Here’s How Chipotle Is Strengthening Its Food Safety Program

Reports suggest that Chipotle Mexican Grill (NYSE: CMG) has hired David Acheson and David Theno as food safety consultants in an attempt to ensure that the food virus outbreaks which the company faced last year do not recur. These events, which recurred at locations across the country, led to a significant decline in its sales. David Then is a well-respected food safety consultant, who previously worked with Jack In the Box and fixed similar e-coli outbreaks in the 1990s. David Acheson was previously an official with the U.S. Food and Drug Administration and the U.S. Department of Agriculture. Earlier this year, the company had hired James Marsden, a former meat science professor at Kansas State University, and entrusted him with the primary responsibility of its food safety programs. Chipotle’s sales and consequently its valuation were significantly impacted after the e-coli outbreak last year. Assuring consumers ofor these roles should accelerate the company’s efforts in this regard.

See Our Complete Analysis For Chipotle Mexican Grill

High Food Safety Standards Critical To Win Back Customers

With the repeated outbreak of the e-coli and nanovirus contamination, Chipotle has suffered a significant decline in revenues and net income. In Q1 2016 the company witnessed a nearly 25% decline in revenues year on year and reported a net loss of $ 26.4 million, primarily due to an increase in food costs and decline in operating leverage with falling revenues.  (Read Chipotle Mexican Grill Struggles in Q1 FY’16 As Last Year’s E.coli Controversy Impacts Comparable Sales.)  The company is now working on several initiatives to win back customers such as promotional programs and incentives and highlighting the company’s high quality ingredients and friendly service. While the pace of recovery is slow, the company believes that its long term strategic initiatives, including hiring senior food safety consultants, will accelerate sales recovery. After these outbreaks, Chipotle took several steps, such as systematic evaluation of each ingredient and implementation of interventions, to make it safer. The company changed some of its suppliers and invested in providing education, training and financial assistance to help small farmers meet its new food safety requirements.

We estimate the average consumer spend per visit in Chipotle’s restaurants to improve slightly from $ 11.70 in 2016 to around $ 12.10 in 2017 and remain steady thereafter till the end of our forecast period.

However, if the company’s  is able to generate higher spending through its initiatives and the average spend increases to $ 13.00 by the end  of our forecast period, there can be a nearly 10% upside to our price estimate.

Chipotle is taking several steps to focus on its food safety standards and win back customers. The chain suffered  huge damage to its reputation and a sales recovery has been extremely slow.  Still, these efforts should bear fruit in the long term. In 1993, the fast food restaurant Jack In The Box had a major E.coli outbreak in which four children died.  In the quarter following this crisis, comparable sales declined 22%  and 9% year to year in each of the next two quarters. However, in the fiscal year 1994, Jack In The Box posted a full year comp increase of 2.4%. Chipotle hopes Jack In The Box’s David Then to pull a similar recovery for the company.  Still, it might take take longer for Chipotle recover in the world of social media where news travels faster and several other fast food alternatives are available. That said, we believe the company management is focused on winning customers back and the results will be visible over the longer term.

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