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Can Chipotle's (CMG) Launch of Chorizo Boost Sales?

Reportedly, Chipotle Mexican Grill, Inc. CMG is going to leave no stone unturned to lure back customers to its restaurants.

The company has recently turned to menu upgradation to bring back customers. Previously, the company had given away free burritos to customers as a promotional offer.

This time, Chipotle is introducing “chorizo” – a mix of spicy pork and chicken, which proved to be popular among guests when it was tested last year.

The company’s first-quarter 2016 revenues were marred by negative publicity surrounding the E. coli outbreak and norovirus outbreak in many states, which began towards the end of 2015. Traffic was severely hurt when the news broke out about the outbreak in Oregon and Washington. It later spread to seven other states – Illinois, Maryland, Pennsylvania, California, Minnesota, New York and Ohio. Along with this, a norovirus outbreak related to one of its outlets in Boston's Cleveland Circle added to the company’s woes.

Later, in December, the U.S. Centers for Disease Control and Prevention (CDC) announced that it was probing the restaurateur’s links with another E. coli outbreak (with a rare DNA fingerprint) in three other states – Kansas, North Dakota and Oklahoma.

Naturally, as a safety measure, the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients, and after deep cleaning and sanitizing, the incidents dealt a severe blow to Chipotle’s sales.

The fact that Chipotle uses only healthy ingredients has long been its marketing strength and attracted customers despite its comparatively high prices. However, with the negative publicity associated with the E. coli outbreak, Chipotle is now likely to fall out of favor with health-conscious diners.

Chipotle has also reportedly enforced stricter guidelines for suppliers in the wake of these outbreaks, although management is unsure whether all its local suppliers will be able to keep up with them. As a result, changing suppliers would not only raise costs, but will also be a major shift from the company’s marketing policy of using only locally produced ingredients.

In our view, it will take some time for the fast casual restaurant operator to turn the business around completely. However, the introduction of a popular menu item might perk up sales at the moment.

Currently, Chipotle carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same industry include Darden Restaurants, Inc. DRI, Dave & Buster's Entertainment, Inc. PLAY and Carrols Restaurant Group, Inc. TAST. All these stocks sport a Zacks Rank #1 (Strong Buy).

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CHIPOTLE MEXICN (CMG): Free Stock Analysis Report
DARDEN RESTRNT (DRI): Free Stock Analysis Report
CARROLS RESTRNT (TAST): Free Stock Analysis Report
DAVE&BUSTRS ENT (PLAY): Free Stock Analysis Report
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