Issue #60: Why Is Sweetgreen Struggling?

Call To Action: What Are Your Pain Points With Retail?

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What Happened To Sweetgreen?

If you follow retail/restaurant earnings closely, or follow newsletters like this that cover this topic, you would have seen the restaurant startups that have (semi) recently gone public (and get a disproportionate share of coverage) release their Q2 earnings recently. The (former?) startups I am referring to are Sweetgreen, Cava, Chipotle, and Shake Shack. Across the board, after rapid growth and success for these companies over the past couple of years, growth has fallen off. Before we dive into why, let’s look at a brief snapshot of the numbers I focus on when looking at public retail or restaurant companies:

• Total Sales - The total sales across all corporate-owned locations in a time period (excludes franchise-owned stores)

• Same Store Sales - Excluding new or closed stores, comparing the sales of stores that were open in both periods

• Net Income (unadjusted) - Gross profit less operating expenses and non-operating expenses

• Average Unit Volume - Sales / Number of Locations

• Number of Locations - The number of open locations a company has

• % of Revenue from Digital - The percent of revenue that comes from digital channels, some companies break that down further into digital channels they own (their app and website) and digital channels they don’t own (third-party channels like Uber, DoorDash, etc.)

Here is how the metrics stack up across the companies I mentioned:

Overall, the metrics look much stronger for Cava, Shake Shack, and Chipotle compared to Sweetgreen. Starting at top-line sales, most are seeing some sort of growth; however, a lot of that is due to opening new stores. When it comes to emerging retailers, same-store sales are a metric to utilize, but not the ultimate metric. Before 1,000 locations, it is hard in some ways to penalize for growing via new stores, but that is a balance. You need to be slightly growing existing stores, too. With that in mind, Shake Shack and Cava are the only companies with positive Same Store Sales and Total Sales growth year-over-year (YoY). Net income, aka profitability-wise, Sweetgreen has fallen, while Shake Shack and Chipotle have recovered from Q1 2025 dips. On the Average Unit Volume front, those that report are indicating mostly flat AUV. All continue to grow stores, with Cava growing the fastest. Finally, most concerning is the growth of Sweetgreen's revenue mix from a digital perspective, as that has been mostly through third-party channels that are more costly. This growth is not incremental to revenue, they are trading more profitable sales for less profitable. Overall, looking at these metrics, Cava and Shake Shack are in strong positions, Chipotle is in a solid position, and Sweetgreen is in a concerning position.

Diving into the reasons behind the metrics, there is a big reason that separates those in a solid or better position, and those that are not. It comes down to having successful limited-time offers (LTOs). These products may feel gimmicky, but they do wonders in bringing in foot traffic, growing basket sizes, and maintaining a brand’s relevancy. Look at one of the best in the business, Taco Bell, who is constantly launching new items. Most recently, they did a Y2K themed menu with five previously discontinued items. McDonald’s just brought back its snack wraps, too. In terms of these companies, Sweetgreen has dabbled with LTOs over the years but doesn’t have a steady flow; Shake Shack has very strong LTOs; and Cava and Chipotle are both starting a steady flow of LTOs, with Chipotle releasing its first one recently. The lesson here is that well-executed LTOs can make a difference.

In addition to LTOs, once consumers make up their minds about something, it is difficult, but not impossible, to change. It takes conscious effort. According to this study, customers need good overall experiences, where they see value, to change their perception of value. Consistent value = repeat purchases & strong perceived value. On the Sweetgreen front, that has been a challenge. Just this last earnings call, CEO Jonathan Neman talked about how Sweetgreen is ”focused on improving how customers perceive the value of its meals” by boosting protein portions and offering $13 LTOs (back to the previous point). The other three have had their battles with perceived value over the years, but not to the level or issues that Sweetgreen has consistently faced. In this era of reduced consumer spending, value has never been more pertinent.

Looking at the metrics, one stands out for Sweetgreen in terms of performance and in many ways drives down the rest of the metrics: Location Count. Sweetgreen has 35% fewer locations compared to the other companies on the list. That means it has fewer economies of scale and higher operating costs as a result. Hindsight is 20/20, but it seems that they may have prematurely gone public. Cava, which went public after them, has more locations and is growing faster. Plus, location-wise, Sweetgreen is very urban-focused, which is a double-edged sword. The density of urban areas is helpful, but the ticket sizes are much smaller, as customers are usually buying for just themselves. Even when Sweetgreen is in the suburbs, it seldom has a drive-thru, which drives up basket sizes. It seems that there is currently one Sweetgreen location with a drive-thru, with two more in development. As of Feb 2024, Cava had 31. Drive-thrus really boost sales. In 2022, Chik-Fil-A locations with a drive-thru did $8.7M AUV, compared to the $8.5M AUV system-wide average. For most fast casuals/fast food restaurants, there is a clear ceiling you hit without a drive-thru, especially if you are not in a dense urban area. Overall, being small has its advantages; however, it can be very challenging to overcome the worse economics of being smaller scale.

