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.  

Farmers markets and food safety

Last spring, I noted that Marc Bellemare from he University of Minnesota gave a provocative seminar in our department on the relationship between farmers markets and foodborne illness.  This weekend, the Marc discuss the research in a piece for the New York Times. 

Here is the main finding:

“As we will report in an updated version of an unpublished working paper released last summer, we found correlations that, in statistical parlance, are too robust to ignore. First, we found a positive correlation between the number of farmers markets per capita in a given state and in a given year and the number of reported outbreaks, regardless of type, of food-borne illness per capita in that state that year. Then, we found a similar positive correlation between farmers markets per capita and reported individual cases of food-borne illness per capita.”

And,

“And even if our results did identify a causal relationship between farmers markets and food-borne illness, it would not be possible to identify the precise mechanisms through which this happens, and it would be a critical mistake to conclude that the foods sold at farmers markets are themselves to blame. That is because most cases of illness are caused by consumers who undercook or fail to wash their food. Indeed, our results may suggest that many people erroneously believe that food bought at farmers markets needn’t be washed because it is “natural.””

On the Chipotle Food Safety Outbreaks

Much has been written in the past couple weeks about the foodborne illnesses contracted by Chipotle customers.  I've been a bit reluctant to weight in because, at least in some social media circles, there seemed to be some pleasure taken in Chipotle's misfortune.  From my perspective, however, I don't want to delight in someone else's misfortune (particularly some unsuspecting food consumer's foodborne illness) even if I've previously been critical of the vendor's marketing practices.   What I will say is that Chipotle engaged in a variety of marketing practices  (e.g., going non-GMO, no hormone, etc.) the best science suggests have no material impact on food safety, and yet the moves were likely aimed (at least in some part) to increase the perception (rather than the reality) of food safety.  

Marketing aside, there is a real trade-off to be made between selling "clean", fresh, food sourced from small-local vendors and food safety.  There are likely some taste benefits with fresh, unfrozen food and there is nothing inherently wrong with being willing to pay a bit more for wares from smaller more local providers.  But, choosing these options may make ensuring food safety a bit more challenging.  

That's the message I tried to communicate to the reporter Kimberly Leonard for this piece in US News & World Report.  She quoted me as saying:

““If you want to make products fresh, that means you’re not going to use a preservative or it’s going to be unprocessed,” says Jayson Lusk, president-elect for the Agricultural and Applied Economics Association, who has been critical of Chipotle’s marketing practices. “It does provide a real tradeoff in terms of providing a safe product for the consumer.””

and

“Lusk says his research has shown that the increase in demand for all-natural, so-called “clean” food, is a “real challenge to food safety.”

“We tend to have this idea that small is clean and safe – it could be true but it’s not necessarily true,” Lusk says. “You’ll have more food waste and it will be more expensive, and your food safety is more of a challenge. … It’s just a trade off they make.””

I touched on this same topic for a chapter on technological improvements related to food safety I wrote for my forthcoming book, Unnaturally Delicious: 

“The bigger problem, however, is what happens to the safety of food when seemingly unnatural ingredients are not used. Keeping food safe without using chemical additives is a big challenge for food manufacturers and retailers. Consumers are increasingly demanding fresher, more natural, “clean” food. Yet, as one food safety expert told me, “It’s a tremendous strain on the food-producing industry. If you take away growth inhibitors, what do you do?” One executive of a large food retailer remarked, “As consumers are asking for fresh and more natural food, we have to take out ingredients and preservatives, which makes food less safe.” Fresh foods might have taste advantages, but they also tend to have shorter shelf lives, increasing the likelihood of earlier spoilage and food waste. Moreover, research and development costs involved in reformulating preservatives to increase the perception of naturalness are passed on to the consumer in the form of higher food prices, even when the preservatives’ underlying chemical properties have not changed.”

