Back in October of 2015, the once ultra-hot Chipotle poisoned itself when it allowed widespread E. coli outbreaks in several of its restaurants, scaring away customers and investors alike. After of year of muddling its way through a flawed recovery process, it would seem like the last thing Chipotle needed was for CEO Steve Ells to criticize the company’s progress and question the guidance about future performance that it had given Wall Street.
But that’s exactly what Ells did. Presenting at a Barclay’s investor conference on Tuesday, Ells told the audience that he was “nervous” about meeting Chipotle’s established earnings guidance. The comment dragged the Chipotle stock down another 7%, exacerbating an already brutal year for the company’s shareholders.
While Ells also affirmed that the company was on the right track, he then made a statement that seemed more like something that would come from a health inspector’s report or an internal performance review: “I’m not satisfied with the rate of recovery. I’m particularly not satisfied with the quality of experience in some of our restaurants.”
That’s not the usual, cheery “we’re-making-terrific-progress-so-please-be-patient” message most CEOs would offer up after a year of trying to lead a company out of the abyss.
It was not only a candid thing to say, but savvy as well.
Why? Because the whole game for Chipotle changed back in early September when Bill Ackman’s Pershing Square took a 9.9% stake in the company.
Once that happened, Ells had to forget the first two decades of rapid growth and gushing public accolades for dramatically improving fast food in America. He also had to take zero solace in how far the company had come since the dark crisis months in late 2015.
None of those things mattered any more once Ackman entered the picture, which effectively established a new baseline for how the company would be measured going forward. Chipotle’s all-time high stock price of nearly $750 no longer mattered, only the price at which Ackman bought in, which is estimated to be somewhere just north of $400 per share.
While Ackman always asserts long-term intensions with his investments, he’d undoubtedly love to rack up a highly visible victory sooner than later, given Pershing’s recent struggles. Therefore Ells’ public expression of disgruntlement was wise for three important reasons:
It resets expectations
In most turnarounds, the first thing new management does is lower expectations, usually by packaging up every looming financial liability and pushing it out publicly in one big lump. The intent is to get as much of the bad news out of the way as soon as possible, instead of letting it dribble out over time.
As Chipotle’s founder, Ells is certainly not new management. But the sudden emergence of a new lead shareholder has fundamentally changed the company’s governance dynamics. Unlike some founders of game-changing companies who later bunker in when hard winds blow, he seems to understand that the game has changed again, and he needs to move with it.
Six weeks after Ackman took his stake, Chipotle announced quarterly financials that significantly underperformed expectations, driving the stock below $360, its lowest level in four years. Then, as the stock price began to creep back up in recent weeks, Ells seemed to deliberately try to temper any premature optimism with his “nervous” and “dissatisfied” remarks at the Barclay’s meeting.
It identifies solvable problems
By expressing his frustration with the pace of progress, Ells framed the problem as one of speed, not strategic direction. There’s a big difference between those two. Accelerating a recovery plan is far easier than having to reinvent one that is perceived as simply not working.
It establishes Ells as part of the solution
With many of his investments, Ackman has often viewed the existing leadership as a big part of the company’s problem, and the historically highly paid leadership team is understandably “nervous.” By stating his own impatience and challenging the company to go faster, Ells essentially moved his chair around to the other side of the table to sit by Ackman’s side.
Ells seemingly seeks to take the actions required to work with Ackman, not against him. Ells has signaled he will be announcing a revamped board shortly, and his normally visible co-CEO Monty Moran has been scarce lately, sparking speculation he may be leaving.
If Ackman wants to take more drastic actions like franchising off the actual restaurants or dramatically stripping out costs, will Ells go along? “We don’t have any fundamental differences about the business,” Ells told investors.
So will the “dissatisfied” strategy work? Chipotle will likely never get back to its spectacular growth rates, but it can return to solid growth, particularly as its financial performance this year compares favorably to last year’s. And if it does that, it should indeed provide Ackman with a nice win.
Chipotle’s biggest risk is rushing too quickly from one side of the boat (food safety) to the other (service speed). Slow service might slow Chipotle’s recovery. Then again, another notable food-safety incident would likely kill the company, so it will need to accept a growth hindrance in the near term.
If the turnaround doesn’t work, it won’t be from a lack of desire of its biggest players. Ells surely wants to avoid becoming just another outcast founder, and Ackman needs a new victory.
Paul Pendergrass is an independent communications advisor and speechwriter who writes on business, leadership, and communication.
