Our company philosophy, which is fast served food

Our main discussion focus has been different
types of risky assets and as such I will discuss Chipotle and its stock price
development. I have a very strong personal experience with this company as I am
a student and I eat there very often. I believe in their concept and company
philosophy, which is fast served food using high quality ingredients. The
company was very successful between 2008 and 2015, however they have been
struggling since that initial extended period of success. In this paper, I will
take the opportunity to investigate how the company affected the stock price
and vice versa.

Chipotle Mexican Grill is an American
chain of fast casual restaurants. Chipotle is one of the pioneers in the fast-casual
dining market. The specialties offered are the burrito and the tacos. Chipotle
tries to offer very fast food for relatively cheap prices, while maintaining
high quality standards. Chipotle’s low prices are achievable with their special
food sourcing techniques that other restaurants do differently, they have a
more direct relationship with local growers and suppliers.

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The company was founded in 1993 by Steve
Ell’s who still is the current CEO. In 1998 Chipotle had 16 restaurants, when
McDonalds Corporation became a major investor. By 2006 Chipotle had over 500
locations, the expansion was large and rolled out rapidly. With its simple menu
and simple mission Chipotle’s was able to open up over 2000 locations by 2015.
The stock price gained over a 1000% between 2009 and 2015, with every single quarter
posting wins.

There were absolutely no signs of
weakness.  However, as we discussed in
class, Chipotle cannot be counted as a risk-free asset.  The Chipotle stock price had quite a heavy
drop in the 3rd quarter of 2015, therefore we can confirm that it is
not risk-free at all. Just looking at the stock price and looking at the rest
of the stock markets in 2015, it was still a pretty good year for the overall
market. Now why exactly did the stock price tank when other markets were doing
fine?

As seen in the BusinessInsider Newspaper
article in November 2015, Chipotle Mexican Grill had an issue where four dozen
people were infected with the E.coli virus. This virus was transmitted because
of contaminated food and bad hygiene in the kitchen. The company was so focused
on local food sourcing and the growing template of restaurants that it can be
assumed that there was not as much focus on preparation hygiene in the
decentralized kitchen model.

Perhaps having over 2000 locations in the
U.S. during such a short space of time was maybe too fast an expansion. The
company was later plagued by outbreaks of other viruses like norovirus and
salmonella affecting staff and customers. One could research a million
different reasons why this happened, but we know that it is impossible to know
exactly the reason why these outbreaks happened. However, it is a good
illustration of why it is impossible to predict the stock price of such a stock
as Chipotle. There are many outside factors that can affect the stock price,
some within control and others not. This clearly has nothing to do with market
risk, but more with diversifiable risk.

 In
this article, it says that Chipotle Mexican Grill is taking every precaution to
address this multistate outbreak, however it did not succeed in restoring sales
figures which you can see obviously again in the stock price. Steve Ell’s even
placed a personally signed full page ad in the papers apologizing for the harm
that might have been caused and promising that Chipotle would become the
pioneer in food preparation hygiene much the same way that they were the
pioneers in fresh high-quality food sourcing. 
The company had to make some adjustments to their initial model and relinquish
some of the food preparation to centralized kitchens to address the weak links
they had in the control of hygiene. Chipotle incorporated a very lengthy new
hygiene plan to recover from this crisis. This process of basically
restructuring the entire company is going to cost a whole lot of money and
production cost were probably going to rise as well. Ell’s couldn’t estimate
the exact cost but told it’s shareholder that it will be costly and the profit
margin on the already cheap food is going to decline. Besides that, the company
lost a whole lot of regular customers that were not going to come back for a
long time, which impacted overall sales negatively. The total overhaul of
Chipotle’s systems and processes will definitely have come at a cost to the
company as well as the new hygiene scrutiny and testing standards that have had
to be implemented.  This would also have
an impact on profitability. 

Now in 2017 the company still has not
recovered well from its crisis two years ago. The company tried to regain its’
best customers with a small loyalty program but has not been able to reach the
popularity of the height of its performance. The company remains extremely
vulnerable where even the actions of a single irresponsible employee can have
an effect on the stock price. The founder and CEO resigned this month which now
makes me wonder whether the company will be driven with the same passion for
integrity and innovation.

This is why you can estimate this stock as
a risky asset with a low return on investment and therefore it has very low
utility. Investors are acutely aware of all risks related to the company, and
with that their risk aversion coefficient is very high. This means that Chipotle
needs to post unbelievable figures to make their stock attractive again, as
investors want to be well compensated for taking this risk.

In this situation I would possibly hold a
small amount of the stock as there might be a small recovery to gain from,
however I would balance out an investment portfolio with known performers with
less risk and T-bills.  To some extent I
would explore some newcomers to the market, but in a nutshell I think Cipotle
has had it’s day.

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