It's hard to question Chipotle Mexican Grill, Inc. (NYSE: CMG) founder Steve Ells' status as a visionary. Nonetheless, the market was glad to see him go when he announced his departure Wednesday.
Chipotle shares popped after investors learned the news that Ells would be moving on into the executive chairman seat as the company begins a search for his replacement. Ells presided over an epic collapse in Chipotle's stock and its brand over the past two years, starting with the E. coli outbreak in late 2015 and ending with a much-maligned queso launch in September and a disappointing earnings report in October.
While Chipotle stock is still up more than 500% since its IPO, the erosion in value over the past two years, especially after this summer's norovirus outbreak and the queso fail, signaled it was time for Ells to move on.
Let's look at some of his key failures over the past two years, and what the company needs from its next CEO.
Inability to communicate
Chipotle's series of food-borne illness outbreaks in 2015 was bad enough on its own. Before the well-known E. coli outbreak that began in the Northwest, the company experienced a norovirus incident, a salmonella incident, and a smaller E. coli issue that went unreported. Then, while the company was dealing with the nationwide E. coli outbreak, another norovirus infection occurred at a Boston location.
Perhaps what was worse than that series of infections, however, was the company's response to it, which was often slow-footed and pointed fingers elsewhere. It wasn't until the Boston norovirus incident, three weeks after the Centers for Disease Control reported that the E. coli outbreak had expanded, that Chipotle apologized to its customers with ads in major newspapers, and with Ells going on the Today show to reassure customers of its food safety.
But even after that, the company's public relations continued to be tone-deaf. CFO Jack Hartung blamed the media and the CDC's reporting methods for the customer exodus, and Chipotle's marketing campaign continued to tout Chipotle's all-natural ingredients rather than address head-on customer concerns about getting sick. Jack in the Box (NASDAQ: JACK), which experienced the worst E. coli outbreak in modern U.S. history in the 1990s, bounced back in part because of an ad that showed the Jack character blowing up the board room.
Chipotle made no such attempt to signal that heads were rolling in the aftermath, and its "Food With Integrity" message rang hollow after the series of food-safety incidents. This summer, the company made the same mistake after a norovirus case that affected more than 130 customers, forcing the closing of a Sterling, Va. location. Chipotle didn't make the news public in any way, nor did it apologize to customers who got sick. Once again, the company and its management appeared smug.
Failure to evolve
Chipotle's formula worked wonders for much of the company's history. Its simple menu of high-quality ingredients served in a customizable manner was a hit with customers, but all businesses must adapt as market conditions change. Not surprisingly, Chipotle's success has spawned imitators big and small, and its assembly-line, fast-casual style of serving food is no longer unique.
While it's understandable that Chipotle resisted conventional fast-food tactics like limited-time offerings, breakfast, and drive-throughs when sales were going through the roof, it needs something to build brand buzz again, and its efforts to bring back customers over the past two years have fallen flat. The Chiptopia loyalty program lasted only three months; it pulled chorizo, the first new meat it's added since its early days, off the menu after just a year; and queso, which had so much potential to rejuvenate the brand, has mostly disappointed.
Chipotle was also behind the curve when it came to its app and mobile ordering, even though it caters to a higher-end crowd than traditional fast-food chains do.
There are still levers the company can pull to make customers excited about the brand again, such as breakfast or limited-time offers, but Ells has been reluctant to mess with his formula. A new CEO may be more likely to tinker.
In its press release, Chipotle said a search committee composed of directors Robin Hickenlooper and Ali Namvar will look for a new leader with "demonstrated turnaround expertise to help address the challenges facing the company, improve execution, build customer trust, and drive sales." The company also hired executive search firm Spencer Stuart.
McDonald's (NYSE: MCD) CEO Steve Easterbrook would seem to be an excellent model for Chipotle's next chief. Under Easterbrook, Mickey D's shares have risen 72%, as the company has found simple ways to boost customer traffic. Most importantly, Easterbrook is listening to the customers who, for example, had clamored for years for the company to offer all-day breakfast. After past CEOs made excuses or refused to do it, Easterbrook found a way to make it happen. Other moves, like $1 sodas, McPick 2 value deals, and an expanded McCafe line, have also been popular.
Chipotle needs a similar operator who will respond to what customers want, rather than Ells' approach, which often seemed to be overly focused only on the "Food With Integrity" platform. The next CEO may want to consider taking a step away from Chipotle's fixation on all-natural ingredients, as that seemed to be the biggest culprit for the underwhelming queso rollout.
Still, investors should remember that Chipotle is stronger than it looks. Its average restaurant's sales, at $1.9 million, are near the top for fast-food chains, and its food quality gives it an advantage over its competitors. With some conventional tweaks like breakfast or limited-time offers, Chipotle could regain the buzz it desperately needs.
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