Bigger the brag, bigger the burn: Chipotle Q3 income tanks as food safety issues take toll

I have a cousin who has carried on the family tradition and makes a living growing asparagus.

chipotle-ad-2In Ontario.

The family biz has gotten into all sorts of asparagus by-products and the farm has a large, devoted crowd of customers.

He proclaims his stuff is GMO-free.

Without going into the nuances of that statement, I said to him a few years ago while visiting, what happens if a super-great genetically engineered asparagus comes out that is beneficial to your farm, your income, and your customers?

He was too busy thinking about the present, and that’s fine.

But consumers’ attitudes can change in a heartbeat – or an outbreak.

Chipotle, the purveyors of all things natural, hormone-free, sustainable, GMO-free, dolphin-free and free from whatever apparently wasn’t free from the bacteria and viruses that make people sick.

And when food folks go out on an adjective adventure to make a buck, they sometimes get burned by the realities of biology.

And the bigger the bragging, the bigger the burn.

So it’s no surprise that the depth of the damage from Chipotle Mexican Grill’s food safety issues showed up in yet another quarterly earnings report Tuesday in which net income fell 95% and missed estimates compared to the same quarter in its high-flying days a year ago.

The Denver-based company reported third-quarter net income of $7.8 million, a dramatic fall from $144.9 million a year ago. Per-share earnings totaled 27 cents, compared with $4.59 a year ago. That was well short of the $1.60 estimated by analysts polled by S&P Global Market Intelligence.

Revenue sank 14.8% year-over-year to $1 billion during the quarter despite even though the fast-casual dining chain opened 54 new restaurants with only one closing.

To me, the amazing thing is that people still spend $1 billion a year at calorie-laden faux Mexican food.

Shares of Chipotle fell 2% in after-hours trading to $397.56. The stock has fallen about 38% in the last 12 months.

Chipotle restaurants are clearly struggling from the food safety issue that sickened customers last year and forced the temporary closure of some restaurants. Comparable restaurant sales — or sales of restaurants that have been opened at least a year — tumbled 21.9%. Comparable restaurant sales are estimated to fall again “in the low single-digits” in the fourth quarter, it said.

The company’s management is more optimistic for 2017, partly due to the lower base of comparison. Comparable restaurant sales will increase “in the high single digits,” it estimated Monday. And the company will open 195 to 210 new restaurants next year, after opening more than 220 this year. Per-share earnings next year will be $10, it estimated.

chipotle-diarrhea“We are earning back our customers’ trust, and our research demonstrates that people are feeling better about our brand, and the quality of our food,” Steve Ells, founder, chairman and co-CEO of Chipotle, said in a statement.

Not quite.

YouGov BrandIndex, a firm that tracks a brand’s reputation, regularly asks this survey question: Is Chipotle high or low quality? Before all the bad food outbreaks, Chipotle scored a very healthy 25 (on a scale of -100 to +100) for quality. It plunged to -5 by February. It has recovered to 9 recently, but that’s still far from where it was.

Translation: Customers don’t see Chipotle as the golden brand it was before the E. coli outbreak.

Be careful, cuz.


Branding versus government regulation of food

Tim Worstall, whose latest book is “23 Things We Are Telling You About Capitalism” writes in Forbes in yet another way of the power of marketing food safety – at retail — that Don Boudreaux outlines the value of brands in maintaining or increasing the quality of foodstuffs subject to branding. He then goes on to ask whether there have been any empirical studies of which method actually improves quality the most. I’m afraid that all I can offer is anecdote here from the UK’s history: but branding most definitely came first in the clean up of mid-19th century food supplies.

better.brand.spinach.e.coliHere’s Boudreaux:

Because Smith will in fact supply milk of consistently good quality (with “good quality” here determined by consumers rather than by bureaucrats, dietary “experts,” or other officious intermeddlers), other milk suppliers will have incentives not only to devise and use ways to signal to consumers that their milk will be of consistently good quality, but, as a result of this signaling, actually to supply milk of consistently good quality.

These ways can vary, depending upon costs, benefits, and existing government regulations. The ways of assuring consistently good quality milk might be branding of the sort used by farmer Smith. But perhaps they will involve the use of grocery chains that take responsibility for testing and assuring the quality of the milk sold in their stores. (With this latter method, the relevant brand becomes that of the supermarket rather than of the individual dairy farm.) But the particular ways used to assure consistently good quality milk are less important than the fact that there are private market incentives to supply quality assurance and maintenance – as Tom Sowell’s description of McDonald’s efforts makes plain.

He then goes on to ask whether there are any empirical studies: to which I have to say that I don’t know of any rigorous ones. However, a tale from history. In my native UK the first investigations into who was adulterating what came around 1820. The German chemist who published them soon found himself the object of trumped up charges and left the country. So, no, no one is saying that unalloyed corporate or producer power is the answer here. …

Another way of describing this is the possibly apocryphal story of Heinz tomato soup. Back in the early days canning, at least at industrial scale, was a fairly hit and miss operation. There’s another story of an Arctic expedition all dying from botulism as a result of their canned food not being properly heated and sealed before departure. When Heinz came out they were just another in a long list of people trying it all. But their soup had the startling feature of killing people less often than their rivals. And thus the brand became valuable as a signifier of someone who knew what they were doing with their canning. But that is an apocryphal story.