Shares of McDonald’s ( MCD ) fell more than 6% in premarket trading Wednesday after the Centers for Disease Control and Prevention said the company’s quarter pounder burgers had been linked to an E. coli outbreak in some states, with the most diseases in Colorado and Nebraska.
“This is a rapidly evolving outbreak investigation,” the CDC wrote on its website. “Most sick people report eating McDonald’s Quarter Pounder burgers and investigators are working quickly to confirm which food ingredient is contaminated.”
The company’s shares were down as much as 10% in extended trading in the immediate aftermath of Tuesday’s news.
The CDC said McDonald’s has stopped using fresh-cut onions and quarter-pound beef patties in certain states while a source of the disease has been confirmed.
One person has died from the outbreak, the agency said, and 10 hospitalizations have been reported in 10 states.
In an internal memo that McDonald’s shared on its website Tuesday evening, Cesar Piña, McDonald’s chief supply chain officer for North America, said the company is taking “swift and decisive action” and noted that the investigation’s initial findings “indicate that a subset of diseases may be linked to chopped onions used in the Quarter Pounder that come from a single supplier serving three distribution centers.”
“As a result, and in line with our safety protocols, all local restaurants have been instructed to remove this product from their offerings and we have halted the distribution of all chopped onions in the affected area,” the company said.
The menu item is being temporarily removed from restaurants in the affected areas, including Colorado, Kansas, Utah and Wyoming, as well as parts of Idaho, Iowa, Missouri, Montana, Nebraska, Nevada, New Mexico and Oklahoma. All other menu items are available.
“While the incident appears to be more contained than others we have seen in the industry, an expansion of the investigation or continued publicity is what has the potential to weigh on consumer traffic,” BTIG analyst Peter Saleh wrote in Wednesday a note to customers. .
He added that the incident could dampen the ongoing limited-time offers of Chicken Big Mac and McRib that will close out the year.
“We believe McDonald’s could reduce advertising supporting these LTOs in the near future as the message could fall on deaf ears amid the broader news coverage,” he explained. “The company may also want to shift its message toward quality, and away from value, to reassure consumers about food safety.”
“Traffic at McDonald’s was anemic before this incident, so any sustained negative publicity could only make it more difficult to revive sales in this area.”
Fellow fast food giant Chipotle (CMG) experienced its own E. coli outbreak in 2015, along with a norovirus outbreak. As a result, the company was forced to temporarily close 43 locations in Washington and Oregon.
The CDC declared the outbreak over in February 2016, with the company aggressively revamping its food preparation practices.
But it took years for the Mexican food chain to rebuild brand trust and recover its share price as a result of the crisis. Shares are up more than 500% since 2016.
In his note, Saleh, who maintained his neutral rating on McDonald’s, said that “it is premature to make comparisons to the Chipotle precedent etched in investors’ memories.”
“That incident was driven by repeated outbreaks across the country and continued reporting, and other quick service chains have had localized E. coli outbreaks in recent years with virtually no discernible impact on sales,” he explained. “For the time being, we are in a wait-and-see position.”
Jefferies analyst Andy Barish agreed, adding in a separate note that it’s “difficult to assess near-term risk, but we don’t think Chipotle is an obvious choice.”
“The problem/source at MCD was quickly identified and importantly isolated, while at CMG there was little to no visibility in the early days of the outbreak, followed by multiple store closures, which is not the case at MCD at this time,” Barish said . maintains its buy rating on shares.
“Nevertheless, it is still too early to say anything about the initial consumer reaction, but we believe it will be much less severe than in the case of CMG.”
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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