Shake Shack, Sweetgreen, and Cava Group are opening dozens of restaurants and using technology to become more efficient. By Evie Liu
As fast-food chains struggle with rising costs and increasingly frugal consumers, restaurants that offer diners fresh, high-quality food with the same convenience and speed have been a bright spot.
Chipotle Mexican Grill is the standout of this group. In the first quarter this year, the burrito chain's same-restaurant sales growth surpassed nearly all fast-food companies, including McDonald's and Wendy's. Its stock is up 55% in the past six months.
Three others -- burger joint Shake Shack, salad specialist Sweetgreen, and Cava Group, which serves Mediterranean-style bowls and pitas -- are expanding at a fast clip as they aim to replicate Chipotle's long-term success.
It's a tall order for this trio, which will have to show that they can grow quickly and become more profitable. So far, they're making progress on both fronts: All three have been opening dozens of restaurants annually, most generating strong sales. By adopting new technologies, they are becoming more efficient and boosting the profitability of each store.
Although the companies are barely profitable now (and in Sweetgreen's case, not at all), investors are betting that they will be, and have pushed the stocks up by over 80% in the past six months. "We're pretty optimistic about the store growth path for at least a number of years," Morgan Stanley analyst Brian Harbour says.
It isn't easy to emulate Chipotle, which enjoys a combination of high unit revenue, healthy profit margins, and low expansion costs. The food-safety crisis in 2015, when E. coli bacteria was found in Chipotle food, damaged the company's sales and reputation, but it has bounced back even stronger. It's easily the best in fast-casual dining, as the group is known.
Shake Shack, Sweetgreen, and Cava are racing to catch up. They have been growing rapidly since they were founded, and their public listings have turbocharged the pace. Shake Shack went public in 2015, Sweetgreen in 2021, and Cava, last June.
Over the past two years, Shake Shack and Sweetgreen each expanded their physical footprint by more than 40%. Cava is growing even faster, nearly doubling its store count by converting over 150 restaurants it bought from rival Zoe's Kitchen in 2018.
By the end of 2023, Shake Shack, Sweetgreen, and Cava had 518, 221, and 309 locations, respectively. Wall Street expects all three to add at least 15% more restaurants in both 2024 and 2025. Sweetgreen aims to have 1,000 stores by 2030, while Cava expects to get there two years later. Chipotle has nearly 3,500 stores.
In 2023, Sweetgreen and Cava generated nearly $3 million in annual sales per store on average, not far behind Chipotle. Shake Shack has an even higher average of $4 million per domestic company-operated location. The challenge will be to maintain those levels as the companies scale.
The three have improved their restaurant-level profit margins, a measure of how efficiently a company is running its stores. Cava, approaching 25% in 2023, is the closest to Chipotle's 26%. Shake Shack and Sweetgreen are at 20% and 17%, respectively.
"For investors to get excited about a brand's long-term unit growth potential, they need to see return metrics that are compelling enough," says Raymond James analyst Brian Vaccaro.
Technology is a key driver of the higher margins. "The adoption of tech in restaurants has historically lagged [other industries], but it's catching up, and we are seeing it in various forms," says J.P. Morgan analyst Rahul Krotthapalli.
"We're investing up front to make sure we can support the growth rate in a sustainable fashion," Cava CEO Brett Schulman told Barron's. "Then we'll start to reap the benefits of that leverage as we successfully scale."
Cava automated pita bread and onion slicing in its kitchens, and is working on a system that analyzes captured images in real time to better predict customer demand and staff workload. Shake Shack has installed ordering kiosks to free workers from cashier positions.
Most notably, Sweetgreen is testing an automated salad assembly line dubbed Infinite Kitchen. Each machine costs about $500,000 but could boost store margins by seven percentage points through labor savings, the company says.
The machine can make up to 500 bowls per hour, about 50% faster than humans. That would reduce wait time and prevent customers from walking away, boosting sales during peak hours.
Shake Shack and Cava are also opening new stores with drive-through lanes. Although those sites often cost more, they usually generate much higher sales and better margins, according to TD Cowen analyst Andrew Charles. This transition could be the next growth engine for the chains.
Shake Shack and Cava already have drive-through windows at about 10% of their domestic locations. Still, that's far below Chipotle's 25%, Starbucks' 70%, and the over 90% rate at most fast-food chains, according to BTIG analyst Peter Saleh. "If they really want to be a 1,000-unit chain, drive-through will have to be a big piece of that development going forward," he said.
Plenty of hurdles remain. Although a higher-income clientele tends to insulate these restaurants from inflation, that could change if prices rise much further. At some point, more consumers will stay home. Rising costs to build new stores have stabilized in recent months, but those, too, could pick up again. A recession, meanwhile, could cause sales to dry up just as the companies' expansions peak.
Shake Shack and Cava turned narrowly profitable last year, with net income margins below 2%. Wall Street expects margins to expand, reaching 6.4% at Shake Shack and 4.7% at Cava by 2029. In comparison, Chipotle's profit margin has grown from 5% two decades ago to 12.5% last year. Cava is expected to report first-quarter earnings on May 28.
Sweetgreen's path to profitability is more elusive. It lost $1 per share last year. It's scheduled to report first-quarter earnings on May 9. Wall Street expects the loss to narrow but not turn positive soon.
The trio are working on boosting brand awareness. Shake Shack last year significantly increased ad spending in markets where it opened new restaurants, and plans to continue in the coming quarters, management said in an earnings call earlier this month.
Sweetgreen has been expanding into suburban markets and recently added various protein plates to the menu -- an attempt to attract a wider demographic beyond salad-loving urban professionals.
Cava hosts a "community day" event for each new store to generate traction. Customers from big cities to the suburbs have been receptive to the brand, says CEO Schulman. "It's been really encouraging to see how we're able to resonate across the country," he told Barron's.
But all that costs money. The three companies have to rein in overhead spending. In 2023, Shake Shack and Cava's administrative expenses made up 12% and 14% of their sales, respectively. At Sweetgreen, the rate is 25%. That's much higher than Chipotle's range of 6% to 8%.
If any of the trio can come close to matching Chipotle's success, investors will be handsomely rewarded. Cava, with its high store margins and better profit outlook, looks the most appetizing, but it trades at 8.1 times expected 2025 sales, higher than Chipotle's seven times. That could be a reason for some caution.
Sweetgreen trades at just three times, but a path to profitability is harder to see. That leaves Shake Shack, which also trades at three times expected 2025 sales and is already profitable. It could be the most attractive of the three.
One thing is clear: Each of the three have growth on their menus.
Write to Evie Liu at evie.liu@barrons.com
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May 10, 2024 21:30 ET (01:30 GMT)
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