New CEO Will Struggle at Chipotle

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Chipotle Mexican Grill Inc. (NYSE: CMG) has hired a well-regarded executive from Yum! Brands Inc. (NYSE: YUM) to be its new chief executive officer. He has run the Taco Bell franchise, which investors believe makes him a strong candidate for the top job at the battered Mexican food chain. Based on the depth of Chipotle’s problems, a change at the top of the company probably won’t make much difference.

The company issued a press release about the hiring:

Chipotle Mexican Grill today announced that its Board of Directors has appointed Brian Niccol as chief executive officer and a member of the Board, effective March 5, 2018. Niccol most recently served as CEO of Yum! Brands’ Taco Bell Division, where he was responsible for the highly successful turnaround of the business.

The current CEO and co-founder, Steve Ells, will become executive chairman. It is not clear how much responsibility he will cede to Niccol. Founders who remain at the head of company boards are often meddlers. However, the board’s argument for giving Niccol a great deal of latitude is his success managing Taco Bell for Yum.

Chipotle shares rallied on the news but are still close to a 52-week low, down 40% in the past year, while the S&P 500 is higher by 14%. The depth of the company’s problem is long term. Chipotle shares have dropped 20% in the past five years, while the S&P is higher by 73%. Shares of McDonald’s Corp. (NYSE: MCD), which once owned a large piece of Chipotle that was spun out in 2006, are up about the same as the S&P over the five-year period. At one point, investors believed the McDonald’s decision to divest was a mistake.

Chipotle’s difficulties are widely known, which makes a turnaround even harder. Much of the fast-food consuming population has been exposed to news about the repeated food poisoning problems that extend from 2008 to July of last year. Since there are so many fast-food alternatives, it will be particularly hard to get customers back to a restaurant where they believe they cannot trust the food quality. The announcement of a new CEO does not address the problem at all. Niccol has not had to face the great depth of anything close to the trouble over the course of what has been a successful career.

That Ells could not turn around Chipotle is telling. While he can be blamed for the food poisoning issue, he also can take credit for the years of rapid growth that preceded it. Certainly, no one could be more intimately knowledgeable about the troubles. Presumably, he is either a weak executive, and has been for several years, or a scapegoat.

Niccol steps into a set of problems he cannot solve.