Sweetgreen, Inc. (SG) Earnings Call Transcript & Summary

Good afternoon, everyone. We'll kick off the session after lunch. I'm Rahul Krotthapalli. I cover gaming and -- sorry, I cover Restaurants and Fitness for JPMorgan. I'm very happy to have Jonathan Neman, CEO of Sweetgreen; and then Mitch Reback, CFO, with me here today.

So we'll just get kicking off. Jonathan macro and consumer continues to remain in pressure. But even keeping that aside for a moment, let's talk about Sweetgreen's plan, how to improve the value proposition in '25 versus how you guys did in the past. And also, I think it's interesting. It would be great if you can talk about your journey on educating consumers that they can get fresh, clean, tasty food at great price?

Absolutely. So at Sweetgreen, we think about value, but more in the sense of price value. And Sweetgreen, what we do with our food is very different than most fast food. First of all, it starts with our sourcing. We source regionally. We source from suppliers we know and trust, and we really bring in a higher-quality product, whether that be our produce or our chicken being antibiotic-free, or making or cooking our food and our dressings without seed oil. So a number of things that we think our consumers really appreciate. The second piece around that is what we do inside of our restaurants. While most restaurants are leveraging commissaries and processing their food further upstream, we make most of our food -- for the most part, we're making our food from scratch in our stores every day and not only doing that but showing our consumers that we do that. So if you go inside of our restaurants, you see the food being prepped fresh and then you can taste it. So we do believe that with the brand and the higher quality food that we have, we do have a lot of pricing power. We haven't seen a lot of issues or pushback around pricing. Having said that, we always think there's opportunities to delight our customers and continue to offer great price value. So there's a few things. Over the past couple of years, there is a big push for us around driving hot and hearty food, broadening our consumer base, driving dinner and really making Sweetgreen work in all of our markets. And that has really worked. If -- when we were here a year or 2 years ago, there were a lot of questions. Will Sweetgreen work in some of these emerging markets? Does it -- do you have a broad consumer base? Is it just the one daypart business? I believe we've really answered a lot of those questions. And you see that through the growth in our emerging markets, our high-comping stores, the incredible success of our new stores. Our 2025 pipeline opened at a $2.8 million year 1 AUV. So really kind of opening at year 2 levels in year 1 and many new stores -- many of those stores are in new markets that just did phenomenally well. As it relates to the price value, 2 major things that we'll be doing this year. One, I think the biggest will be our loyalty program. We had some experiments with a loyalty program a couple of years ago, more of a subscription-driven program. While it worked for a very small group of our consumers, we realized we needed something more broadly appealing from a loyalty perspective. So we are reintroducing loyalty. We've actually begun rolling it out today. It's in a couple of markets in pilot testing. We'll continue rolling out over the month. And in April, we'll do our nationwide launch. The program itself called SG Rewards is a more -- it's a much simpler points-based program, $1 earns you 10 points, and then we have different redemption levels for all of our different items that you can get. Within that, the Martech stack has been reimagined where we are using machine learning to personalize our CRM, both menu suggestions and offers, and we have a lot of capabilities around things like double point days and other ways to kind of drive the LTV of our consumers. So one is very excited about loyalty and how that can reward our best customers. The second -- one of the biggest learnings from last year was as we push towards hot and hearty, we moved away from our seasonal menu. The seasonal menu is something that we had at Sweetgreen pretty much since the beginning of the company's history. We would introduce 3 new items 5 times a year. And what this did was, one, it positioned the company around the fact that we were changing our food, buying the best produce and you could taste that freshness. But it also was a way to reengage our core customers. And the third thing is we would -- oftentimes price gave us an ability to kind of create some value with those, sometimes price without protein. And so you had kind of lower-priced menu items coming in 5 times a year. Again, the learning last year is while it was great to introduce the hot and hearty, we should have introduced that and kept the seasonal menu. So the seasonal menu is coming back this year, coming back in a very big way. We're starting -- in May, we're going to launch a big chef collaboration, which is another part of our playbook. We've partnered with a great Michelin-starred chef, many of you've probably heard of, which will be launching a big campaign and a series of kind of a new menu with him. And then in the summer, bringing back our seasonal hits. In the fall, we'll continue the seasonal menu cadence. And with that, considering where we can kind of price some things more, kind of mid-tier pricing. I'll just add. We just launched Ripple Fries. Ripple Fries, we intentionally priced them right around the price of medium fries at McDonald's. I was shocked because I couldn't believe the medium fries average price at McDonald's is mid-$4s today. It kind of blew my mind, but that is what people are charging for fries. And so our Ripple Fries, instead of made with many, many ingredients like most of the industry, many ingredients you can't pronounce, chemicals that probably should not consume and then deep fried in seed oils, we make them with 5 ingredients, air fried and avocado oil at a really compelling price. And so far, we've seen a really, really strong reaction.

