Chipotle Mexican Grill, Inc. CMG has reportedly enforced stricter guidelines for suppliers in the wake of the latest E. coli outbreak that affected several customers in six U.S. states. The fast casual chain plans to release the guidelines in the next few days.
Management reportedly does not expect many of its local suppliers to be able to meet the latest standards, which in turn would increase costs as it shifts to new ones. The move would also be a major shift from the company’s policy of using locally produced ingredients, started in 2008 to support local farms and sustainable agriculture. Reportedly, last month, Chipotle replaced the representation on its website about buying local ingredients with a note on long-term supplier relationships.
Negative Publicity Hurting Chipotle
The E. coli outbreak had earlier led the fast casual chain to close 43 outlets on Nov 3 as a safety measure since eight of its restaurants in Oregon and Washington were linked to the incident. However, these outlets were reopened about 10 days later with fresh ingredients and deep cleaning and sanitizing.
However, on Nov 20, the Centers for Disease Control and Prevention (CDC) informed Chipotle that it identified six cases, in addition to the 37 reported previously, in which initial testing matched the E. coli strain found at the Washington and Oregon locations. The company’s shares have declined 7.8% in the last month mainly due to the resultant adverse publicity surrounding the E. coli infections. Further, the shuttering of restaurants is expected to have a negative impact on the company’s top line in the current quarter.
Our Take
We believe that the stricter standards would reinforce Chipotle’s popularity, especially among health conscious customers. Notably, the company informs diners about serving responsibly raised meat, in addition to the calories served. In fact, earlier this year, Chipotle reportedly suspended the sale of pork at one-third of its restaurants in the U.S. as one of the suppliers failed to comply with its animal welfare standards. (Read: Chipotle Halts Pork Sales after Quality Issues with Supplier)
Stocks to Consider
Chipotle presently has a Zacks Rank #3 (Hold). Investors interested in the restaurant industry may consider some better-ranked stocks like Shake Shack Inc. SHAK, Jack in the Box Inc. JACK and BJ's Restaurants, Inc. BJRI. All these stocks sport a Zacks Rank #1 (Strong Buy).
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