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With Chipotle Down and Out, Competitors See Opportunity

In the wake of its food safety crisis, Chipotle's competitors eye the throne

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On the morning of February 8, Chipotle stores across the country were noticeably absent of customers, trading the bustle of burrito-rolling and avocado mashing for a company-wide live-stream on food safety. And while some 60,000 Chipotle staffers gathered for a lesson on new measures the company implemented in the wake of one of the most widely-covered food safety crises in recent memory, the company's competitors were taking full advantage.

Moe's Southwest Grill purchased a full-page ad in USA Today that read: "We're open, especially on February 8th." On The Border offered $5 "Border Bowls," complete with free chips and salsa. Qdoba tweeted a photo of a burrito along with the caption, "Hunger doesn't accept rain checks." Freshii announced a half-priced, Mexican-inspired menu, along with the hashtag "#chipotfrii."

Competition is sniffing around for opportunity.

It's been more than nine months since the first set of diners were sickened by E. coli outbreaks at Chipotle stores in California and Washington, but the fast-casual chain's reputation remains in jeopardy. Initial decreases in foot traffic, earnings, and stocks were to be expected but the company is still sliding on the popularity scale. Now, its competitors are looking to do more than simply bank on the burrito chain's half-day off — they want to come out on top.

The Harris Poll's annual Brand of the Year Awards recognizes the strongest brands in a number of categories, based on consumer response. In its 2016 poll, released April 20, consumers selected Moe's Southwest Grill as Brand of the Year, Fast Casual Mexican Restaurant. Chipotle, which had previously won the title every year since 2013, didn't make it to the top four.

"We really view the competition as share of stomach," says Moe's President Bruce Schroder. "We're very fortunate to be in the fast-casual space and I think that's because more and more people are trading up to quality or in some cases trading down to value. In terms of differentiating ourselves [from our competitors], it's the way we produce and serve our food."

In a survey of customers that visited Chipotle in April 2016, location analytics firm Placed found that 21 percent of customers were lowering the frequency of their visits as a result of the E. coli incidents, which occurred in the second half of 2015. In an analysis of foot traffic at Chipotle restaurants, Placed found that the restaurant's competitors were benefiting as a result. The increase in market share (in terms of percentage of visitors) at Moe's Southwest Grill went up five percent, while visitors at Panera increased seven percent from October 2015 to December 2015, around the time of the food borne illness outbreaks at Chipotle. Foursquare's recent research on traffic patterns predicts a 30 percent drop in same store sales.

Though Schroder says Moe's hasn't implemented any new food safety policies "as a direct result" of the Chipotle incidents, he notes the company has implemented the use of anti-microbial produce wash in all of its restaurants (by June, the program will be fully rolled out at all locations).

As foot traffic into Chipotle dipped, competitors' sales ticked up.

Despite its rising popularity on some polls, consumers still likely aren't as familiar with Moe's as they are with Chipotle. Most don't know, for instance, that "Moe" isn't a person, but an acronym — for Musicians, Outlaws, and Entertainers. A forthcoming marketing campaign — Schroder says the company only launched national media campaigns a few years ago — seeks to highlight the company's "personality" and differentiate it from its competitors. As for whether logo redesigns or any major brand changes are in the works, Schroder says, "That's something we're contemplating in the future."

There are currently 600 Moe's locations in the U.S., one of which — in Roswell, Georgia — is the brand's "Moe's of the future." That location serves as a testing ground for new menu items, service methods, and seating and design. The "innovation center," as Schroder calls it, will soon be testing a fajita steak quesadilla, among other new dishes.

Chipotle, on the other hand, rarely adds new menu items. In fact, its simplified menu has traditionally been part of the brand's success. A UBS analysis of average online customer ratings across more than 90,000 Chipotle customers found that "declining review scores over the last several years... could signal lingering challenges." The analysis cited slow service, lingering concerns over food safety, and "menu fatigue" as reasons for those deteriorating scores.

