There's no denying that Chipotle Mexican Grill (CMG) is feeling the pain of the E. coli outbreak that has hit stores throughout the country. The question is, how will it see itself out of it?
On Friday, the company lowered its guidance for the fourth quarter and rescinded its outlook for 2016 in response to the E. coli outbreak. It forecasts an 8-11% decline in same-store sales for the fourth quarter, as well as increased costs in the $6 million to $8 million range to replace food in certain restaurants and for laboratory testing.
According to data provided by the Centers for Disease Control on Friday, the outbreak has affected 52 people in nine states. The most recent illness tied to Chipotle started on Nov. 10.
Of course, Chipotle isn't the first company to contend with an outbreak of foodborne illness and concerns about the safety of its food. Costco (COST) -- which is a holding of the Action Alerts PLUS portfolio -- is currently contending with an E. coli outbreak tied to a celery and onion blend used in its chicken salad that affected 19 people in seven states. In 2014, KFC (YUM) was found to have been using tainted and expired meat. In 2006, Taco Bell (YUM) had an E. coli outbreak that affected 71 people in five states.
In the wake of the outbreaks, all companies struggled to ensure their food meets safety standards, and also to regain customer trust. And while Costco is currently dealing with its food scare, Chipotle may want to look to direct competitor Taco Bell to see what its way out of the crisis could look like.
During the 2006 E. coli outbreak, Taco Bell saw a 5% decrease in same store sales in the quarter in which the outbreak occurred. The CDC found that onions were the cause of the outbreak and pulled them from the company while the situation was sorted out. Still, the quarterly losses persisted for Taco Bell in following quarters as same-store sales declined by 11% in the quarter following the outbreak, and 7% and 6% in the following two quarters, according to data provided by Jeff Farmer, an analyst with Wells Fargo Securities.
If Taco Bell's case is any indication, Chipotle can expect a difficult year ahead of it as it works to regain trust. Plus, the company has another hurdle ahead of it. It has taken Chipotle some time to isolate the problem, and this is something that further erodes customer trust, Clarence Otis, former CEO of Darden Restaurants (DRI) said in an interview on CNBC's "Squawk Box" on Monday morning.
In an ironic twist, the thing that makes Chipotle one of the more popular casual dining choices -- its "healthy and organic" branding -- also makes it more susceptible to difficulties in maintaining food safety, something that the company has acknowledged. "We may be at a higher risk for food-borne illness outbreaks than some competitors, due to our use of fresh produce and meats rather than frozen, and our reliance on employees cooking with traditional methods rather than automation," Chipotle said in its 2014 annual report.
The annual report went on to list the potential fallout from a food-borne illness outbreak and measures to remedy it. Among the measures Chipotle could take, altering its menu or dining experience to ensure safety were included. But those measures bring risks, as menu changes -- even for client safety -- could turn diners away. Worse, changes could also mean higher costs, which could turn customers away too.
So investors should take a wider look at the company to assess the full damage. At the end of the day, Chipotle's problem is bigger than ensuring safety: It has to do so while maintaining the brand's integrity.