Moms often remind their kids that if they don't have anything nice to say, don't say anything at all. That has largely been the approach I have taken covering Chipotle's (CMG) ongoing E. coli saga.
But many on social media haven't been so kind to the burrito chain and its execs lately as the E. coli scare has unfolded, something Chipotle CFO John Hartung blasted at an investor presentation recently. Co-CEO Monty Moran was one of these first executives I interviewed when I started out as a journalist, and I have caught up with him several times over the years. It has been a pleasure to watch how he and founder and Co-CEO Steve Ells have built a giant restaurant chain from the ground up.
Slamming two very well paid CEOs for taking their eyes off the ball while enjoying a surging stock price and breakneck sales pace is a story that writes itself. No question in my mind, Chipotle will pick itself up and regain its stature with its customers. But having watched an otherwise unusual and damaging series of events this week, it's time for me to take the gloves off.
Arrogance at the Top
This is something I have felt brewing for some time within the executive ranks. From blasting McDonald's (MCD) and the fast-food industry on earnings calls, to a company spokesman emailing me all of the harmful ingredients that McDonald's uses to giving a figurative middle finger to competitors in online marketing videos, members of Chipotle's top brass have gotten a big head. I believe they have lost their sense of humility. I encourage them to take a trip to Starbucks (SBUX) in Seattle and sit down with CEO Howard Schultz. That guy exudes humility. Sure, Schultz is known to get riled up on earnings calls when his baby is criticized by a stock analyst, but I have not once heard him disparage competitors on earnings calls or take success for granted. When that humility is lost among executives, it puts the company in a position to be attacked when times get tough -- as they are at Chipotle now. Frankly, it just leads to operational miscues.
Each and every Chipotle leader needs to look within today and reassess their attitudes -- the CFO, for example, should be embarrassed by how he handled himself at this week's investor's conference. The guy made it sound as if the media secretly planted E. coli at Chipotle locations across the country to cook up desktop and mobile traffic in the last month of the year.
Even Steve Ells' performance on the "Today" show Thursday lacked authenticity. I watched that appearance 11 times. The stock may have rallied on the apology, but if you bought Chipotle's stock on the news, I encourage going back to watch the footage: The culture of arrogance is still there, and it has to be eradicated at a chain growing as quickly as Chipotle.
Toxic 'Culture' Grows in the Restaurants
One of the single biggest reasons Chipotle has shot into the hearts of investors is because the chain's restaurant workers are absurdly productive. Moran has told me on numerous occasions that the company's "people culture" (it's not about one employee, it's about the good of the team) has been instrumental in its success. The speed at which line workers get crowds burrito bowls and burritos has been impressive since day one. For those great efforts, Chipotle has given its workforce a clear path to advancement and, potentially, a nice fat check if becoming the overseer of multiple locations. People greet you with a smile at Chipotle, and with a wink you could often receive an extra few pieces of chicken at no charge.
But getting lost in the broader E. coli story of Chipotle are new examples of what appear to be gross negligence. Norovirus in Boston because of a sick worker? Operational neglect. Closing a Seattle restaurant Thursday due to food not being kept hot enough? Operational neglect. It's interesting to me that all these problems have arisen in the wake of the company's national hiring day in September.
It appears that Chipotle has tried to move too fast to appease Wall Street, and in the process has lost sight of instilling the winning culture into new recruits and reinforcing it in longer-tenured workers. In hindsight, a red flag should have gone off in my head during the summer, when Chipotle said it was going to offer entry-level workers new benefits and hike pay for other positions; it was a sign the employees were likely being pushed to their limits, raising the prospect down the line for operational mistakes.
Chipotle may have to consider cutting the number of new openings in 2016 in half to solidify its operational procedures.
Kudos to the company for putting Ells on national TV, something I had suggested. Although I don't think it was the right time, it started to reverse some of the perceived arrogance outlined here. I still would not be a buyer of the stock in front of what will be material sales declines this month and likely into 2016. That being said, two drastic actions need to be taken at Chipotle to get things under control:
- Close all restaurants for a day: When Howard Schultz returned to Starbucks as CEO in 2008, he closed all locations down for over three hours in the evening so that workers could be retrained. Schultz had hated how Starbucks was serving up coffee; it had become a commoditized experience. The maneuver was unheard of at the time, but it worked. The company was able to refocus people on what made the company great. Chipotle needs to do the same, retraining workers and doing a deep clean of every single inch of the restaurant.
- Hire a chief operating officer with packaged-food industry experience or a McDonald's pedigree: Up until now, Moran (a former lawyer) has handled the operational side/culture of the business while Ells has focused on the menu. But in light of Chipotle's torrid pace of growth, it's time to get a veteran operations guy in the mix. Let them handle operations, Ells handle the menu and the energetic Moran work on culture. Someone from the packaged-food industry would be ideal. Even a person with experience at McDonald's (love it or hate it, McDonald's churns out operational wizards) would be incredibly helpful.