That's amazing. We'll get back to the fries really quick. I just want to keep on the price value thing. I mean you guys have Infinite Kitchen, which has like 800 bps of straight-up margin benefit. As you densify your store base in some of the smaller markets over time, how do you think of prioritizing reinvesting some of these gains into the menu price, customer plate abundance and whatnot, like as you try to be more competitive?

I think it's a really interesting question. A lot of investors ask us about this of what we're going to do with that margin. So we know the margin is there. We do -- one thing we've said is we want to have more Infinite Kitchens out there, really specifically have kind of a whole market enabled by the Infinite Kitchen to take advantage of that opportunity. And I think it's going to require some testing. It's going to require some testing to understand if we reduce prices by X percent, do we drive that -- what's the lift in terms of transactions and what's ultimately going to create the best, most profitable business. What we do know is within -- typically our restaurants, the incremental dollar has approximately 40% flow-through. Within Infinite Kitchen store, it's 65% or 70%. There's no incremental labor. So it's pretty much just cost of goods. So there is a good reason for weaponizing price to drive transactions, whether that comes in the form of more aggressive loyalty and discounts or pricing, not -- we have not gone there yet, but we will -- like everything we'll do, will be thoughtful and test and learn into it.

I'd like to pivot to think about the TAM, not only in the context of national competition, but also the local competition, which I think a lot of people don't think enough about. How does your real estate model today capture the dynamics of local competition? Can you also talk about a specific market, how your stores have performed before and after you saw some increase in competition?

The competition is interesting because at the end of the day, at Sweetgreen, a lot of our competitors, in a way, we're all trying to move people away from the industrialized food system to eating healthier food. And in a lot of ways, as this category grows, as long as we are -- can be the best in the category and the category leader, the long story is let's move people away from fast food and into eating better-for-you food and Sweetgreen can help lead that. And so in some ways, there are competitors, but we're on this kind of mission together. What's interesting is we do see, in some cases, some small regional players, but we've -- as we go into these new markets, we've performed really, really well. I think people understand the commitment to the food quality. They can taste it in the food. They see the brand. The brand is a bigger brand than our footprint, whether they see us on social media, in the press, heard from friends. And one of the things we did very intentionally when we started the company is from the very beginning, we said we want to build a national and then global iconic brand. We want to build the category leader. And in order to do that, we built a footprint in order to enable that. So we didn't take a regional approach. We took a national approach. We went to the major cities. We went to New York and Los Angeles and Chicago in these big cities. And so in a lot of ways, we've planted these flags and now we get to go to a lot of the easier markets. You get to follow that customer home to the suburbs where build-out costs are lower, labor is easier and competition is less. So in a lot of ways, we've gone to the heavy competition markets. And now we're going to places like Indianapolis and Cincinnati and Cleveland and Sacramento, and we see not only less competition, but people -- and people are waiting for us and excited for us to get there.

I think Rahul, build on that. I think the competitive environment is changing a little bit. And by that, I mean, it takes outside capital to grow in this industry. And Sweetgreen was largely built in an era of low interest rates and plentiful capital. And one of the things that we're seeing is that smaller regional private companies are having a much more challenging time today. And the industry seems to be moving in the direction of larger publics that have better balance sheets and are able to kind of weather the environment.

That's awesome. Let's talk fries. I love the marketing that is taking shape around the product. What are some of the learnings and behind-the-scenes planning that went into this product launch? Most importantly, how are we ensuring that this product, which has a steep decline in half-life, stays fresh, hot for the customers?

