Chipotle picking up the pieces

by Monica Watrous
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Chipotle worker serving burrito bowl
Chipotle plans to launch a marketing campaign that focuses on the company's commitment to "high-quality ingredients and great tasting food."

DENVER — Chipotle Mexican Grill is preparing its biggest marketing campaign in company history to win back customers following the high-profile food safety crisis that crippled the burrito chain’s sales at the end of 2015. Comparable sales for the fourth quarter ended Dec. 31, 2015, tumbled 15%, which included a 30% decline in December alone.

Steve Ells, Chipotle
Steve Ells, chairman and co-c.e.o. of Chipotle

“The fourth quarter was without question the most challenging in our history, but we have responded and have implemented an industry-leading food safety program that reduces our food safety risk to as low to zero as possible,” said Steve Ells, chairman and co-chief executive officer, during a Feb. 2 earnings call with financial analysts.

On Feb. 1, the Centers for Disease Control and Prevention said it had concluded its investigation of two E. coli outbreaks linked to Chipotle that sickened dozens in October and November. In the midst of those outbreaks, more than 120 Boston College students fell ill with norovirus after eating at a nearby Chipotle restaurant. National attention surrounding the incidents led to a worsening of comparable sales performance as the quarter progressed, the company said.

For the fourth quarter, Chipotle’s net income plummeted 44% to $67,874,000, or $2.19 per share on the common stock, which compared with $121,234,000, or $3.91 per share, for the same period of the prior year. Revenue for the quarter fell 7% to $997,507,000 from $1,069,811,000.

Chipotle’s net income for the fiscal year rose 7% to $475,602,000, equal to $15.30 per share on the common stock, up from $445,374,000, or $14.35 per share, for the previous fiscal year. Revenue increased nearly 10% to $4,501,223,000 from year-ago revenue of $4,108,269,000. Comparable sales were flat for the year.

“As we emerge from this difficult time, we can focus on what will be our primary objective for 2016: making sure our food is as safe as possible and welcoming customers back to our restaurants as our teams deliver an extraordinary dining experience,” Mr. Ells said.

Meanwhile, the company faces a grand jury investigation that began in California and has expanded system-wide. The company announced in early January it had been served with a federal grand jury subpoena from the U.S. District Court for the Central District of California related to an isolated incident of norovirus in Simi Valley, Calif., in August.

Monty Moran, Chipotle
Monty Moran, co-c.e.o. of Chipotle

“We had anticipated that the investigation might broaden into a more national investigation, and last week, we received a new subpoena replacing the one that we had announced in early January,” said Monty Moran, co-c.e.o., during the Feb. 2 call. “The new subpoena requires us to produce documents and information related to companywide food safety matters dating back as far as Jan. 1, 2013. So we will continue to cooperate in the investigation as it moves forward.”

The crisis has not affected the pace of new restaurant openings for Chipotle, which in the fourth quarter opened 79 units to finish the year with a total of 2,010. The company plans to add up to 235 more restaurants this year.

As for new marketing programs, which are set to begin next week, Chipotle will launch a traditional advertising campaign across all major markets that will run through the end of June.

Mark Crumpacker, Chipotle
Mark Crumpacker, chief creative and development officer for Chipotle

“The creative for this campaign, with one small exception, does not mention food safety or the recent incidents,” noted Mark Crumpacker, chief creative and development officer. “Instead, it reinforces our commitment to high-quality ingredients and great tasting food.”

Additionally, the company is deploying a direct marketing campaign using direct mail, mobile and social media platforms. Chipotle also plans to unveil a new food safety web site on Feb. 8 outlining the steps taken to prevent future outbreaks.

Increased investments behind food safety, marketing and labor are expected to have a significant impact on margins and earnings in 2016. Furthermore, executives said a full recovery of sales may take at least a year.

“When we looked at other events, other companies that have gone through something like this, the recovery typically takes four or five quarters or so,” Mr. Ells said. “We know that there are things that are different and what happened in previous cases. For one, we have had a couple instances here, so that kept us in the news a lot longer. Secondly… the news travels faster. There is a lot more chatter on social media and so the word really traveled fast, sometimes accurately, sometimes inaccurately. And so, we know that there are differences that might make this a little tougher.”
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