A newly redesigned Qdoba restaurant exterior in Omaha Qdoba

A newly-redesigned Qdoba in Omaha

Fellow fast-casual Mexican chain Qdoba is in the midst of a "brand pivot," according to a company spokesperson. The company is now testing a new restaurant design in about 30 stores across the country. This new design — the result of consumer research conducted a couple of years ago — includes community tables, mix-and-match seating (none of which is bolted to the floor), patios, and garage doors. The new aesthetic has been in the works for a couple of years, but will soon be rolled out in earnest.

"Ultimately, this is the new look of the brand," says John Dowachinski, Qdoba's Chief Development Officer. "And the restaurants will all be converted within the next few years."

Unlike many current Qdoba stores, which operate in the center of strip malls, the company is also looking into opening more end-cap units (retail spaces at either end of strip malls, which have higher visibility) and potentially freestanding stores. "To make Qdoba more of a gathering place, we need a larger footprint," says the company's Chief Marketing Officer David Craven. "A lot of our newer locations will have more square footage."

Craven says the new focus isn't relegated to aesthetics, either. "We have been used primarily as a lunch destination, and we believe we have a great opportunity to be a dinner destination as well." Though Craven says Qdoba hasn't yet started "peeling apart" the dinner menu, the company is looking at "a heavy focus on seasonal offerings" and shareable items for larger group sizes.

The interior of a new Qdoba store Qdoba

The interior of a new Qdoba store

So it is safe to say Qdoba is moving away from the fast-casual look that Chipotle pioneered? "It's not that we don't consider Chipotle to be competition, but we [also] consider local, independent eateries that millennials are frequenting to pull share from," says Craven. "To do that, we need to ensure that not only do we have the menu, but that we can explore offerings that the fast-casual restaurants don't offer."

There are hundreds of millions of dollars that have drifted out of Chipotle's revenue.

Qdoba, which currently has 674 locations, is looking to add 50 to 60 new stores in 2016 (by comparison, Chipotle has more than 2,000 stores). And despite poor sales for its parent company, Jack in the Box, sales at Qdoba were up last quarter. As for whether Chipotle's lackluster numbers have attributed to a spike in sales at Qdoba, executives shy away from a direct answer. "From a strategic standpoint, we are seeing growth," says Craven. "We are seeing movement in the direction we want to be headed."

The move by some of its competitors to shift focus from fast-casual likely has less to do with Chipotle, says restaurant consultant Aaron Allen, and more to do with another major player on the food scene — Starbucks. "The creation of the 'third place' was counter-intuitive early on — to give away free Wi-Fi and have people lounge around," he says. "The notion before was to get them in-and-out." Of course, the gamble paid off and, says Allen, "endeared a lot of loyalty [to Starbucks]." With more people working remotely and freelancing, he adds that the shift from fast-casual to "third place" might not be such a bad idea.

Allen says the time is ripe for competitors to use Chipotle's slip-ups to their advantage. "It's a good time to pounce on them in a certain respect," he says. "There are hundreds of millions of dollars that have drifted out of Chipotle's revenue and into other restaurants [as a result of recent food safety problems]. I think $300 to $400 million is the amount they've lost in revenue in terms of customer attrition."

Allen compares the restaurant industry to the airline industry, saying that one mishap can be "the equivalent of an airplane crashing," in terms of negative press and loss in sales. He expects Chipotle to release a barrage of advertisements over the summer but, in the meantime, notes that smaller, startup chains ("particularly those who are priced a bit higher") will have an advantage over the burrito behemoth. "Places like Tender Greens and Sweetgreen have an advantage now," says Allen, due to the companies respective supply chains. Chipotle's massive size makes it increasingly difficult to purchase the amount of non-GMO, locally-sourced, quality ingredients it banked on as it grew.

The restaurant industry is like the airline industry — one mishap can be "the equivalent of an airplane crashing."

Touting the integrity of a restaurant's food can be a risky thing. "You only have to have one slip up and you can unravel decades of brand building in seconds," says Allen. In other words, don't expect to see Chipotle's competitors playing up their commitment to "organic" or "clean" foods anytime soon. Even Taco Bell, which recently promised to stop using antibiotic-laced chickenis more focused on being an easy meal option than serving food of better quality.

So what can consumers expect to see more of as a result of the Chipotle disaster? "These days, 'fresh' is the most bankable word," says Allen. "It allows you to say 'healthy' without actually using words like 'nutritious.'"

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