Why Chipotle Still Handily Leads Its Competition Despite Food Scandals

Chipotle Mexican Grill Inc. (NYSE: CMG) has now become synonymous with salmonella, norovirus and E. coli. It was that one-two-three punch that helped tear shares down 37% from their 2015 highs. Since the beginning of last week though, Chipotle has been on a tear in the exact opposite direction, with shares up $81 from their lows, or 20% in a single week.

The question of whether Chipotle’s competitors will benefit noticeably from the restaurant chain’s fall from grace has long been on the minds of investors ever since the infamous outbreaks began. A look at the stocks of Chipotle’s main competition, taking into account the recent surge higher in Chipotle’s stock, may answer that question. While fundamentals have yet to back up the claim, it seems that shareholders have magnanimously forgiven the chain for its misdeeds, and possibly customers to follow, allowing the company to maintain its position given a little more time for recovery.

Looking at Chipotle’s competitors in 2015, none of them have been doing well, to say the least. Fiesta Restaurant Group Inc. (NASDAQ: FRGI) was down over 42% last year. El Pollo Loco Holdings Inc. (NASDAQ: LOCO) is down almost 40%. While Del Taco Restaurants Inc. (NASDAQ: TACO) was up 9.5% for the year, it is still down 43.5% from its own highs. Look at a one-year chart of these four in isolation and you’ll have a hard time figuring out which one of them is guilty of three counts of food poisoning.

Chipotle’s initiative to close all its stores on February 8 in order to retrain employees regarding new food safety procedures may simply be a public relations gimmick, or at least a combination of gimmick and real change. Regardless, the higher-ups in the company know very well that they cannot get away with this again and keep their jobs. Food safety will probably be the number one priority at Chipotle until the press forgets about the food poisoning fiascoes of 2015. At that point, it will be simple competition again between Chipotle and its Mexican-themed competition.
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On an even playing field with no E. coli involved, Chipotle wins handily. The question is how long will it take for customers to forgive and forget? If Chipotle keeps up its quality and service, then not very long. People have short memories, especially when they’re hungry. If the restaurant chain can convince the public that these sorts of episodes will not happen again, then all will be forgotten a few months from now and it will simply be an historical footnote for restaurant historians.

Look at it this way: If Chipotle can perform on par with its competitors while being handicapped with three different food poisoning scandals, then unhampered it will probably break away. The past week has shown what it can do. As long as it is serious about food safety being its top priority, the company should recover and continue growing.

Of course, it is still on probation, and if there is one more incident, then Chipotle is in deep trouble. For now though, it looks like the best choice among Mexican-themed restaurant chains.