Can Chipotle’s New Menu Prove Stronger Than Its New Food Virus Scare?

Recently, Chipotle Mexican Grill (NYSE: CMG) started testing queso chip dip, a long desired menu item, after denying customer requests for nearly two decades since it is difficult to prepare this dip without artificial ingredients. This popular menu item is being tested in the company’s “Chipotle NEXT Kitchen,” its only public facing test kitchen which will serve its newest dishes. This test kitchen is part of the company’s $50 million marketing plan aimed towards shaping the future of Chipotle. However, the company’s reputation suffered another blow when it had to shut down one of its restaurants in Virginia on receiving multiple reports of customers falling sick after eating at that store. Company officials suspected this to be a norovirus outbreak, which is a highly contagious virus.  Chipotle is still struggling to attract customers back to its stores after an E. coli virus hit its food in late 2015. Post this event, the company had taken several measures to ensure food safety, spending heavily on these measures to prevent a recurrence. However, this incident indicates that these measures have fallen short. While Chipotle is working overtime on its new “test kitchen” to avoid loss of customers  due to the exclusion of queso from its menu (and creating a “natural” queso), questions on the safety of its food can impact the company adversely despite these new menu initiatives. A new safety related incident with an already fragile reputation can impact the company negatively and the introduction of queso might not be able to cover for this reputation loss.

See Our Complete Analysis For Chipotle Mexican Grill

Food Safety Crucial, Innovative Menu Secondary

The current norovirus outbreak is an isolated incident and the company management clarified that this virus does not come from its food supply and hence it is safe to eat at Chipotle’s restaurants. However, widely circulated media reports about the incident which comes when the memory of the E. coli virus is still fresh in the minds of the customers, can impact traffic at Chipotle’s restaurants negatively. While innovative menu changes usually impact restaurants positively, it remains to be seen if “queso” would have the power to attract customers to Chipotle’s stores or overcome possible safety worries.

Companies such as McDonald’s have benefited from bold menu changes and the success of McDonald’s “All Day Breakfast” indicates that these changes have been successful in driving revenues.  Strong marketing efforts coupled with interesting and popular menu items can attract curious customers to Chipotle’s restaurants, if they ignore the current standalone incident.  However, whether this will result in a permanent increase in the average number of customer visits at its stores remains to be seen. We expect this number to increase moderately over our forecast period.

A faster pace of increase in the average number of visits can impact Chipotle’s valuation positively.

The initial reviews of Chipotle’s queso have been positive and some experts believe that this change can increase the frequency of visitors at its stores. Certain analysts also believe that customer centric food initiatives such as introduction of new food items can help Chipotle to “resurrect customer interest” and drive sales.

While menu innovation is essential to drive Chipotle’s growth, creating a perception that it is a “safe restaurant” is crucial for the company’s survival. It has suffered significant losses in the last two years due to a loss of reputation after the E. coli incident. Another outbreak, even though isolated, is likely to garner attention and impact customer perception. This recent outbreak is likely to impact the company’s efforts to regain customers via innovative menu items, however the exact impact will be visible in the coming quarters.

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