Supply Chain Management On The Example Of Chipotle Mexican Grill

Abstract

Supply Chain Management is more important than ever before for large foodservice companies. For evidence of this, one need not look further than the news surrounding Chipotle Mexican Grill in the second half of 2015. In this essay, we will examine how the complications surrounding foodborne illnesses are believed to have begun, delving into their business practices, supplier relations, and recovery initiatives. Our main goal will be to show how restaurants, including Chipotle Mexican Grill, can learn from these recent experiences and work to ensure that such events transpire as little as possible in the future.

Case description:

The cause outlined for this assignment will focus on the core issues surrounding Chipotle’s struggle with foodborne illness in 2015. We will be discussing now just these core issues but also the solutions as they have been implemented. We will determine how well they have contributed to achieving the goal of restoring consumer trust in their brand and practices overall.

Introduction:

Chipotle Mexican Grill (“Chipotle”) is a multinational fast-casual restaurant that focuses on Mexican food, such as burritos, tacos, and salads.

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In the latter half of 2015, outbreaks of several foodborne pathogens were reported. This case study will discuss causes for the outbreak, the effects of this outbreak, and what they have since done to improve.

History:

Chipotle started in 1993 with a $85,000 loan from Steve Ellis's father who was a Culinary Institute of America graduate and is now the company's Chairman and Co-Chief Exec. Officer. The company is headquartered in Denver, CO where it was founded.

The organization has over 59,000 employees and also has operations overseas. Within one month of opening its first restaurants it sold a 1,000 burritos per day. Using the money from the first restaurant it opened its second restaurant in 1995. 1996 was a big year for the company. It opened its third restaurant using a Small Business Administration loan. In that same year, the founder of the company again invests in the company. This time investing $1.5 million. But probably the most significant thing that happened is the creation of the board of directors which raised an additional $1.8 million for the organization. McDonald's first invested in Chipotle in 1988. In 2001 they were the company's largest investor. McDonald’s stated divesting in 2006 to focus on its main chain. In that same year the company went public (Dazkowski, 2016, pg. 1)

Products and Suppliers:

Chipotle has prided itself on the use of what they define as high-quality ingredients. Their mission statement emphasizes this, saying “Food with Integrity is our commitment to finding the very best ingredients raised with respect for the animals, the environment, and the farmers” (Chipotle, 2014 para. 1). To accomplish this, Chipotle has worked to partner itself with a large number of small, local, and independent farmers. These suppliers span the entire country, each with their own individual relationship with the fast-casual chain. Chipotle has laid out strict quality standards that must be met by each individual supplier. Many companies have chosen to work with fewer, larger suppliers, but Chipotle has chosen to take a more “natural” approach to their food, using aggressive advertising campaigns that show all of the benefits of eating organic, locally sourced, non-GMO food.

With locally sourced ingredients, it is much more difficult to ensure that all safety requirements are being met by each individual supplier. Johnathan Gray, an associate professor at Ohio State University, discusses how this can be problematic, saying Chipotle “has a complex supply chain that requires 100 percent compliance from many individuals... everyone’s balancing cost, delivery, and compliance, and sometimes compliance takes a back seat” (Balakrishnan, 2015, para. 8). It is much easier for restaurants that use few suppliers to ensure that they meet all health and safety requirements, but in Chipotle’s case, with many local suppliers, it is harder to ensure the same level of quality is met. To Chipotle’s own detriment, these suppliers could have been the cause of the foodborne illness outbreak in 2015. Chipotle could not effectively screen all of their suppliers, and as a results, the outbreak occurred. Local suppliers, and disregard for health and safety regulations, can have a surprisingly large effect on the ingredients they supply restaurants with.

According to GracEcommunications, a site dedicated to the sharing of information about organic and local produce, the term local, “doesn't provide any indication of food qualities such as freshness, nutritional value, or production practices” (GracEcommunications, 2014, para. 2). Organic farmers use manure to add nutrients to the soil. This can lead to things like E. coli contamination. Salmonella contamination is also a concern, since it can survive in the soil for almost a year. (GracEcommunications, 2014, para 4). E. coli and Salmonella were both found in several Chipotle locations across the United States and are both pathogens that can thrive in environments like the ones Chipotle looks for in suppliers, which means that this issue could largely be a supplier issue, such as the one that we described. Chipotle’s insistence on using local and organic products that are allowed to grow and live in conditions such as this (in addition to improper sterilization and preparation) may have largely contributed to the eventual outbreak of E. coli, Salmonella, and Norovirus in the latter half of 2015.

In addition to issues with local suppliers, Chipotle and their staff may have also contributed to the outbreak. Each store has specific and detailed procedures that keep ingredients fresh and safe. In two locations, Simi Valley and Boston, a breach of store protocol caused the spread of norovirus, according to the CEO Steve Ells (Bertfield, 2015, para. 20). Norovirus is caused by improper sanitation, mainly by leaving either stool or vomit on the surface of the food. This was caused by several things. The first cause would be the improper sanitation of produce and meats before preparation. The other cause would be employees not washing their hands after using the restroom. Both of these likely contributed to the outbreak in 2015, and both of these causes show how vulnerable the Chipotle supply chain is to ingredients that are, in fact, made without integrity.

