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February 04, 2016

Restaurant Risk Management: A Tragedy Unfolds

What’s up with the food supply? It’s a question increasingly on everyone’s mind as outbreaks of food-borne illnesses continue cropping up. The Centers for Disease Control and Prevention (CDC) estimates that one in six Americans gets sick every year from contaminated food or beverages, and more than 250 different foodborne diseases have been identified.

If you’re in the food industry, this is a threat you can’t afford to ignore. The risks are greater than ever, and getting caught up in a foodborne illness outbreak could force you out of business – for good. For a peek into the chain reaction of devastation that can result, the Chipotle Mexican Grill story should serve as the perfect case study.

A tragedy unfolds

Launched in 1993 as a burrito stand in Denver by a young entrepreneur who borrowed money from his parents, the Chipotle chain has grown to more than 2,000 locations around the country, and by August 2015, the company had attained a market value of $23 billion.

But that all started to unravel in 2015 when customers started becoming ill after eating at the restaurants. Over several months, hundreds of customers across the country became ill in six separate incidents involving norovirus, salmonella, and E. coli. In just the most recent outbreaks, 58 people across 12 states were sickened from E. coli.

It’s become the perfect storm for Chipotle – and it’s more than a little ironic given the chain’s positioning as a healthy, fresh alternative to traditional fast-food chains, a company that touts “food with integrity.” In fact, it was the first major chain to reject genetically modified food. So eating at Chipotle’s has always been seen as an ethically and ecologically responsible choice.

Unfortunately, the multiple outbreaks of foodborne illnesses have taken a serious toll on that image, and on many other aspects of the chain’s business. Consider the multifaceted costs, inconveniences, and challenges associated with the fallout:

  • Reputational. Chipotle has lost a great deal of trust and is struggling to convince customers that its food is safe. With so many incidents, many are questioning if the company was doing all it could to make its products safe, and the company has faced public criticism of its handling of the crisis.
  • Financial. The ordeal has taken a toll on the company’s bottom line, with sales falling in the last quarter of 2015 – as much as 11 percent overall – and its stock falling 30 percent last year. But that’s just for starters. The company is still dealing with cleanup costs, costs to revamp their operations, legal costs, loss of income, and on and on.
  • Government investigations. The CDC’s outbreak response team and investigators from the Food and Drug Administration (FDA) are still trying to determine the root cause of the outbreaks.
  • Legal. Chipotle is now facing a class-action lawsuit by a group of students who allege the Simi Valley, California, restaurants deliberately covered up signs of a foodborne illness outbreak. On top of that, the Justice Department and the FDA have served Chipotle with a grand jury subpoena related to the Simi Valley outbreak, and may bring criminal charges.

The long road back

It’s a trail of misery. Can Chipotle recover? Sure – other corporations have done it – but it’ll be a long, hard, costly road. While customers are often quick to forgive companies for mistakes, only time will tell if Chipotle will be so lucky.

What if it happens to your food business? Will you survive? If you don’t know, Heffernan Insurance Brokers has a team of experts specializing in business insurance for the food industry as well as a team for restaurants and hospitality that will help you get prepared.

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