Data Breach At Chipotle: A Lesson For Restaurant Companies?

Technology is transforming the restaurant industry. One of the key trends in the industry this year is the mobile ordering and payment system which makes the fast casual restaurant experience convenient and reduces the waiting times. However, as companies increasingly depend on technology to improve customer service, security of customer data is of paramount importance. Recently, Chipotle Mexican Grill (NYSE: CMG) reported a payment card security incident where malware was found in point of sale devices of certain Chipotle and Pizzeria Locale restaurants between March 24, 2017 and April 18, 2017. This malware searched for track data which sometimes contains cardholder name and other credit card information, leading to payments security breach. Post this incident, Chipotle is looking at ways to enhance security measures. However, for a company which already faced significant reputation loss due to the E. coli food virus, this security breach can impact its turnaround efforts. A payments card security breach can impact customer confidence and the fear of their credit card details being stolen while making the payments can drive away customers who are slowing warming up to Chipotle’s restaurants after the E.  coli incident.

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Stronger Security Measures Critical

While Chipotle Mexican Grill reported a payment card security incident, which impacted payments at the restaurants, the mobile order and pay systems are also prone to fraud. In 2015, several Starbucks customers reported a breach in their mobile apps, where money was siphoned away by attackers.  Experts believe that the Starbucks app is still vulnerable to fraud although nearly 30% of the company’s transactions are now via its mobile order and pay app. The convenience and personalization available via a mobile ordering and payment system is attracting several customers to this platform. Popular fast food restaurants such as McDonald’s and Burger King are also likely to roll out their own mobile platforms in the coming months and Starbucks is already facing a congestion issue due to overwhelming orders placed via this system. However, strong security measures are crucial for fast food restaurants to ensure that this platform remains popular. Data breaches and frauds can drive customers away from using these systems and impact the reputation of the company negatively.

The data breach incident has impacted Chipotle at a time when it appeared that the company is recovering from the E. coli virus and traffic is slowing returning to normal. The security incident is likely to impact its reputation, as the company admitted that most of its 2,250 restaurants were impacted by this breach. This can lead to lower sales and impact its margins as the company spends on investigations and stringent security measures to prevent another incident.  A 2014 retail study concluded that customers change the stores they patronize after a security breach and are less likely to shop at a place which has witnessed a breach. We believe Chipotle’s store traffic might be impacted due to this breach and the exact impact will be visible in the next results announcement.  Our price estimate for Chipotle is around 10% lower than its current market price and we will update our model after the next quarterly results as we watch for the impact of this data breach on the company’s recovery efforts.

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