Final PDF to printer CASE 12 Chipotle Mexican Grill’s Strategy in 2018: Will the New CEO Be Able to Rebuild Customer Trust and Revive Sales Growth? Arthur A. Thompson The University of Alabama eaded into August 2015, Chipotle (pronounced remained off duty until they were cleared to return chi-POAT-lay) Mexican Grill’s future looked to work. County health officials also inspected the Hrosy. Sales and profits in the first six months facility on two occasions and rendered passing of 2015 were at record-setting levels, and expectations grades, despite finding several minor violations. were that 2015 would be the company’s best year The restaurant reopened the following day, and no ever. But a series of events occurred over the next five further food poisoning incidents occurred. months that alarmed customers, drove down sales • In October, 55 people became ill from food poisoning at Chipotle restaurants, and proved frustrating for after eating at 11 Chipotle locations in the Portland, Chipotle top executives to fix. Oregon, and Seattle, Washington areas. Medical • In August, a salmonella outbreak in Minnesota authorities attributed the illnesses to a strain of E. sickened 64 people who had eaten at a Chipotle coli bacteria typically associated with contaminated Mexican Grill. The state’s Department of Health food. Most ill people had eaten many of the same later linked the illness to contaminated tomatoes food items, but subsequent testing of the ingredients served at the restaurant. at the 11 Chipotle restaurants did not reveal any E. coli contamination. (When a restaurant serves foods • In August, 80 customers and 18 employees at a with several ingredients that are mixed or cooked Chipotle Mexican Grill in Southern California together and then used in multiple menu items, it is reported gastrointestinal symptoms of nausea, difficult for medical studies to pinpoint the specific vomiting, and diarrhea that medical authorities ingredient or ingredients that might be contami- and county health officials attributed to “norovi- nated.) State and federal regulatory officials reviewed rus.” Norovirus is a highly contagious bug spread Chipotle’s distribution records but were unable to by contaminated food, improper hygiene, and con- identify a single food item or ingredient that could tact with contaminated surfaces; the virus causes explain the outbreak. Nonetheless, out of an abun- inflammation of the stomach or intestines, leading dance of caution, Chipotle management voluntarily to stomach pain, nausea, diarrhea, and vomiting. closed all 43 Chipotle locations in the Portland and After the reported food poisoning, the restaurant Seattle markets, pending a comprehensive review of voluntarily closed, threw out all remaining food products, and sent home the affected employ- ees. Employees who tested positive for norovirus Copyright ©2019 by Arthur A. Thompson. All rights reserved. tho75109_case12_C120-C137.indd C-120 12/18/18 10:49 AM Final PDF to printer CAse Chipotle Mexican Grill’s Strategy in 201812 C-121 the causes underlying the food contamination and (3)—became ill after eating at Chipotle Mexican a check of whether any of Chipotle’s food suppliers Grill restaurants. Studies conducted by the were at fault. Chipotle management worked in close Centers for Disease Control and Prevention consultation and collaboration with state and federal (CDC) determined that all five people were health and food safety officials (including personnel infected with a rare strain of E.coli different from from the Centers for Disease Control and Prevention, the infections in Oregon, Washington, and nine the U.S. Department of Agriculture’s Food Safety other states. However, investigators used sophis- and Inspection Service, and the U.S. Food and Drug ticated laboratory testing to determine that the Administration) throughout their investigation of the DNA footprints of the illnesses in the Midwest incident and also launched a massive internal effort were related to those in the Portland and Seattle review of the company’s food preparation and food areas. safety procedures. These internal actions included: • In mid-December 2015, about 120 Boston College students became ill after eating at a Chipotle 1 . Confirming that more than 2,500 tests of Chipotle’s Mexican Grill near the campus, an outbreak that food, restaurant surfaces, and equipment all showed local health officials attributed to a norovirus. no E. coli. Health officials also tested students for E. coli 2. Confirming that no employees in the affected res- infections but the tests were negative. taurants were sickened from the incident. Extensive reports of the last three incidents in 3. Expanding the testing of fresh produce, raw meat, the national media took a toll on customer traffic at and dairy items prior to restocking restaurants. most all Chipotle locations. The average decline in 4. Implementing additional safety procedures and sales at Chipotle locations open at least 12 months audits, in all of its 2,000 restaurants to ensure that was a stunning 14.6 percent in the fourth quarter of robust food safety standards were in place. 