Counting the cost of food safety issues
The outbreaks of norovirus, salmonella and E.coli linked to restaurants within the Chipotle chain in the United States provide a stark warning about the potential cost of food safety issues. Over 500 people have become ill since July 2015 after eating at the company’s restaurants, with outbreaks centred around different locations in the US.
Leaving aside the physical impact on those customers (and staff) that suffered from food poisoning, Chipotle’s experiences demonstrate five main effects that food safety issues can have on any business:
1. Lower revenues and falling stock price
How Chipotle has suffered financially:
- Profits are down by 44% in the fourth quarter of 2015 compared to the same quarter one year earlier
- Sales have dropped 14.6% in the same quarter at restaurants open for more than 13 months – and 30% in December alone
- Quarterly revenue has fallen compared to the year before
- Store sales are down by 36% in January 2016
- The stock price has plummeted by 40 percent during the crisis, wiping nearly $11 billion from the company’s value
- Compensation paid to its co-CEOs has shrunk by over 50%.
For businesses smaller than Chipotle, the consequences would be far worse. Not many restaurants could survive a 44% drop in profits without closing.
2. Government investigations and legal action
There have been a number of state and federal investigations into the outbreaks at Chipotle, and while some have closed without any charges, others are still ongoing. This means the company could potentially face legal cases, from both affected diners and government agencies.
The legal climate around food safety is getting tougher around the world. Restaurants and large suppliers in the UK that fail to meet legal requirements could now be liable for fines of up to £3 million, with courts now able to take into account the level of harm caused by their actions. Again, this has the potential to shut down businesses due to the size of legal settlements alone.
3. Reputational damage
Despite taking action to overhaul its food safety systems and putting in place new testing requirements and processes, customers have not been returning to the chain. Indeed, given Chipotle’s very public positioning around providing healthy, non-GM sourced food, the damage to reputation is likely to be longstanding.
The company itself said that 63% of customers were aware of its issues, and that about 60% said it would cause them to visit stores less. A previous food poisoning outbreak at Taco Bell led to a decline in sales for 15 months, demonstrating the time it takes to rebuild reputation and public trust.
4. Higher costs
Chipotle has invested heavily to resolve the crisis and win back customers. As well as hiring independent food safety experts to completely update its processes, it then closed all restaurants for four hours to explain the changes to staff. Employees that have been sick have now been told not to return to work for five days – time they’ll be paid for. All of this adds up to substantial one-off and ongoing costs for the chain.
Additionally, to try and win back customers, Chipotle is increasing its marketing budget, with multiple promotions promising free food to customers. It provided 5.3 million free meal codes back in February, and is now in the midst of mailing 21 million further offers to customers across the country. Overall the new marketing campaign is expected to cost the company $50m.
While the scale of the problems at Chipotle are enormous, they illustrate the impact that a food poisoning outbreak could have on any restaurant, large or small. Very few food businesses could survive the combination of a dramatic drop in diners, higher costs and damage to reputation that Chipotle has undergone, showing yet again that food safety has to be a priority for any restaurant if they want to thrive in a competitive market.