept joins two other concepts. One is called Pizzeria Locale, which launched in 2013 and has five stores, and another called ShopHouse Southeast Asian Kitchen, which has 15.
Personally, I think all of these are terrible ideas. I get the intent — to diversify. Use the same limited menu concept, offer super fast food that is above the quality at other fast food chains.
There are two problems. First, all three of these food arenas are oversaturated. We don’t need more pizza, Asian food or burger joints. We especially don’t need more burger joints, and trying to distinguish itself from among all the other gourmet burger joints is never going to work.
The second problem is that this feels like a distraction. Maybe it is and maybe it isn’t. However, CMG has not even recovered from the E. coli crisis yet and it is putting effort into these new businesses?
CMG needs to put the health concerns to rest. It has not engaged in proper crisis management.
Bottom Line for Chipotle Stock
Were I advising them, the first thing I would do is commission a short documentary film and a couple of short animated films. They should walk consumers through every single stage of how food makes it from source to table. As part of this process, CMG should upgrade every one of those steps. “We did this, we did that, we changed the way we did X, Y, and Z. We test the food here, here, and here.” Show how this new system is state-of-the-art and how it is different from the previous process. They must tell this story! They must demonstrate to the consumer that they are on top of things.
Then they must market the heck out of this PR fix. The CEO needs to do a personal message to the American public. He has to apologize for the errors and show how the company is correcting it. He must eat at the restaurant every day and show he isn’t afraid.
That’s the tip of the iceberg. CMG also has to push back against critics.
Opening a burger shop is not going to fix anything.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of the forthcoming Liberty Portfolio, has 22 years’ worth of experience in the stock market and has written more than 1,500 articles on investing. He has no position in CMG. He can be reached at TheLibertyPortfolio@gmail.com.
