In the latter half of 2015, a series of pathogen outbreaks at Chipotle Mexican Grill (NYSE:CMG) caused a precipitous drop in traffic at the Mexican-themed restaurant chain. The ensuing negative publicity caused Chipotle’s stock to drop into the low $400 range from a high of $757 per share. Prior to the outbreaks, Chipotle was one of the most successful restaurant concepts of the past thirty years. CEO Steve Ells, a classically trained chef, helped pioneer the concept of high-quality food made from fresh ingredients in a fast casual environment. Chipotle’s high quality product, simple menu, and efficient service combined to make its restaurants extraordinarily profitable, and this in turn has allowed Chipotle to expand its footprint at a rapid pace without resorting to franchising or borrowing money.
In the wake of the pathogen outbreaks we contacted a number of food safety experts to verify that Chipotle management had established industry leading food safety practices in all of its stores. Wereviewed the history of outbreaks at public and private restaurant chains and tallied the long term impact each outbreak had on each chain’s franchise value. Most importantly, we held conversations with dozens of industry veterans to develop a timeline for Chipotle’s recovery. While we expect Chipotle to suffer through a slow and bumpy recovery, we believe the company has an opportunity to more than double its U.S. store base over time at terrific unit economics.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund second quarter 2016 shareholder letter.
