Sweetgreen pushed margins over a 20% benchmark during the second quarter and now the fast-casual chain is confident they will be able to keep those restaurant-level margins climbing, said CFO Mitch Reback in an investor presentation Tuesday.
At the Piper Sandler Growth Frontiers Conference, Reback outlined the multi-layered path ahead as Sweetgreen moves toward profitability. This is the year Sweetgreen expects to break even, and the company upgraded its guidance for the year, saying margins would reach 16% to 18%, up from earlier projections of 15% to 17%.
Reback explained some of the key strategies that will get the brand there, and what the company expects will push margins higher.
But first, Reback was asked about the current news in California, where labor organizers and restaurant industry advocates have reached an agreement on amending legislation that would have created a joint-employer standard that some saw as an existential threat to franchising. Under the agreement, the joint-employer provision will go away, and the Fast Act—a law that would set work standards for fast-food workers across the state—would be modified. But the pact also calls for fast-food workers in California to earn a minimum wage of $20 per hour, starting next April.
About 20% of Sweetgreen’s 220 units are in California. Reback said many Sweetgreen team members in California already make close to $20 per hour, or more, and the company estimates that a 2% menu price hike could offset the wage there, if needed.
Meanwhile, here are the broader strategies that are working for Sweetgreen:
Better labor deployment.
Earlier this year, Sweetgreen put in place a general manager program that gave regional managers more control at the restaurant level. In addition, head coaches spend more time on the floor with team members and engaging customers. The result has been higher throughput, lower turnover and improved retention.
“What we find is when we empower people and we provide them with incentives, that they actually do a pretty good job at driving up the margins,” Reback said.
Bringing costs down.
There was zero inflation on cost of goods during the second quarter, which helps, and Sweetgreen expects to see further advantages as the chain gains scale and densifies markets. Occupancy costs can be higher in the urban markets where many stores are located, but Reback said he expects those occupancy costs to get lighter as the brand expands in suburban neighborhoods.
Building loyalty.
Reback also has high hopes for the relatively new two-tiered Sweetpass loyalty program, which went live in April and has already been building attachments. So far, however, the program is only available digitally. Guests cannot yet earn or redeem points from ordering in restaurants, though that’s coming and will be deployed in the next few months, he said.
When Sweetpass is fully in play, the goal is to impact the large middle cohort of moderate Sweetgreen users, and move them up one or two purchases per month, he said. “We’re very confident that will happen over time.”
More upstreaming.
Sweetgreen has always been known for scratch cooking in restaurants. Up until recently, even salad dressings were made in house. But earlier this year the company started “upstreaming” their dressings, making them in a centralized kitchen for each region and delivering them to restaurants.
And it’s something Sweetgreen expects to do more of.
Reback said there are tremendous efficiencies. There’s the potential for mechanization that could lower the cost of goods, and it takes the burden off labor in the stores, he said. “And, frankly, a lot of those jobs are jobs that people really have complained about, making a dressing—another example is the stemming and washing of kale, which is extremely labor intensive.”
All of those initiatives could help Sweetgreen sustain 20%-plus margins, Reback said. But then there’s the Infinite Kitchen, a new format that company officials say has the potential to be transformative.
Earlier this year, Sweetgreen opened its first restaurant with an automated makeline dubbed the Infinite Kitchen in a Chicago suburb. A second is scheduled to open in Southern California later this year.
In its first month of operation, the Chicago-area Infinite Kitchen unit had margins of 26%, which for a new store is pretty good, said Reback. There’s the clear labor benefit: typically about half of a Sweetgreen’s labor force is involved in assembling meals at the makeline and the automated system cuts that labor need by about 70%.
So far, the automated makeline makes a more consistent product more quickly, so guests love it, he said. Team members love it because the store is quieter, cleaner and roles are easier. Investors are likely to love it because the return on capital is accretive to the business.
“The way we look at it, it’s really a win for the customer, a win for the team member, a win for the investor, so we’re very pleased with what we’re seeing,” he said.
Now Sweetgreen is looking to include more Infinite Kitchens in the development pipeline, which will likely start in 2024 and build in 2025. The company is exploring potential contract manufacturing solutions, though Reback did not offer details on what that might mean.
Another strategy with potential is the idea that Sweetgreen could shift to marketing on a national scale at some point, said Reback. Sweetgreen has historically relied on local marketing, which works well for now.
“We do see ourselves as an under-marketed business where we have a wealth of opportunity to drive more marketing and drive more consumer acceptance of the brand,” he said.
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