Here's another portion of the book related to a discussion I had with Frank Yiannas, the VP of food safety for Walmart (written well before news of the Chipotle outbreaks emerged):

“I started by asking about the size of Walmart. More than 120 million Americans (more than a third of the U.S. population) shop at Walmart every week. Does the sheer scale of the operation make the U.S. food system riskier? If Walmart has an outbreak, multitudes would be sickened. Yiannas replied: “One out of every four dollars spent on food are spent at a Walmart. We can make a big difference. Large organizations like Walmart result in a safer food system.” He points out that when Walmart makes a change, it affects the whole system. Sure, smaller companies might have outbreaks that affect fewer people, but when lots of small companies are having lots of small outbreaks, the problem is more widespread. A downside to small companies, said Yiannas, is that they can’t easily invest in improving the system as a whole. While Walmart often attracts negative attention because of its size and scale (e.g., Do they pay workers fairly? Do they hurt local mom-and-pop busineses?), at least in the world of food safety, their size has significant benefits for its customers, and as I’ll soon discuss, even for non-customers.”

Incentives for Safer Food

Over at the US Food Policy blog, Parke Wilde writes about the terrible track-record Foster Farms had with noncompliance leading up to it's widely publicized Salmonella outbreak.

Parke advocates for better public access to food safety information (such as, I presume, the public release of noncompliance reports written by food safety inspectors) as one approach to partially deal with food safety issues.  

He also points out the main challenge with food safety: as consumers we often cannot directly observe whether a food is contaminated before purchase.  Parke writes:

“Food safety problems are fundamentally about lack of public information. If consumers had magic sunglasses that displayed the presence of Salmonella on chicken in the grocery store, there would be no need for government regulation. Immediately, faced with market consequences for distributing chicken with Salmonella, the companies would clean up their product. ”

Well, they may not be magic sunglasses, but it appears entrepreneurs are working on hand held sensors, chopsticks, and iPhone apps that may one day let us quickly check for food contaminants.  

These innovations may, one day, prove to be a very powerful incentive for companies to provide safe food.  The nice thing - from the consumers' perspective - is that they let us take action before an illness happens.

Hormones in Soybeans and Beef

About 90% feedlot cattle in the US are administered some type of growth hormone to promote growth.  Use of the hormones convey economic benefits to consumers (lower prices) and a host of environmental benefits (more meat using less land, less water, less C02).  The biggest drawback, from my perspective, is the evidence that use of such hormones reduces the eating quality of steaks, particularly by reducing tenderness.  

While reduced tenderness might be a reason to eschew hormones, food safety isn't.  Some people are worried about the health effects of these hormones, but such concerns do not mesh well with the scientific literature, and the concerns tend to ignore relative risk.  Specifically, there are much higher levels of naturally occurring hormone-like substances in many foods we eat.

As a result, there have been many attempts to communicate this information to the public.  Examples of such discussions appear at BeefMyths.org, US Meat Export Federation, the NCBA, and extension facts sheets from Michigan State University, University of Nebraska,University of Georgia, and many others.  

A common approach is to compare the extra amount of estrogen in a serving of beef from an animal that has received a hormone implant to one that hasn't, and then compare that to estrogen-like substances in other foods like soybean oil (it is a comparison I've made myself in a study on the effectiveness of such communication), cabbage, peas, and potatoes.

After making this comparison in a talk a couple weeks ago, an audience member gently questioned my numbers on soybean oil.  While it is true that soybeans have high levels of isoflavones, which acts like estrogen in humans, it turns out that these compounds are not in soybean oil.  

Here is a publication from the USDA Ag Research Service showing the isoflavone content of a long list of foods.  As you can see, soybeans have quite a bit, but if you'll look down on page 38, you'll find soybean oil listed in a table titled "List of Foods Containing Zero Values for Isoflavones."  This website neatly summarizes the USDA data.

So, where does that leave us.  First, those that have used this comparison should try to correct the record (as I'm doing here).  If we are arguing that the public should make decisions on "the facts," we darn well better get our facts straight.  Second, the relative hormone comparison remains useful (though only marginally persuasive with most consumers), but one needs to drop soybean oil and use other soy products instead.  An Iowa State University Fact's Sheet by Dan Loy helps make the proper comparisons.

Here is a key screenshot