So we're very excited about Ripple Fries. We launched them last week to great fanfare, a lot of excitement on social media, a lot of trial in our restaurants. And this is something that we envisioned over a year ago. We knew we -- the strategy started with, we knew we wanted and needed a compelling signature side dish that from a business perspective and something customers talked about. We also -- we wanted to tell a story, and as I referred to this earlier about how Sweetgreen can take classical -- classic comfort foods or classic fast food dishes and do them in a better way. So there was a business component to it, and there was a little bit of a storytelling component with it. And then when we came with our chef came up with this idea and we tasted it, we were like, "These are a hit." So there was a lot of work to then take this idea through our stage-gate process and get the operation really nailed to be able to launch it fleet-wide. Our stage-gate process starts in a lab with a lot of ideation, usually moves to a single store test, understanding just the operation, really not -- less on the consumer side, just can we operationalize this? What does it do to the store? From there, we move to a market test. This -- Ripple Fries were in market in Los Angeles, I believe since October. We were testing. And at that point, we're testing a little bit of customer reaction, understanding merchandising opportunities, how do we tell the story while getting ready for national launch. What Ripple Fries did for us is it really helped us understand the hot cooking capabilities that we have and have gotten a lot more fidelity into how often we cook and hold food. We have connected ovens. So we're able to track how often we cook every single item. So today, I get a dashboard at the end of the day that says, here's how many times we cooked, for how many minutes between fries we cooked at every single restaurant. So we've -- in the process of coming up with these and rolling them out, we've learned a lot about how to better maintain the quality of our hot food, and we think our consumers can taste that. So we're now applying that to many of our other hot food items. Again, cook less food more often, and it will taste better. The other thing we've done, the other realization is one of the -- we've always known the key role in the restaurant is obviously the general manager, what we call the head coach. But the other key that really the heart of the restaurant that keeps it really the food tasting good is what we used to call the hot prep, we now call the Culinary Pro. It's really the person that's running the kitchen and running the ovens. So what we've done over the past few months is redeveloped a new training certification and validation program for these Culinary Pros. Once you're validated, you do get a pay increase. We believe this will help create a more stable team of the people that are responsible for the quality of the cooking of our food. They're paid more. They have the additional training. And I think we're starting to see some of the impacts in the quality food. So we're watching price carefully. You're right. It does have a -- it is probably the most temperamental item in terms of the hold time. We can't hold them definitely no longer than an hour, really 30 to 40 minutes is kind of the whole time. But in doing so, I think it's going to make the whole operation a lot stronger.

Awesome. I want to get into the marketing side of it. Like can you elaborate on your product-centric marketing strategy which you have talked about? And how impactful is this versus the regular course marketing throughout the year? And if you can contextualize some of the lift you have seen at Steak and air-fried Brussels Sprouts last year, which were like the 2 big launches. Can you like help us think through how that is going to play a role this year?

Absolutely. So a lot of learnings last year from our launches. Our 2 big launch moments last year were Caramelized Garlic Steak and then our Brussel Sprouts that we did. The periods right after both of those moments were the highest comping periods we had for the year. In Q2, we comped 9%. We had very high single-digit comps after Brussel Sprouts as well. So what we learned is a great new product, coupled with great marketing, 360-degree marketing, drives comps. And so the lesson -- what we've done this year is we need more newness. Customers are telling us that newness sells. And so we're bringing a lot more moments of newness this year, started with fries, chef collaboration, our seasonals and then again, coupled with loyalty. Within the media mix itself, a lot of optimizations, whether it be how we've optimized the creative process on the actual creative that we put out there, creative really does matter in the story we're telling. A lot of the optimizations around our digital marketing. And we brought back a lot of -- one other thing we've invested more in this year is owned content and influencer. We're seeing a lot of success really leveraging social media to drive brand awareness and excitement. And then the last thing is, I talked about this over the past few years, we're seeing a lot of success with community marketing and experiential marketing. This weekend alone, we hosted a big event at the Hollywood Farmers Market. We popped up and served fries. We saw thousands of customers that day. It created a lot of organic content, a lot of trial, and we're seeing a lot of opportunities around partnering with run clubs in farmers markets, sports teams and really kind of that on-the-ground marketing. So it's really that full funnel 360 approach. And still a lot of work to do, but huge improvements.

Awesome. You have always been this tech-forward executive in the industry, which is right now probably an amazing place to be. Can you discuss how competitive is Sweetgreen's tech stack relative to the larger peers and industry in general? And I'm also interested to understand how commoditized are most of the solutions out there and your thoughts on how democratizing tech can bridge the gap between chains and independents?

So Sweetgreen, I think we had the benefit when we started really being able to see that mobile was going to change the business. And so very early on, we were probably the first company to introduce mobile ordering and introduce secondary make lines and frictionless pickup stations in our restaurants. That was a huge boon to our business. We saw a lot of growth in driving mobile ordering and then layering delivery on top of that. In doing so, we paid a heavy pioneer tax in building that technology stack. We had to build a lot of custom solutions in order to enable it. As Mitch mentioned, we had the benefit of being able to have access to a lot of capital in order to do it. As a lot of that technology has gotten commoditized, we've done a lot of work to simplify the technology stack. The key for us is really owning our data and organizing our data in ways where we can take advantage of the AI revolution, which is to come. And I got to give hats off to our technology team and our wonderful CTO that have done an amazing job really refactoring our technology stack to lower our cost of ownership, make it so we can develop faster and bring new innovations to bear and organize our data in such a way that we can take advantage of a lot of the things that are going to come with AI. For example, one thing that I've talked historically about, which is now going to be coming to life sooner is our ability to really personalize menus. We understand a lot about consumers, what they order, both from a taste and eventually from kind of a health and nutrition. At Sweetgreen, you can make billions of combinations. We only show you about 12 or 15 on the menu. There's no reason your menu should be the same as someone else's. And so we're working on some things where eventually the menu itself can be personalized. So all to say, I think the investments in technology we've made have put us in a very good place. It's very scalable. We've actually been able to lower our technology spend year-over-year and fund more marketing while continuing to invest in more capabilities, and we're very prepared and already beginning to implement AI in numerous parts of our business.

