Taco Bell Proves Chipotle Can Overcome E. Coli Outbreak

• Chipotle Mexican Grill, Inc. CMG shares continue to tumble following an E. coli outbreak.
• The company now blames the outbreak for its first projected quarterly same-store sales decline in its public history.
• Taco Bell had a similar outbreak back in 2006, and the long-term impact of the outbreak on the company’s sales was negligible.

Shares of Chipotle Mexican Grille are now down more than 25 percent in the past three months after the company has announced it expects its first quarterly same-store sales decline as a public company. The company reports that sales have collapsed by as much as 20 percent following a recent E. coli outbreak at its restaurants.

While the impact of the outbreak is certainly severe, Chipotle shareholders can look to a close restaurant rival for proof that the negative press and customer fears surrounding this type of outbreak can be overcome in the long-term.

Taco Bell Outbreak

Back in 2006, Yum! Brands, Inc. YUM's Taco Bell franchise experienced a similar outbreak of E. coli that resulted in at least 71 customer illnesses in four different states in the Northeast. Taco Bell even temporarily closed all of its restaurants in Philadelphia during the outbreak. Yum Brands share price fell 3.5 percent during December 2006 as a result of market fears over the lasting impact of the outbreak.

Related Link: Wall Street Mixed On Chipotle: More Educated Customer Base And Food With Integrity Branding Complicates

Rebound

Taco Bell certainly faced legal backlash to the tune of $76 million as a result of the outbreak, but the potential damage to Yum Brands' shareholders had much more to do with whether or not Taco Bell would permanently lose customers.

It turns out that Taco Bell's customers had short memories after the immediate health threat passed. In fact, Yum's stock has produced returns more than tripling those of the S&P 500 in the years since the outbreak.

Chipotle's Response

The most important thing for Chipotle to do following the outbreak is act quickly to address the issue and assure customers that the food is safe. So far, at least 45 people have become ill related to the Chipotle outbreak. However, after temporarily closing 40 locations in the affected region, the company now assures its customers that no new illnesses have occurred since November 7.

If, in fact, the E. coli outbreak is completely contained, the resurgence of Taco Bell indicates that happy customers have short memories. If Chipotle continues to lose sales throughout 2016, it will likely be a sign that the company has more long-term fundamental problems than simply the E. coli outbreak.

Disclosure: the author has no position in the stocks mentioned.