When will Chipotle recover?

By now, I suspect everyone is well aware of the fall-out from Chipotle's foodborne illness outbreaks.  While I've previously discussed some aspects of the outbreaks, I want to touch on a different dimension here.  What are the financial consequences and when will Chipotle recover?

First off, it is almost impossible to answer the "when will Chipotle recover" with any degree of certainty.  I've seen several stories on impending lawsuits, and the timing and outcome of those legal disputes are somewhat erratic and hard to predict.  

In any event, let's look at what's happened thus far.  Chipotle started having some outbreaks in late summer and early fall, but when the the CDC began reporting outbreaks associated with Chipotle in early November 2015, that's when things started heading south.  Since the middle of October, Chipotle's stock (symbol: CMG) price has fallen by about 40% (from above $700/share to low-to-mid $400/share).  The overall stock market has been tanking in recent weeks, but as the chart below shows, Chipotle's stock (the solid black line) fell far more than did the S&P 500 (the light purple line).

One of the things this result illustrates is the private incentive for companies to invest in food safety.  Here's a little snippet from my forthcoming book, Unnaturally Delicious, on that topic:

The reputation conveyed by brand names might allow firms to make a bit more money, but it also exposes them to large potential losses in the event of a product recall or food safety event. Reputation is a two way street, and a once solid name can quickly work against you if it becomes tied to bad news. Research shows that meat recalls by publically traded companies typically result in a 1.5% to 3% loss in shareholder wealth. For branded products like hot dogs, a food safety recall tends to reduce sales by more than 20%, and the negative effects persist for more than four months.

The statistics cited in the above paragraph come from a couple academic papers by Michael Thomsen and colleagues (see here and here).  Here's another interesting paper from a group of agricultural economists showing that consumers exposed to information about a food safety outbreak reduced their willingness-to-pay for the affected brand up to 50 days after they received the information.   They conclude:

Results from this study indicated that consumers are willing to change their purchasing behaviors to avoid unsafe products. Both positive and negative information had an effect on consumers’ WTP. Consumers were willing to pay less for the leading-brand chicken after they received negative food safety information compared to a control group that did not receive this information. Participants that received positive food safety information about Ranger brand chicken were consistently willing to pay more for this safer option than for leading-brand chicken. This suggests that when the information about which brands are safer is available, consumers are willing to alter their purchasing behavior to favor the safer alternative, even if it was a relatively unknown brand. Both of these effects appeared to last well beyond the initial exposure to media information.

So, the length of time it takes to rebound depends, in part, on what sorts of additional positive and negative information come out about Chipotle.  It may also be useful to look at similar events for other companies.  Taco Bell had a widely publicized Salmonella outbreak a few years back, and it really hit the news around the 1st of February 2012.  Here's a plot of the stock price of YUM! Brands, which owns Taco Bell.

You can see a downward movement in mid 2012, but the price rebounded by the end of the year (before falling again). But, the mid-2010 fall was less than 10%.  This helps illustrate the fact that it's hard to generalize.  How the public responds to a recall depends on how they view the company and how the company responds, among other factors.

It's also useful to take a step back and take a longer view.  Yes, the price of Chipotle has fallen about 40% in the past few months.  But, if you'd bought their stock back in 2008, when the price was around $50/share, you'd still be up over 700% after the recalls.