Why Chipotle Needs Integrity As Operating Expenses Mount?

Nearly 10,000 workers of Chipotle Mexican Grill (NYSE: CMG)  are suing the company, for non-payment of wages for working overtime. Workers claim that this is being done by the company to meet its budget goals. Workers at the end of the day are  automatically clocked out at closing time and then required to finish cleaning and prep work for the next day, creating unpaid work time. Managers can, but often do not adjust for the overtime.  While Chipotle maintains that is has high standards of integrity towards its food and employees, a large class action against the company by former and current employees is an indication of a possibly systemic problem that Chipotle may be facing. This lawsuit reflects negatively on the company’s management, which is still dealing with the impact of the food poison instances at multiple Chipotle locations last year. While its management is working on food safety measures and promotions to bring customers back, in addition to growth strategies, addressing employee issues is critical to maintain high service standards.  Marketing initiatives and stricter food safety norms are impacting Chipotle’s operating expenses negatively.  However, wage theft allegations can dent its reputation further and affect customer service. We believe as Chipotle works towards re-establishing itself in the quick service restaurants segment, its management needs to tread cautiously and avoid any systemic issues that can impact its reputation negatively.

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Better Management Need Of The Hour

The lawsuit by its workers suggests that Chipotle’s management is unable to address systemic operational issues in the company. The company has faced such lawsuits in the past and, then as now, it has denied wrongdoings.  Yet a lawsuit with the participation of such a large number of former and current workers is troubling and leads the casual observer to question the integrity of its management. The company is already reeling under a severe impact of the e coli virus, which contaminated its food last year. Food quality concerns have impacted Chipotle’s revenues significantly and the company is working on several promotions to bring customers back to its restaurants. Recently, the company launched a September promotion where kids can eat free on Sundays with a paid adult meal. This comes after several other promotions such as free drinks for students and free burrito coupons. These measures are already negatively impacting the company’s margins. (Read How Has Negative PR Affected Chipotle’s Operating Efficiency?) Dissatisfied employees can impact customer service, leading to a reduced impact of these promotions on sales. Chipotle’s popularity and “food with integrity” tagline was a key driver of its revenue growth and sales in the past. However recent developments including the law suit by employees is indication of inability of its management to handle situations with “integrity”. We believe as the company looks to recover from the e coli scandal, a focused management team with high ethical and moral standards is critical. The company is treading on difficult territory and any further negative news can scar is reputation for a long time.

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