Name: Sweetgreen Wants to Reinvent Fast Food With Salad. But Can It Make Money?
Uploaded: 2023-09-19T09:30:00Z
Duration: 7 min 33 s
Description: Sweetgreen’s fast-casual salads have a cult following. But the company’s value has dropped about three-quarters since its peak and it’s been operating with significant losses. Here are the headwinds it faces in turning profitable. Photo: Getty Images

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Sweetgreen’s fast-casual salads have a cult following. But the company’s value has dropped about three-quarters since its peak and it’s been operating with significant losses. Here are the headwinds it faces in turning profitable. Photo: Getty Images

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Sweetgreen Wants to Reinvent Fast Food With Salad. But Can It Make Money?

Narrator: This Sweetgreen salad starts at 14.95. Add avocado and it goes to 16.95. But even as it's sold millions of these bowls to customers, Sweetgreen has been losing millions of dollars a month. With over 200 locations, Sweetgreen is a fast casual restaurant trying to broaden the fast food market to include salads made with fresh ingredients. But building the infrastructure and logistics to accomplish this goal hasn't come cheap.

We're not that fancy yet.

They've always sort of branded themselves as a tech company, and so they talked a lot about changing the food system. At one point they said that they wanted to be the McDonald's of better eating. Now they've had to translate some of those lofty ambitions into reality, and that's challenging.

Narrator: This is The Economics of Sweetgreen. Sweetgreen brought in hundreds of millions in investment before going public in November 2021. In an SEC filing, it reported having about 1.35 million active customers. After its IPO, its stock surged to bring the company's value to over $6 billion.

I'm obsessed.

Narrator: But its market cap has since fallen to almost one quarter of that. While individual Sweetgreen locations are profitable, the company has struggled to overcome high overhead costs. In its last quarterly report, the company announced net losses of more than $27 million.

Hi, what can I get started for you to eat?

Narrator: The company's costs begin with its salads.

There's a few things that drive the cost of what we do. We buy really, really high quality food from farmers we know and trust.

Narrator: Most restaurants source their food through distributors, which give them access to a wide range of food at low prices. And on top of that, these distributors handle the transportation logistics. Sweetgreen, on the other hand, works directly with farms. Another major cost is labor. Sweetgreen has staff assemble meals and also do a significant amount of food prep.

Most restaurants process their food centrally and ship it out around the country. In order to maximize the taste and the freshness, we believe food should be made closer to where the guests are eating the food. So we actually make our food every day in our fresh prep kitchen.

Narrator: Beyond restaurant level expenses, Sweetgreen has also put a lot of money into technology.

We've built out from just having a pickup channel, to building our own native delivery, partnering with some marketplaces, and even building catering and our outpost business. We've also been able to integrate machine learning and AI in order to personalize a lot of the recommendations that we give you, as well as things like our loyalty program.

Sweetgreen hasn't just built tech for customers, it's also built apps for employees to plan out how much food to make at different times of day, so food is fresh but ready when they expect customers.

I would say that the founders are trying to be more disciplined now. They've also earned a lot in stock compensation, and I think there is certain amount of tech alignment thinking there. But you know, they are coming down to earth a bit and trying to trim expenses where they can and try to become more efficient. But again, it's gonna take time.

Narrator: The question is how to do that without changing the parts of the business that customers care about.

Our path to profitability in a net income basis comes from a few levers. The first is continuing to grow our footprint. This year, we're opening about 35 new restaurants. Second is growing sales in existing stores where a huge portion of that increase goes to lifting the profitability of those restaurants. The third is being very disciplined on our cost structure to make sure that the incremental profit we're making is flowing through the bottom line.

Narrator: Sweetgreen has closed some restaurants in cities like Boston and New York. It's also had some layoffs.

One of the challenges for the business has clearly been the pandemic and the recovery from the pandemic.

Narrator: In 2019, Sweetgreen stores were concentrated in urban centers, but recently it's been focused on expanding outside cities.

I think we're going to continue to build out in the markets that we currently operate in, and looking to open up one or two new markets a year for the next several years.

Narrator: Sweetgreen recently hired two former Chipotle executives to help make its menu appeal to a wider range of customers, especially as it expands past major cities. That's important because its path to profitability centers on having enough profitable restaurants to offset overhead. To make each restaurant more profitable, it's also counting on increasing loyalty and leveraging technology. Sweetgreen has experimented with loyalty programs for years, and its most recent effort is something called Sweetpass. There are a few tiers in the program. In the paid version of Sweetpass, customers pay $10 per month to get $3 off one salad per day. So a customer would have to spend at least $40 on salads per month to come out ahead.

In general, restaurants are really pushing these loyalty programs because it makes a lot of sense to try to get someone hooked. You know, it's harder to advertise to a new customer than it is to try to just keep current one coming. But you know, if you're going to eat that every day for lunch, that is gonna add up.

Narrator: Sweetgreen hasn't shared how many people have signed up for its loyalty program, which it still considers a pilot. Another key strategy moving forward is automation. In 2021, Sweetgreen bought Spyce Food Co, a startup that makes automated food assembly lines. And earlier this year, it opened its first so-called Infinite Kitchen in Naperville, Illinois, where salads are assembled robotically. That enabled it to hire one third fewer staff without sacrificing efficiency. Sweetgreen plans to continue rolling this out to new locations, and hopes to retrofit an existing location in late 2024.

Probably the biggest improvement for our customers is much faster throughput. Typically, you can order your salad and have it ready in under three minutes, even in a very busy store.

We believe what this will allow us to do is provide a superior economic model. This will significantly impact and improve our unit economics, which will allow us to continue to scale in a profitable way, and over time may even give us some pricing power as we think about creating healthy food that is truly accessible for everyone.

Narrator: Sweetgreen has made some progress towards profitability. Last quarter, the company announced it was profitable for the first time, though this comes with some qualifications. Sweetgreen is only profitable based on a measure called EBITDA, which excludes a variety of costs such as taxes, acquisition costs, restructuring costs, and stock-based compensation. It's a measure that's popular with tech companies, but doesn't follow generally accepted accounting principles.

It's a pretty heavy list of things that aren't included, but by doing this, I mean, they can say that they just had their first profitable quarter, which is in Q2, and they wanna show some progress to investors. And I think that does show a certain magnitude of progress, but it's not all the way there.

Narrator: The company though is confident that it can become a national business based on three things. It creates a new category in the market, has capital to expand, and maintains a loyal customer base.

We see Sweetgreen as having all three of those ingredients as we move forward.

You know, I think there will continue to be challenges as we scale, whether it be how we scale our supply chain, how we scale our technology, how we scale our leadership. But I think the big thing is proving that this type of offering can work all around the country.

I think they're pretty honest that they're trying to become a more mature business now. And you know, for a young company founded by young founders, that makes sense that that's a little bumpy.