2015, causing Chipotle’s revenues in Q4 2015 to be 5. Working closely with federal, state, and local gov- 6.8 percent lower than in the fourth quarter of 2014. ernment agencies to further ensure that robust The company’s stock price crashed from an all-time food safety standards were in place. high of $758 in early August 2015 to $400 heading 6. Replacing all ingredients in the closed restaurants. into 2016. 7. Conducting additional deep cleaning and sanitization in all of its closed restaurants (followed by deep clean- ing and sanitization in all restaurants nationwide). 2016 AND 2017—GROWING Meanwhile, the Federal Drug Administration FRUSTRATION IN REVIVING sought to identify a cause for the outbreak. The SALES AND RESTORING FDA’s investigation revealed no ingredient-related cause and no evidence that particular suppliers were CUSTOMER TRUST IN the source of the outbreak. Ultimately, no food item THE CHIPOTLE BRAND was identified as causing the outbreak and no food item was ruled out as a cause, although fresh produce In January 2016, the CDC announced that the prior was suspected as the likely cause. food contamination and food safety issues at Chipotle After health officials concluded it was safe to do were “over.” Chipotle management followed up by so, all 43 restaurants in the Portland and Seattle mar- finalizing plans to install comprehensive food safety kets reopened in late November 2015, roughly 6 weeks procedures at all Chipotle restaurants and establish after the incident occurred. Chipotle as an industry leader in food safety. In February 2016, Chipotle shut all of its restaurants for • Later, it was confirmed that at least 13 people in a period of four hours to conduct food safety training nine other states became infected with the same for all store employees. That same day, in an effort to strain of E. coli linked to the Chipotle restaurants get customers back into its stores, Chipotle offered a in Oregon and Washington states. free burrito to anyone who signed up on its website. • In early December 2015, five people in three states— Recognizing that the task of rejuvenating customer Kansas (1), North Dakota (1), and Oklahoma traffic at its restaurants would not be easy, Chipotle tho75109_case12_C120-C137.indd C-121 12/18/18 10:49 AM Final PDF to printer C-122 PART 2 Cases in Crafting and Executing Strategy management launched a series of marketing efforts any Chipotle in the United States or Canada just and incentives to entice former and new customers for playing. to dine at Chipotle restaurants. For example: • On Halloween, from 3 p.m. to closing at all • In March, Chipotle introduced a new online game Chipotle locations, customers dressed in costume called Guac Hunter—a digital photo hunt where could buy $3 burritos, bowls, salads, or tacos. players saw a series of two images that looked • All active duty military, reserves, national guard, similar and had to spot the differences before time military spouses, retired military with a valid U.S. runs out. During a specified 11-day period, play- military ID, and veterans with ID were offered a ers were rewarded for their keen eyesight with a special buy-one-get-one-free with the purchase of mobile offer good for a free order of chips and an entrée from 3:00 p.m. to close on Veterans Day. guacamole at any Chipotle in the United States In addition, in October 2016, Chipotle began an and Canada. “Ingredients Reign” advertising campaign highlight- • In May, teachers, faculty, and school staff with ing its carefully selected ingredients and reinforcing a valid school ID received a free burrito, burrito Chipotle’s commitment to sourcing, preparing, and bowl, salad, or order of tacos with the purchase serving only the very best ingredients. The campaign of another menu item at all U.S. Chipotle loca- featured a series of animated stop-motion short films tions from 3:00 p.m. to close in honor of Teacher shown in movie theaters across the country and also Appreciation Day. distributed through various online, digital, and social • All nurses who showed a valid ID were rewarded media outlets. In addition, the company used indoor with a special buy-one-get-one-free promotion on and outdoor advertising with content showcasing the June 8. company’s obsession with fresh ingredients. • In June, chorizo sausage was introduced as a meat But the results of all these efforts to revive cus- selection. tomer traffic were disappointing. Average sales at • A national advertising campaign featured Chipotle’s Chipotle restaurants in 2016 dropped to $1.87 million, carefully selected ingredients and its longstanding 22.9 percent below the 2015 average of $2.42 million. commitment to sourcing, preparing, and serving Chipotle’s revenues dropped from $4.5 billion in only the very best ingredients.