Impact on the Company:

The Chipotle stock, before the incident, had reached its highest point, trading at nearly $750/share. The stock sharply declined after that until it reached $404.26/share on January 12th (Yahoo! Finance). The stock enjoyed brief recovery, jumping up 6.85 after the store closure on February 8th (Williams para. 5). Despite everything that they have done to try and assure consumers and investors that this will not happen again, their stock has come nowhere near pre-outbreak price/share. The stock, as of November 11th, 2016, is trading at $393.89/share (Yahoo! Finance, 2016, pg. 1). The stock has been declining mainly due to declining revenues since the outbreak, with third-quarter 2016 revenues being down 14.8% year-over-year and $50 million under the average analyst estimate (Green, 2016, para. 2). This stock will likely take a very long time to recover, as revenues will need time to increase and show improvement over quarters and years. Consumers will also have to be certain that events like this will not happen again. Any small scare, such as another potential sickness or an issues with a supplier, could cause the stock to tumble.

Declining sales and, as a result, a declining stock price are the result of a poor consumer opinion of Chipotle. As mentioned before, Chipotle has always prided itself on its ingredients and used it as one of its main selling points. After it was shown that Chipotle not capable of handling these ingredients properly and led people to illness, many consumers have decided that eating at Chipotle is not worth the risk. YouGov is a company that interviews 4,800 people each day for their polls. These people are drawn from a pool of 1.8 million. In a poll about how these consumers viewed the brand, “4.5 percent more people said that they had a negative rather than a positive perception of Chipotle’s brand, according to its data” (Acker, 2016, para. 9). This poll was done in quarter 3 of 2016. In another YouGov poll done December 11th, 2015, they had a “buzz score” of -26, which dropped to -40 later that month. (Tadena, 2016, para 5). Many consumers still do not think that eating at Chipotle is a safe bet for a quick lunch, and this is drastically affecting their sales and reputation. Chipotle has given away millions of free burritos since they opened their doors again in February of 2016, but this has done little to return them being perceived as a “safe” lunch option.

Despite the rough year that Chipotle has had following the outbreak, many investors and analysts are expecting Chipotle to normalize and have increased earnings over the next few quarters/years. Analysts that focus on stocks listed on the NASDAQ are predicting that Chipotle’s Earnings Per Share (EPS) will go up drastically for fiscal year 2017, from $1.78 to $9.32 (NASDAQ, 2016, pg. 1). This would mean that the stock would go up drastically. This makes sense, too. Chipotle has, more or less, dedicated this year to laying the base for restoring their public image. As time goes on, people’s feelings about the brand will more than likely shift from “I don’t trust Chipotle” to “let’s see what they’ve done to improve.” In addition to this, sales and earnings will likely increase on a year-to-year basis because the sales this year were so low. The brand has been affected heavily by this crisis to the point where some consumers are unwilling to ever try a burrito or taco again. Most consumers, however, just want to be assured that they will not get sick after eating food from Chipotle, and that is what the company has set out to do by increasing transparency, changing the way food is sourced, and creating newer, safer procedures for handling and preparing food.

Solutions to the Problem:

So, what exactly happened where, and what went wrong? After looking into the outbreaks, it was determined that the E. coli had been prevalent in the food they were serving, as well as more isolated cases of salmonella and norovirus (Zuraw, 2015, pg. 1). This was not one isolated incident, as it affected hundreds of people in many different and far-apart states. In July of 2015, 5 people were infected with a strain of the E. coli bacteria. In August of 2015, at least 234 people were infected with Norovirus as a result of eating at Chipotle. In that same month and September, 64 people were infected with Salmonella. Lastly, in December, at least 136 people were infected, again, with Norovirus as a result of eating at Chipotle (Zuraw, 2015, pg. 1). Anybody that was interviewed and became sick confirmed that they had eaten at Chipotle restaurants in areas being affected by outbreak (Kelly, 2015, para. 2). These infected people had a variety of different foods that had been sourced from several different places. The presence of several foodborne illnesses was also concerning, as it complicated the issue; Chipotle was not only dealing with contaminated chicken or unwashed vegetables, this problem could potentially span across all of their menu items.

As these events were unfolding and people started becoming sick, there was a lot of speculation as to what exactly happened. When the FDA looked into this issue, they looked to the distribution process and supply chain, but “the distribution path did not lead to an ingredient of interest” (FDA para. 6) and “no food has been ruled out as a cause” (FDA, 2016, para. 7). According to two unidentified sources, the cause of this outbreak was contaminated Australian beef that was used by the restaurant (Peterson, 2016, para. 2), but Chipotle, like the FDA, has denied these claims and stated that they are unable to determine if one singular ingredient was the main cause of the outbreak. Chipotle has approached this problem by looking at all of their ingredients as potential issues, and has since outlined new ways to handle food, better and safer ways to prepare food, and also worked to educate their staff about the issue and what can be done to prevent it from happening in the future.