To summarize, why is Sweetgreen struggling? A lack of LTOs consistently drawing in customers, poor economies of scale, and a low perceived value. All barriers that are challenging to overcome, but even tougher when it is all three together.

Retail As An Affordable Luxury

In addition to being a retail nerd, I love cooking. Recently, two of my favorite chefs, Dave Chang and Samine Nosrat, spoke on Dave’s podcast. The conversation went in a variety of directions, but what stood out to me was when they started discussing Filterworld, the book I am reading, and how it applies to retail/restaurants. For those who haven’t read it, Filterworld discusses how social media, via how algorithms operate, is making everything digitally and physically the same. They felt that restaurants and retail were getting flattened as customers’ preferences became more similar. However, one of the optimistic things I take from their conversation was the ability of restaurants and retailers to give people across all walks of life an amazing experience. That experience is something that cannot happen in many places, but is something that is lasting. I am very bullish on experiences in retail and restaurants, and it is exciting to see that leaders in the space see this as the future as well.

Consumer Confidence Dips

The Conference Board is a research organization that surveys customers on their economic confidence monthly. As illustrated in the chart above, month over month, confidence dipped. Compared to historical sentiment, it is matching 2020 levels, but still stronger than post 2008/2009 recession sentiment. According to the survey, consumers are worried about income gains slowing and the job market cooling down. On the job front, consumers are also worried about how hard it is to find a new job. Interestingly, there is a huge difference for consumer confidence by age group, which may partially explain the future job focus for those concerned. For consumers under 35 years old, confidence fell, it was stable for consumers aged 35 to 55, and confidence rose for consumers over 55. For retailers, they are accustomed to customers seeking value and tightening their wallets. However, this was the first time I saw the age split talked about. Something to monitor going forward for retailers who service a variety of ages.

Resale/Secondhand On The Rise

Customers have indicated they are interested in value. Tariffs are impacting how new clothing is priced. Enter secondhand and resale platforms like ThredUp, Depop, OfferUp, Wish, and Nuuly. They are meeting the customer demands and seeing benefits. Here are a couple of stats on their performance that stand out:

• Thredup - new buyers up 95% in Q1 75% in the Q2, revenue up 16% YoY

• Depop (owned by Etsy) - 35% Q2 global gross merchandise sales growth, sales in the United States up 54% YoY

• The RealReal - revenue up 14%, Average Order Value (AOV) up 8%

• Poshmark - new users up 24%

• OfferUp - significant YoY increase in sessions per user on our site, meaning users are spending more time on the site when they log in

• Goodwill (Washington State Only) - visitors up 9% YoY, sales up 6% YoY

• Nuuly (Urban Outfitters) - subscribers up 53% YoY, sales on track to be $500M for the year 2025

If these trends continue to hold, it will be interesting to see how large companies adapt. In a retail environment, these types of products require a ton of process, effort, and specialization.

Buc-ee’s Expands Products To Be Sold In Texas A&M; First Non-Buc-ee’s Location

Chances are, if you are driving south of Washington, DC, and east of New Mexico for long enough, you will drive past a behemoth of a rest stop. That rest stop is Buc-ee’s, which has amassed a cult-like following due to its excellent service, restrooms, and product assortment. Some of its top products are the Beaver Nuggets, beef jerky, and Buc-ee’s branded merch. Until recently, you could only buy it at a Buc-ee’s location, despite products that are optimized for eCommerce. That all changed recently as Buc-ee’s struck a deal with Texas A&M to put some of their products on the Texas A&M campus at markets. I am sure this deal was financially orchestrated, so it was beneficial to them, but I am perplexed as to why they accepted it. Their products are very eCommerce friendly yet they do no eCommerce. Also, their brand is typically purchased off highways that are in more rural areas. Just all around a puzzling fit.

Additional Links:

1. Real estate developers are capitalizing on affinity to one’s alma mater by building alumni-specific housing (read more here)

2. As discussed in Issue #59, now is the time to raise capital, here is a deep dive from Drew Fallon on the current capital raising market (read more here)

3. Augmodo raises $37.5M to help retailers track inventory and manage data via Smartbadges worn by store employees (read more here)

4. Amazon is having Whole Foods corporate employees transition to be part of Amazon (read more here)

5. Aldi is opening additional United States locations, including one in Times Square (read more here)

6. Walmart is cutting grocery prices as it tries to drive additional value (read more here)

7. How is M&A looking in the CPG market? (read more here)

8. Dollar General saw foot traffic increase in Q2 from both new customers as well as existing customers (read more here)

9. Kroger cut 1,000 members of its corporate team (read more here)

10. Auntie Anne’s is utilizing airports as a way to fuel growth (read more here)

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