McDonald’s (MCD) shares tumbled by more than 6% in premarket trading on Wednesday after the Centers for Disease Control and Prevention (CDC) linked the company’s popular Quarter Pounder burgers to an E. coli outbreak affecting several US states.
The CDC confirmed the outbreak had resulted in one death and 10 hospitalizations, with most illnesses concentrated in Colorado and Nebraska.
“This is a fast-moving outbreak investigation,” the CDC stated on its website.
Most sick people are reporting eating Quarter Pounder hamburgers from McDonald’s, and investigators are working quickly to confirm which food ingredient is contaminated.
McDonald’s stock initially fell as much as 10% in extended trading on Tuesday, as news of the outbreak and the CDC investigation hit the market.
How has McDonalds reacted?
In response to the outbreak, McDonald’s quickly implemented measures to mitigate the damage.
Cesar Piña, McDonald’s chief supply chain officer for North America, said in an internal memo that the company was taking “swift and decisive action.”
He explained that preliminary findings from the investigation point to slivered onions, sourced by a single supplier, as the likely source of contamination. The company stated,
As a result, and in line with our safety protocols, all local restaurants have been instructed to remove this product from their supply, and we have paused the distribution of all slivered onions in the impacted area.
McDonald’s also confirmed that it would temporarily remove the Quarter Pounder from restaurants in affected areas, which include Colorado, Kansas, Utah, and Wyoming, as well as portions of Idaho, Iowa, Missouri, and several other states.
Despite these steps, the reputational damage from the outbreak could weigh heavily on the company’s bottom line in the coming months.
Citigroup analyst Jon Tower noted,
Negative food safety news is never welcomed by restaurant operators, especially those working to improve brand image after getting off-sides on consumer affordability in recent years.
Tower added that McDonald’s future performance would depend on how effectively the company manages the outbreak, which should include taking responsibility, controlling the spread, and enhancing food safety measures.
How have E. coli outbreaks impacted restaurants and their shares in the past?
McDonald’s is not the first fast-food chain to suffer from a food safety crisis.
Similar incidents have occurred at other major restaurant chains, significantly impacting both reputation and share price.
Chipotle Mexican Grill, 2015
Chipotle’s 2015 E. coli outbreak forced the chain to temporarily close 43 restaurants in Oregon and Washington as it was found that out of 53 53 people in nine states who were sickened with the same strain of E. coli, 46 had eaten at Chipotle in the week before they fell ill.
Sales plummeted by 20%, and the company’s stock tumbled over 25% in the two months following the outbreak, with recovery taking years.
Taco Bell (Yum! Brands), 2006
In 2006, Taco Bell also faced an E. coli outbreak that affected customers across multiple states.
The CDC reported 71 people had fallen ill, with 53 hospitalizations and 8 cases of hemolytic uremic syndrome.
Taco Bell saw an immediate impact on sales, which fell 5% in the fourth quarter of 2006 and 11% in the subsequent quarter. The slide continued until the third quarter of 2007.
The fast-food chain’s sales dropped as much as 20% nationally, and even more in the affected regions, leading analysts to downgrade the stock.
Jack in the Box, 1993
Another infamous case is the 1993 E. coli outbreak at Jack in the Box, which led to the deaths of four children and 171 hospitalisations, and sickened 700 people in four states.
This crisis caused Jack in the Box’s stock price to plunge, and it took the company a long time to rebuild consumer trust.
At the time, they reported projected losses of $20 to $30 million as a result of the outbreak.
Looking ahead: McDonald’s recovery depends on swift action
The E. coli outbreak linked to McDonald’s Quarter Pounder burgers is a major challenge for the fast-food giant, especially as it battles to maintain its market dominance.
The company has already taken steps to address the crisis, but it remains to be seen how effectively it can restore consumer confidence.
Analysts are closely monitoring McDonald’s next moves.
As Tower noted, the company’s response must be thorough and responsible.
Any missteps could prolong the damage to its brand and delay recovery in the stock market.
In the meantime, the E. coli outbreak serves as a stark reminder of how food safety issues can quickly unravel a restaurant chain’s growth, as seen in the cases of Chipotle, Jack in the Box, and Taco Bell.
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