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Steve Ells departure as CEO from Chipotle could be just what the beleaguered restaurant needs

  • Chipotle Mexican Grill's Steve Ells is stepping down as CEO and it could be just what the company needs.
  • Ells will remain with Chipotle as executive chairman and plans to oversee innovation once a new CEO is selected.
  • "Steve Ells' success in founding and growing Chipotle is not in question, but his ability to run a larger publicly owned company and to guide it through choppy waters was," said Neil Saunders, managing director of GlobalData.
Steve Ells, chairman and co-chief executive officer of Chipotle Mexican Grill.
Victor J. Blue | Bloomberg | Getty Images
Steve Ells, chairman and co-chief executive officer of Chipotle Mexican Grill.

Chipotle Mexican Grill's Steve Ells is stepping down as CEO and it could be just what the company needs to finally cement a solid turnaround.

The burrito chain announced Wednesday that it's begun to search for a new chief executive, sending shares of the company up more than 5 percent.

Jeremy Scott, senior research analyst at Mizuho Securities, called the decision "unexpected," particularly after the company recently streamlined the CEO position from two co-CEOs, a post Ells had shared with Monty Moran.

"But [it] is an absolutely critical, important next chapter for Chipotle, which has been struggling to recover sales under Ells," Scott wrote in a research note Wednesday.

The Colorado-based restaurant chain has been testing initiatives to lure customers back ever since it faced a slew of foodborne illness outbreaks in 2015. However, its efforts have been overshadowed by a number of food safety incidents and a payment system breach.

"The decision of Steve Ells to step down as CEO is the inevitable consequence of Chipotle's inability to get to grips with its various problems," Neil Saunders, managing director of GlobalData, told CNBC via email. "Under his leadership, the chain has stumbled from one crisis to the next and has failed to reignite the growth that it once enjoyed."

"Steve Ells' success in founding and growing Chipotle is not in question, but his ability to run a larger publicly owned company and to guide it through choppy waters was," Saunders said. "While not entirely his fault, the continued lack of momentum concerned investors and raised questions about his leadership and his vision for the group."

As of Tuesday's market close, Chipotle shares have fallen more than 24 percent this year.

Going forward

Ells will remain with the company as executive chairman and plans to oversee innovation once a new CEO is selected.

The restaurant chain's board has formed a committee to help find a new leader, Chipotle said. On the committee are directors Robin Hickenlooper and Ali Namvar, who were nominated and added to Chipotle's board in 2016 at the behest of activist investor Bill Ackman's Pershing Square. Ells is also on the committee and recruitment firm Spencer Stuart will assist in the search efforts.

"We expect new management to take a fresh look at loyalty, mobile, marketing, daypart strategy, management compensation, corporate hierarchy, product quality, sustainability, and a more streamlined approach to the store labor configuration (already under way), particularly in morning prep," Mizuho's Scott said.

The chain has launched several turnaround initiatives in recent years, including a refreshed advertising campaign and a nationwide rollout of queso dip, which was criticized by some customers. Chipotle has since hinted at other new items, such as salads and desserts, to come.

"In our opinion, with Ells remaining involved in setting the vision for the food/concept (including oversight of how to execute the food experience within the restaurants), the addition of a complementary leader who can bring fresh perspective in the effort to strengthen core operating and brand fundamentals can prove to be a major long-term positive for the company," David Tarantino, analyst at Baird, wrote in a research note Wednesday.

Darren Tristano, a restaurant industry trend expert, said that Chipotle has opportunities to delve into breakfast, late night, delivery and expanding its menu.

"It will be of paramount importance for the next CEO to continue Chipotle's long-standing philosophy of food with integrity," he told CNBC via email. "The right candidate should have a very strong understanding and experience with food service supply chain so the brand can continue to operate without major ingredient changes and avoid potential food safety issues that have plagued them."

Food safety issues have cropped up an again and again. Most recently, "Supergirl" actor Jeremy Jordan said he had "almost died" after eating at one of the chain's restaurants, sending shares spiraling down.

That followed reports in July where customers were sickened by norovirus at a location in Sterling, Virginia. Then, a few days later, a viralcellphone video was released that showed rodents falling from the ceiling at a restaurant near Dallas.

"The next CEO will have his or her work cut out for them."