Chipotle Cooperating With Fed Criminal Probe As Sales Worsen

Chipotle Mexican Grill not only told investors yesterday that its sales had been harder hit than it initially anticipated by the reaction to recent outbreaks of E. coli and other food-borne illnesses, it also revealed that it received a grand jury subpoena last month for an investigation by federal authorities into a norovirus outbreak in August at a restaurant in Simi Valley, Calif. 

“The investigation is being conducted by the U.S. attorney's office for the Central District of California in conjunction with the Food and Drug Administration's office of criminal investigations,” reports Samantha Masunaga in the Los Angeles Times. It has been asked to submit a “broad range of documents” related to an “isolated” incident in August and says it is cooperating fully with the authorities.

“Criminal inquiries related to food safety outbreaks are uncommon, but there has been increased attention on these issues and companies' responses to them, especially after the FDA Food Safety Modernization Act was signed into law in 2011,” Masunaga reports. 



“We're sort of in new territory here,” Michael Roberts, executive director of the Resnick Program for Food Law and Policy at UCLA, tells Masunaga. “I think we're seeing a new partnership between the FDA and prosecutors.”

“It’s pretty atypical for the FDA to get involved in a single store, albeit in a sizable outbreak,” Steve Kluting, regional director of the food and agribusiness group at risk-management firm Arthur J. Gallagher & Co, tells the Wall Street Journal’s Julie Jargon and Jesse Newman. “It makes me suspect it’s part of a bigger investigation involving Chipotle’s supply chain or an intentional contamination by an outside party at that store.” 

Chipotle’s woes started when it closed 43 restaurants in Washington state and Oregon after health authorities linked an E. coli outbreak to six restaurants in the region, reports Roberto A. Ferdman in the Washington Post.

“Illnesses contracted at Chipotles were then reported in seven more states, including Illinois, Pennsylvania and Maryland,” Ferdman writes. “Then in December, at least 80 students at Boston College fell ill after eating at a Chipotle, leading the company to close another restaurant. Boston health officials said the cause was norovirus, a common virus, while citing the restaurant for two health violations: improper handling of poultry and the presence of a sick employee.” 

The barrage of bad news has battered the chain’s reputation with consumers and its buzz with investors. Until recently, its 1,900 units had enjoyed a steady rise and stellar reputation. 

“In a incredibly competitive fast-food industry, Chipotle has tried to distinguish itself as selling ‘food with integrity’ with high-quality ingredients and more cooking in-house,” points out CNBC’s Katie Little. “But following the outbreaks, it has shifted some of these cooking steps out of restaurants to heighten food safety, a move that is more in line with traditional fast food.”

“I'm not sure, quite frankly, they'll ever have the halo they did prior to the outbreak,” Bob Derrington, senior restaurant analyst at Telsey Advisory Group, tells Little, although he thinks sales will recover over several years. “It could take a decade before they're fully back,” Gene Grabowski, a partner at K Global and head of its crisis communications group, tells Little. 

Timothy Calkins, clinical professor of marketing at Northwestern University's Kellogg School of Management, tells NPR’S Jim Zarroli that while customers are often quick to forgive companies for transgressions, that may not be the case this time.

“The difficult thing for Chipotle is that, it's not that there was one incident. There have been a number of different incidents. And the problem with that is that it creates an overall perception, and it raises questions about safety,” he says.

“The burrito chain's stock has taken a walloping, falling by more than one-third in last 12 months and losing 5% to close Wednesday at $426.67. The company said it has approved the repurchase of up to another $300 million of its shares, in addition to a $300 million authorization approved in December,” writes Aamer Madhani for USA Today.

Meanwhile, Chipotle “has parted ways with Edelman” and is reviewing proposals from several PR agencies with a new firm expected to be in place within the next few weeks, the Holmes Report’s Arun Sudhaman reports. The “agreement” to part ways at the end of 2015 after seven years comes after Edelman took on a “sizable piece of business ... that presented a conflict,” Chipotle communications director Chris Arnold tells Sudhaman.

1 comment about "Chipotle Cooperating With Fed Criminal Probe As Sales Worsen".
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  1. Jay Fredrickson from Fredrickson Services Inc., January 7, 2016 at 12:45 p.m.

    The stock will not recover until it bottoms out at $338 per share.  It's got a way to go, but it will not hit $750 again for at least 5 years, if ever.  The company would be better off it it split 10:1 to bring in retail investors instead of mutual funds and hedge funds.

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