Just what is going on with Chipotle Mexican Grill, the 1,800-plus-outlet chain of Mexican-style food? And what might be the impact of its food-safety problems on its local-food model, along with many thousands of smaller producers of sustainable local food?
Since last summer, Chipotle been dealing with report after report of illness outbreaks at its restaurants, from around the country, affecting 500 or more people. Its financial results have taken a big hit, which has caused its stock price to decline by nearly one-third.
So, which narrative do we want to believe about Chipotle Mexican Grill, which, over its 22-year history, has been one of the fastest-growing fast-food chains in memory?
Is it just another fast-food chain that has run into the same predictable problems with pathogens from factory-produced food as other mega-corporate chains like McDonald’s and Taco Bell?
Or is it a health-and-locally-oriented producer of non-GMO food that is being singled out for blame by the U.S. Centers for Disease Control for causing dozens of illnesses from E.coli O157:H7, and a variation of that pathogen, that it may not entirely deserve?
Chipotle has distinguished itself in the brutally competitive fast-food arena—and become an investor darling in the process—by producing what it calls “food with integrity”. This is based on its narrative of providing locally-sourced meat and produce, “respecting the soil,” along with a commitment to avoid GMO foods. It’s stock has soared more than 1,000% since it went public in 2006.
It has been both praised and disparaged for its highly public focus on healthy fast food. Millions of consumers have bought into its promise of a serious healthy alternative to traditional fast food.
Skeptics have questioned just how much of Chipotle’s food is really locally produced. There has also been criticism of its widely publicized non-GMO declaration earlier this year, with critics pointing out that the company didn’t commit to feeding animals non-GMO feed.
Since the first reports of illnesses associated with Chipotle, it’s been interesting to read reports in the investment media. Much of the analysis has been concerned with just how much Chipotle’s stock price will be affected, with most speculating that the stock price will recover once it is clear Chipotle has the illness problems under control.
But as the problems have dragged on through this month, with new illnesses cropping up each time it seems the problems are over, the financial analysts who closely follow the company’s every move have expressed ever more skepticism about the company and its ability to recover the mojo that sent it soaring.
Here is how one analyst, seeing a more conventional fast-food future for Chipotle, put it a few days ago:
“Ultimately, though, Chipotle will need to step back from its ‘food with integrity’ corporate ethos and become a more traditional fast/casual chain. Foods, including all produce (not just tomatoes), spices, and meats, will need to be centrally sourced and prepared to realize the economies of scale that are necessary to profitably integrate costly periodic food testing….”
“All this downgrading from “premium fresh” will, of course, put pressure on CMG’s premium pricing strategy. A more ‘corporate’ model of Chipotle food will allow the chain to survive, but with lower margins and profits that would even further endanger Chipotle’s depressed recent stock price.”
With those reports have come suggestions that Chipotle is moving away from the local-food orientation, to more of a centralized approach typical of fast food producers. Such reports have alarmed some analysts.
One analyst expressed his worry this way: “The company claims that this will allow them to better control the handling of these vegetables, minimizing the risk of another E. coli outbreak. By saying this, Chipotle is essentially vilifying its own business model over the E. coli outbreak, when in fact it should be taking steps to fortify its business model. Yes, there are certain steps that restaurant employees can take to minimize risks, but serving locally sourced food is the best way to provide guests with fresh ingredients that are free of preservatives and contaminants. Instead of vilifying their supply process, Chipotle should argue that despite this unfortunate outbreak, its guests are significantly safer, and eating significantly healthier at Chipotle than when they visit other chains who do not focus so heavily on local sourcing.”
Gee, this line of reasoning is beginning to sound more and more similar to arguments I’ve read before on this blog. For example: “Without deflecting blame, Chipotle should be pointing out that there have been hundreds of foodborne illness outbreaks since the 1990s, and that these outbreaks have come as a direct result of the increasing industrialization of our food supply. According to the Center for Food Safety, one in six Americans get sick from foodborne contamination every year. They claim that our industrialized food system is to blame for many of the outbreaks, as contaminated runoff from large factory farms and unsanitary conditions at large processing centers pose an increased risk to the public. What is the Center for Food Safety’s recommendation to avoid contamination? They recommend buying from ‘local, small, and organic food producers whenever possible.’ “
The solution, says the analyst. Stand up and fight for what is right! “Yes, apologize to your guests and loyal followers about these unfortunate incidents, but do not add insult to injury by taking away what they have loved most about your brand. Instead, raise the bar further by taking an even larger stance against industrialized processed foods. Make a commitment to having even more ingredients sourced locally, and instead of alienating your local suppliers, help them attain the tools and technology they need to ensure their goods are safe. By doing this Chipotle will ensure that once this scandal no longer interests the media, their guests are left with food they are proud to eat, and shareholders retain the business model that has already made them a fortune, and should continue to do.”
Indeed, one analyst even said the unthinkable: that Chipotle may not be responsible for many or all of the illnesses. “Chipotle sold off heavily in October and November after about 50 people were infected with the E. coli strain 026. The majority of these (but not all of the infected) had eaten at Chipotle restaurants in the weeks before they got ill. It is not clear yet if it was indeed Chipotle’s food that made these people sick, and if it was, what kind of ingredient was responsible. The fact that the infections were spread out over several states (some of which have seen only one infected person) and that no Chipotle employees were reported as sick could mean that this was an issue which was not caused by Chipotle, but rather a pure coincidence.”
When raw milk advocates suggest mystery illnesses, they are written off as conspiracy nuts. But when investing professionals begin raising the same sorts of questions, it’s all just legitimate speculation.
Before these outbreaks, I had bought into the Chipotle narrative. I like the food, and I admit I felt good eating it, knowing it was being produced sustainably. Now,I fear that the local-food option will take a big public relations hit because of the Chipotle debacle. If Chipotle goes the sanitized-food route, it will pave the way for aggressive enforcement on small producers of the Food Safety Modernization Act, which is at long last due for FDA enforcement beginning in 2016. Because now the regulators can cite Chipotle as a reason for their concerns about the safety of locally produced food.