Chipotle’s Debacle

Chipotle's debacle by adam kidanJust several years ago, Chipotle was on the very top of the fast food chain market.  Their burritos became the stuff of legend, and an image geared towards sustainability earned approval.  Yet since an E.coli outbreak made customers sick across the country, the Mexican chain has had problems gaining their fans back.  Yesterday they said that their expenses were higher than expected in the end of 2016, due in large part to promotions designed to get customers interested once again.  

In all, Chipotle’s marketing and promotional expenses made up around 5% of sales during the fourth quarter of 2016, which the company said will most likely drag down margins to 13% or 14%.  Compare that to Chipotle’s previous margins of 28%.  To get back to these previous numbers, they’ve been running TV ads in select markets and pushing various promotions.  Sales have been dropping sharply since the E.coli outbreak, yet are expected to decline just 4.8% in the fourth quarter.  That’s not great, but it’s actually an improvement, reflecting a 20.2% decline in October, 1.4% in November and 14.7% in December.  Nonetheless, the quarter is turning out worse than analysts had expected.  Chipotle has said it expects fourth quarter earnings in the range of 50 to 58 cents per share, well below the 96 cents Wall Street analysts had expected.  Total sales are expected to come in at $1.03 billion, slightly behind the expected $1.05 billion.  

When fast food chains first started taking off in the post-WW2 boom, the idea was consistency: the McDonald’s burger wasn’t the best out there, but you’d be able to get that same burger at any McDonald’s location from New York to Alaska.  Yet in the late 2000s, a new crop of fast food chains began to emerge.  Rather than consistency, these restaurants focused on quality; yeah, they were more expensive than McDonald’s dollar menu, but their food was also better.  One of the most recognizable names in this new crop of fast food chains was none other than Chipotle.  It’s sad to see that the company has struggled after helping pioneer the new face of fast food, but it also serves as a reminder that all things pass.  

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