Perfect. I just want to double-click on that labor scheduling tool aspect of the technology. How differentiated and customized is this one for you guys? A lot of your peers are using it. Most of these tools also get better with usage. And if the schedule you're using is fully integrated with the real-time data or is someone responsible to keep on updating it? How does that work?

Yes. So it's a modern solution. There are probably some peers that are using it, but it's kind of a newer one that has been built AI native. So it does have real-time data in terms of our sales forecast, our product mix, helps us optimize our labor deployment, not only based off of -- it really takes the team members' availability, their skills and the sales mix and helps us optimize that labor. It also is mobile-friendly where we can shift -- team members can shift swap, for example. On our last earnings call, we talked about we've been able to reduce our absentee rate pretty significantly already. It's also showed us where do we -- while we are fully staffed, where do we have gaps within that fully staffed. So we may be -- a store may look fully staffed, but may not have the right staffing at the right time. So I think one of the things we're starting to see is there's actually a lot of opportunity in capturing more demand through better labor deployment. Beyond that, there is -- it helps us to be more compliant with a lot of the regulations like fair workweek, which we think can help reduce costs. And all to say, we think this -- you're right, it does learn over time and get better over time. Today, it's live in 50% of our markets. We're very encouraged by the results. But we think over time, this should help us capture more demand by having the right labor at the right places at the right time as well as optimize the labor and hopefully shape some of our labor as a percentage of sales as well.

I want to talk about talent acquisition. How is Sweetgreen able to attract and retain the best talent in the industry? I mean, we need not be the best place to work, but even being among the best places to work for goes a long way, how competitive and differentiated is your sourcing funnel here?

No, we're doing -- I think we're doing a really great job in sourcing talent. One, when it goes -- when it starts with understanding the profile of who's successful at Sweetgreen. We've done a lot of work, again, leveraging both art and science and understanding what makes a really successful Sweetgreen employee at different levels of the organization. And how do we -- we actually are using AI for this as well, understanding what do our best team members look like? What are their attributes? How do they answer questions? How do we find those -- how do you find and identify those people? We are only hiring a very, very small single-digit percentage of the people that are applying to Sweetgreen. It's actually kind of crazy, the number of people that apply to work at Sweetgreen, so we can choose who we want to work there. The thing that we know that people love at working at Sweetgreen, one, it's the mission. They really do believe it's more than just kind of working for another company. Two, it's the growth. You come to Sweetgreen and you can become a head coach within 3 years. And we've really done a lot of work to accelerate the people flywheel, help the team internally develop so we can get more people internally, and we've set pretty high targets of where we want that to go over time. The third is probably around our compensation. We continue to evolve how we compensate our head coaches and general managers around being more incentive-based. We believe as they drive transactions and margins, they should benefit from it, and we're seeing some great benefits to that as well. So all to say, I think people, as you all know, covering restaurants, it's a huge component, people and operations and driving consistent execution. And I do believe it's working. If you look at this past year, our turnover came in at the lowest level that it's ever come in. Our head coach stability continues to increase. Our internal development continues to increase. And we're really perfecting the playbook around how to open new stores and kind of export our culture to new restaurants in new markets. So what's the right mix of internal and external to bring the Sweetgreen culture and know-how as we open new restaurants.

I know you guys changed the compensation for the GMs, RGMs almost a year ago, I believe. Are there any big tweaks that are necessary given the role of GMs and RGMs today in the market is changing dynamically as your stores like upgrade in technology and whatnot? Specifically, with regards to your brand, is there -- are there any big changes that we should look forward to or even as their roles evolve over time?

