Chipotle's CEO made a stunning admission about a grave problem plaguing the brand (CMG)

AP

Chipotle co-CEO Steve Ells says the burrito chain's customer service is slipping. 

In a startling admission, Ells said Tuesday that the company internally rates half of its roughly 2,100 restaurants with a "C" grade for service.

He cited flaws like messy soda stations, dirty tables, and slow-moving lines.

"We took our eye off the ball on the customer service side," Ells said, according to the Wall Street Journal. He made the remarks during a presentation at a Barclays investors conference Tuesday. 

This is a critical issue for Chipotle, which is trying to dig itself out of a massive slump following an E. coli outbreak that sent sales plunging by as much as 30%.

Customers have been slow to return to Chipotle in the wake of the outbreak, which started late last year, and now service issues are threatening to drag out the recovery even longer.

As a result, Chipotle management is suddenly getting nervous about meeting the 2017 guidance that it issued in October, Ells said Tuesday. 

Chipotle had said in October that it was expecting same-store sales growth in the high single digits next year — so anywhere from 6% to 9%. 

In the most recent quarter, Chipotle's same-store sales dropped 21.9%.

AP

That's only a slight improvement since the second quarter, when same-store sales fell 23.6%, despite the company's launch of a generous rewards program called Chiptopia that gave away free burritos. 

Many analysts have said that customers have been slow to return to Chipotle because they were forced to try new restaurants during the E. coli outbreak, and in many cases, they discovered they liked those restaurants even more than Chipotle.

Others have blamed the slow recovery on menu fatigue, saying that even before the outbreak customers were growing tired of Chipotle's menu — which has been virtually unchanged over the last two decades.

Chipotle's sales growth was contracting for several quarters prior to the outbreak, which emerged in the fourth quarter of 2015.

Same-store sales grew as little as 2.6% in the third quarter of 2015, a sharp slowdown from the 16.8% reported for 2014.

Now with the decline in service, it's hard to tell whether Chipotle will ever return to powerhouse it was before, according to Matthew DiFrisco, and analyst for Guggenheim Securities.

"The prioritization used to be speed, speed, speed — and now it is cleanliness and safety," DiFrisco said on CNBC Tuesday. "These are all good priorities. However, the prior success — the 26% restaurant margins and $2.6 million in volume per store — those were all indicative of everyone running with the goal of speed. That's gone away… and that’s what I think, structurally, will be changed forever." 

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