The Case for Chipotle Stock
It’s time to visit Chipotle Mexican Grill, Inc. (NYSE:CMG) again. The worst might be over for the Mexican food specialist that prides itself on healthy and quality ingredients. Chipotle stock has dropped over 28% in the past year. However, it appears to have left the worst behind and its business case is still valid.
Chipotle continues to suffer from the E. coli and norovirus cases that emerged last fall. Yet in February, restaurant traffic improved. (Source: “Willingness to eat at Chipotle increasing; sentiment bottomed in Jan – William Blair,” CNBC, March 3, 2016.)
Chipotle is now looking to export its model. It has already set foot in Canada and now covets a larger presence in Europe, where it has already gained a strong following in Britain and Germany. It has four restaurants in France, opening the last facility in Paris just last October. Chipotle is growing and that will help push Chipotle stock back to its pre-E. coli crisis trading range of $700.00 to $750.00.
As for health, investors and customers alike will be happy to know that, despite the bad press, Chipotle’s health policy works. Chipotle demands employees stay home if they are sick and pays them—a sick employee has no incentive to show up to work.
Most recently, a Boston area (Billerica) Chipotle restaurant was in the news for a norovirus “outbreak.” (Source: “Opinion: The case for buying Chipotle (both the guac and the stock),” MarketWatch, March 23, 2016.)
There are 22 million cases of norovirus in the U.S. each year. In the case of the Billerica Mass, a Chipotle employee contracted norovirus and stayed home. Chipotle closed the restaurant to disinfect it, and it was under no obligation to report the case at all. That happened because of the concerned parent of one of the workers, who leaked the story to the media. (Source: Ibid.)
While the public appears to have abandoned Chipotle, if you take the media headlines at face value, Chipotle investors should hold on to their shares. The company expects to turn CMG stock and sales around. It is doing everything possible to bring people back into its restaurants, so that they can taste the reasons that made the Mexican food specialist popular in the first place. Chipotle’s latest initiative is to offer 21 million free burritos and give customers a chance to win guacamole.
Chipotle’s crisis started in 2015 when a handful of its restaurants were accused of being the source of an E. coli outbreak. Last February, to stem the crisis, Chipotle gave away free food. This is not Chipotle’s first “free food to win them back” foray. It had a five million free burritos campaign a few months ago, which didn’t work. Perhaps the 21 million will achieve what five could not, beginning at the end of March 21 and running until May 21. (Source: “Chipotle using games, brains and off-site cooks to turn corner,” Food Safety News, March 23, 2016.)
Chipotle isn’t just waiting for the customers to come back. It wants to win back their hearts! In addition, CMG investors should take note that the company is not idle. The free burrito campaign has a distinct tactic, one which Machiavelli himself would approve. By attracting old and new customers back to stores using the free burritos as bait, the company will give passersby the impression that Chipotle restaurants are full and that the E. coli crisis has passed.
To ensure the numbers materialize, Chipotle has also launched an online game to encourage visits. “Guac Hunter” is a simple flash application where you only have to find the differences between two pictures in the shortest time. (Source: “Play Guac Hunter, get free guacamole from Chipotle,” Orlando Weekly, March 22, 2016.)
Winners of “Guac Hunter” get free guacamole and tortilla chips. Guacamole is the stuff upon which the chain’s success is built. Chipotle’s guacamole relies on a special spice mixture, as relevant to the chain’s popularity as the Colonel’s recipe has been to KFC.
The next few months will reveal just how successful the campaigns will be. Meanwhile, CMG stock will have to rely on investors’ confidence in the company’s growth-based strategy. Chipotle has grown at a fast pace, building new restaurants and shaping its identity beyond the fast-food paradigm. E. coli has put a damper on the company but growth still continues.