Chipotle’s Nightmare With Negative Publicity Continues
Chipotle Mexican Grill‘s (NYSE: CMG) food virus nightmare is continuing even as the company is taking several measures toward food safety after the E. coli virus hit its food in October 2015. Recently a Texan actor posted a story on a social media website that he was in the hospital after eating at a Chipotle restaurant. In an era where news spreads rapidly via social media and images and quotes from celebrities create an impression on consumers, this story was a huge blow for Chipotle, impacting its stock price by nearly 6%. Further, this will impact the company’s recovery efforts as it tries to innovate with new menu items and promotions to attract customers. Reducing customer traffic and rising costs are likely to put pressure on Chipotle’s margins and the company has already revised its guidance for opening new restaurants in order to focus on the existing ones. Chipotle needs an “incident-free” period of at-least one year to be able to focus on attracting customers with its menu innovation, promotions, and erstwhile popular “Food with Integrity” tag line. However, it appears that the company is struggling to keep away from negative publicity and isolated incidents are being blown up, impacting its fragile reputation further.
Chipotle’s margins and revenues declined sharply after the 2015 incident and while recovery has been slow, the company is limping towards normalcy. We do not expect Chipotle’s revenues or margins to reach their peak levels over our forecast period, but we expect a gradual increase in both these numbers. Below is a summary of Chipotle’s margins and revenues historically and our forecast estimates. You can click here to modify these forecasts.
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Our current price estimate for Chipotle of $284 (higher than its current market price of around $275) is based on the above forecasts for margins and revenues.
However, incidents which lead to negative publicity are likely to impact this recovery and make a turnaround challenging. The more time Chipotle loses in gaining customer confidence, the higher is the risk of loss of competitive edge. Other players such as McDonald’s are cashing-in on “health conscious” customers – the segment which is Chipotle’s target consumers.
In addition to its food safety measures, promotions, and menu innovations, Chipotle also needs a strong public relations team to ensure that isolated incidents are not blown out of proportion leading to negative publicity. Its fragile reputation cannot take too many blows in the tough road to recovery.
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