One of Chipotle’s biggest and most drastic responses was closing 43 of their restaurants in Washington and Oregon in order to deep clean and eliminate any residual pathogens (FDA, 2016, para. 5). In addition to this day, all of their restaurants were closed on February 8th, 2016 (Smith, 2016, para. 1). This closure includes all of Chipotle’s +1900 stores. This day was used to educate employees about the incident (i.e. what happened, why it happened, and new policies). Employees were also trained in new food safety procedures, such as “changes to food preparation and handling practices including how some items are washed… some produce items will now be dipped in boiling water, and there are new rules for marinating chicken and steak” (Kline, 2016 para. 10). These procedures, among others, are designed to keep produce fresher and safer than they were before the outbreak occurred. By Chipotle talking about these new methods openly, the company displays a willingness and desire to be open with their customers about the food that they are buying, where it is coming from, and how it’s being safely prepared. With a clearer image of where they are getting their food from, consumers will be much more informed about what they are eating.

Chipotle has done more than revamp the way they handle and prepare their food, though. The company has plans to “spend up to $10 million to help local farms meet its food safety standards and to make more local ingredients available across the country” (Kline, 2016, para. 12). This will give Chipotle more direct influence and control over their suppliers, ensuring that everything that can be done to prevent this from happening again is being done. If Chipotle can ensure that their inputs are being handled correctly and sanitarily, then the chance that those inputs will become contaminated before they are prepared and served to customers. This action also shows that they are committed to handling this issue and are working to solve the problem. Chipotle has also offered paid sick leave for their employees (Kline, 2016, para. 9). Without sick leave, employees that are not feeling well or have any illness would still be inclined to come to work, which can contaminate the food they handle. With paid sick leave, those employees are encouraged to stay home and recuperate, which will ensure that the food handling process of their preparation remains as sanitary as possible.

Chipotle has always used its ingredients as a selling point. They always claim that their ingredients are fresh and high-quality. For example, in the latter half of 2015, Chipotle began advertising that their food was free of all Genetically Modified Organisms (GMOs) (Chipotle, 2014, para. 1). It was this image of quality, painted by the CEO and their advertising team, that lead to growing sales in 2012 and 2013. So naturally, when this outbreak occurred as a result of these ingredients, their image was badly damaged. According to Bloomberg, “same store sales tumbled 14.6 percent [during this] period” (Giammona para. 2). Sales overall dropped as much as 37% as a result of this outbreak (Giammona pg. 1). While Chipotle has been working diligently to recover sales since the outbreaks, they have not recovered fully and have a lot more work to do. They have increased their advertising and created new campaigns that create more transparency with their supply chain. Ultimately, Chipotle has tried to paint a clearer picture of what goes into their food, what they have changed about their processes, and how those steps are better than the old methods.

Overall, I believe that Chipotle has gotten off to a great start with rebuilding their reputation. They have shown dedication to solving this issues starting back in January with the closure of their stores to educate their staff. I think that greater transparency between them, the supply chain, and the consumer is going to help them. Chipotle has always said that it supports small farmers and locally-grown produce. They are not only beginning to show where they are getting their produce from, but they are also spending money on making sure those suppliers meet their high expectations for quality. Something they could do to improve their public relations and transparency with consumers is start a PR campaign where they do interviews and videos of where they are getting their produce. McDonald’s in the past has created videos and talked about where their products are coming from, and when accusations flew that they were using filler, they were able to quickly quell these claims and show that they use quality ingredients in their food. If Chipotle were to do this, people would be able to see that Chipotle is making sure their food meets all regulations and then some, and it would emphasize their use of small, local farmers.

One of Chipotle’s biggest problems now is getting people to come into their stores. They have had a hard time gaining back the foot traffic that would have previously been easy to capture. As mentioned before, their reputation is still less-than-favorable to many consumers. One solution to this issue could be more coupons, rewards, or giveaways. Due to the fact that they need more people inside of the store, Chipotle could partner with different organizations to offer free or discounted burritos. This would, potentially, appeal to people who have previously avoided Chipotle because of the outbreak. Chipotle also has a rewards program that they offer in the summer, called Chiptopia. They could expand this to become an all-year program. They could also offer more rewards, such as free chips and/or guacamole or a percentage taken off of your meal price. Consumers like to get the things they normally eat or purchase for free, so earning free food by ordering food that they enjoy is a great way convince people to come in and ensure customer retention.

Conclusion:

Despite the fact that Chipotle has had a challenging year filled with a tumbling stock price and ever-growing negativity from consumers, the new practices that they have employed regarding food safety and sourcing have set the groundwork for winning people back. They have worked on building their reputation back up with increased transparency and advertising, as well as the initial burrito giveaway.