I'd say, there's going to be a lot of innovation around roles within the restaurant. I mentioned one around the Culinary Pro as being one change. The head coach, we'll continue to invest in. And then we're kind of thinking about what is the role -- the path outside of the head coach. I don't want to speak too much because it's not out there, but there's opportunities around how do you prepare a head coach to become an area leader. And right now, there's a very big gap between a head coach and an area manager. And so how do we create some sort of position that keeps you retained and engaged and creates a better stepping stone to become an area leader. On your previous question, there's just one thing that -- one more thing I wanted to bring up, which was our Infinite Kitchen restaurants. One of the benefits of the Infinite Kitchens, we talked a lot about our -- the benefit to the customer, which we've seen. We talked about a survey we put out where 90% of consumers prefer to a classic restaurant. We talked about the benefit to the business, which is 7 points in margin, about 1 point in COGS. But the benefit to team members is real as well. And we've talked in previous earnings calls, we are seeing much lower turnover in those restaurants. Those team members are telling us it's a more fun place to work. It's an easier place to work. It's a little bit less stressful. And so they're showing us with their feet. They're staying longer with us. And if you go talk to them, if you ever go to one of our restaurants with the Infinite Kitchen restaurants, feel free to ask a team member what they think about it. But not only do they think it's cool and they're learning about this new technology, it's not just working at a restaurant, but it's also an easier environment, and they can focus more on the things that we think are important in a restaurant, which is the culinary side of the business. So true culinary excellence in the cooking of the food, which we're preserving despite the automation as well as the service component. So really creating more room for humans to do things that only humans can do.

I want to move to the real estate strategy here. Some of your newer markets have been performing and opening pretty well. What would you say as of today, your suburban mix is? And who are you gravitating towards as your anchor tenants over time as you densify? Also, like I did come across the news on the Mission Rock lease like from the Tishman and SF Giants thing, which is pretty interesting.

Which one?

The Mission Rock in Mission Bay area redevelopment. It's one of those interesting examples in the neighborhoods like your brand chooses to build and be. So I'm just curious to hear about your thoughts on this.

Well, we've always seen the company as having broad TAM. We've never seen it as just an urban concept, and we're very happy with the way the new markets are performing and the AUVs that they're hitting. I said on the last call that in year -- first year, our stores opening in 2024 will be at our year 2 target of $2.8 million. In terms of anchor tenants, we've always looked to be close to gyms, fitness, hospital, Whole Foods. And interestingly enough, we do very well when we're next to direct competitors. We like being in a center that's got some competitors. It brings more people in, more people in at lunchtime. While we have very high frequency, not everybody, except you, Rahul, eats the same thing every day at lunch. And everybody needs a little variety, and we're happy to have that. So we're very, very pleased with the new store performance. And quite frankly, we see the TAM is just continuing to get more and more open for us.

Yes. As we continue to scale, I think the brand awareness is unlocking all kinds of opportunities we didn't know. I almost couldn't have imagined that existed. This past couple of weeks, I've been out in market visiting existing and new stores in markets like the Midwest and Denver and many of you are probably know Sweetgreen from New York or Boston. And you couldn't imagine that Sweetgreen an hour out of Indianapolis on the side of a highway in a strip center is doing $3 million, but it is, and it's working in those places. And I think it's showing the power -- really the power of the brand.

Amazing. I just want to end with one other question on the Infinite Kitchens. So why not? Given you're in full manufacturing mode, you have more than 25 stores with Infinite Kitchens coming this year. Any changes in the design modules that are already there? And also, can you talk more about the model store, which you want to like prototype going later in the year?

Sure. I know we're out of time, so I'll try to keep this -- I'll try to do the quick version of this. What we've learned with the Infinite Kitchen is the technology in and of itself really works. We feel very good about the uptime, the quality of the food. The biggest lessons around the first 12 has been around the layout and the experience. And we think there's a lot of opportunities to better lay out stores, both from a customer flow as well as a team member flow and really bringing the soulfulness in theater and the brand attributes into that restaurant. So we've been developing over the past year our new prototype, kind of our new Sweetgreen prototype enabled by the Infinite Kitchen. What you see in that store is hopefully a little bit smaller, but also bringing the prep and the cooking more closer to the customer. So you're seeing the action and really what -- the things that you love as well as other kind of visual cues around what makes Sweetgreen special. So being able to see glass walk-ins and seeing the food brought in whole. Again, how can we lean into the things that only we do, not bringing food in bags already prep. It's whole food coming directly from the store. So there'll be a number of things there as well as how do we warm up the environment, I'd say, a bit and make them feel more of a cafe-style environment, all while trying to bring the CapEx down. So it's quite a big challenge, but we feel really good about the prototypes that we've developed, and we're excited for you all to experience them later this year.

That's great. It's a quick 30 minutes. Good to have you guys here. Thanks a lot.

Thank you.