So I'm Sharon Zackfia. Really happy to have with us today from Sweetgreen, Co-founder and CEO, Jonathan Neman. Sweetgreen is a fast-growing restaurant concept that has hit an inflection point, inclusive of accelerating brand awareness in new markets, positive adjusted EBITDA, and consistent unit-level margin expansion, all of which bode well for the company's plan to accelerate the pace of expansion into 2025 and 2026, while increasingly rolling out Infinite Kitchens, which I'm sure we'll talk about, the company's nascent robotic assembly makelines. Before Jonathan and I start our fireside chat, and Jonathan's gonna explain a video he's gonna roll, I'm required to inform you that there's a complete list of research disclosures and potential conflicts of interest at williamblair.com.
Good morning, everyone. Nice to see you all. Thanks for coming. We're gonna play a quick video, shows our first Infinite Kitchen pilot. It's actually not far from here in Chicago. It's in Naperville, and it's just one part of the story here. It's, again, the first one opened almost exactly one year ago, and you can see how we've enabled technology to improve the customer team member experience, as well as create better unit economics. So what you'll see is a kind of a walk through the new pilot store. These have evolved as we continue to roll them out, but what you'll see is we've developed this technology that automates the entire assembly process of the Sweetgreen experience, enabling us to serve faster food, more consistent, and again, easier jobs for our team members, most importantly. Go ahead.
Okay, can we roll?
Hi, welcome to Sweetgreen Naperville. I'm Tim. This is our newest location. It's the first of its kind. We're testing automation. Let's head inside. At Sweetgreen, we believe in building healthier communities by connecting people to real food. We start with the best ingredients from farmers we know, and we prepare them fresh in-house. Over here, we have our prep kitchen. We're really proud of our supply chain, our fresh prep, and scratch cooking, so we brought it to the storefront. Over here, we have the market area, which features the digital billboard. This highlights our core menu, our seasonal offering, fan favorites, and even how to build your own. Let's go to the counter. A team member will be positioned here wearing one of these, meant to engage with customers, new and returning. We wanted to make it easy for customers to order and learn about our menu.
This is the place for human connection, where you should ask questions, taste delicious products, learn about our app, and even get a recommendation. If you're ready to order, you're gonna do so on one of these kiosks. The kiosk is exactly like our app. It's very easy. So if you have a Sweetgreen app, you can actually order in-store on that and get your food just as fast. But if you don't, you'll come here, choose a bowl, make any modifications that you'd like, add it to your bag, enter your name, pay with card or cash, and your order will be sent to the Infinite Kitchen to be prepared. This is where the magic of automation comes in. From order to pick up, your food will be ready in less than five minutes.
The Infinite Kitchen is a culinary tool that prepares salads and bowls, allowing our teams to focus on fresh prep and putting the finishing touches on each order. The Infinite Kitchen was designed with food quality and speed in mind. It features precise and consistent portioning, a bowl holder that rotates to create perfect plating, unique dispensers to handle delicate items like tomatoes and crumbling goat cheese, and mixers integrated into our dressings in order to keep them perfectly blended throughout the day. In addition to the Infinite Kitchen, we created a few simple tools to help our teams run our restaurants. Our team members receive notifications on when to restock ingredients and can track customer orders along the way. At the finishing station, our team member receives simple instructions on how to add avocado, herbs, and then send the bowl out the door or into our customer's hand.
If you ordered in store, your name will appear on this board. When your order is ready, it'll be highlighted in green, just like mine. If you ordered on the app, your name won't be on this board, but you can use the app to track the status of your order. All right, my order's ready, so I'm going to go grab it from the pickup counter. We hope you can try our new concept and let us know what you think. See you soon!
All right, great. Thank you for.
Of course
The video. You know, I think, we'll, we'll start off with maybe some broader questions that have been ongoing since the IPO. So I think, you know, the, the, the number one question we get asked all of the time is about the geographic portability of Sweetgreen, whether it's urban to suburban or coastal to Midwest. I know we were just talking about Chicago, but can you talk about what you've seen with geographic portability, how the concept really does fare in those divergent marketplaces?
Sure. So we see tremendous white space for the brand. Today, we have about 230 restaurants, so very small in terms of what we think the full potential is, and we're in about 20 different major markets. The concept works across the country. While we started on the East Coast, I remember people saying: "Oh, it's a DC brand," or, "It's an East Coast urban brand." We're now spread out in all, you know, the 20 top major markets across the country. You look at peers, you know, similar, you know, as Chipotle, almost 4,000 units serving a single flavor profile. For us, we have a, an ethos around real craveable food, but attack so many different flavor profiles, which makes us believe that our TAM could be even larger at some point.
You know, while we were really successful in urban as we started, at the time of the IPO, we were, we tilted more urban than suburban. Today, we now are more suburban than urban, and our AUVs have remained where they were, which shows you that it works really strongly in urban, it works really strong in suburban. Over the past few years, we've entered a number of new markets. Think places like the Upper Midwest, Indianapolis, Detroit. We've expanded a lot here in Chicago. We opened in the Pacific Northwest and a lot of stores in Texas and Florida, and some of those markets are our fastest growing and fastest comping markets. So we're seeing a really great adoption to the brand from those places. A few more things.
Recently, as I'm sure we'll talk about, we introduced a category called Protein Plates, really aiming to broaden our consumer, as well as broaden our day parts and drive more dinner business. It's been very, very successful. We're seeing incredible adoption of Protein Plates, and about a month ago, we launched steak. First time having meat on the menu. Again, amazing adoption. In our test, which we talked about at our last earnings call, we saw over 20% adoption rate. We're seeing similar results as we've rolled it out. In a lot of these newer markets, we're seeing an over 30% of our sales being driven by steak. So really great adoption. Again, what we're seeing here is a broadening of our consumer.
We're bringing, you know, where the brand leaned more women, more female, we're seeing more men come in, we're seeing business, dinner business grow pretty significantly, and it all gives us a lot of confidence on the overall white space and TAM opportunity. The last thing I'll say is, you know, the reason we started this company is to build healthier communities by connecting people to real food, and we think some of the best companies are created riding generational tailwinds, which is every day people want to wake up and want to eat healthier. And this is not a fad, this is a long-term trend that we think will go on for a very long time, and we're kinda leading that trend in that category. And so there's also a massive tailwind behind more people wanting to eat real food.
I think, and, and there are a number of ways we can go from that, but I, I wanna maybe tap in to the last point you made on, on frequency, 'cause you do have some real brand advocates that, that go quite often to Sweetgreen. And, and I know maybe Sweetpass has been one of the few areas that maybe hasn't been where you would have liked it to be.
Mm.
So can you talk about what you've learned? Maybe explain what Sweetpass is, what you've learned from it, and how you envision loyalty in the future to kinda bring more people into that, you know, fandom, if you will, and increase frequency?
Absolutely. So I think one of the keys to the financial model is the frequency of what the brand does. And the beauty, you know, what drives it is the variety and the customization. Over 80% of customers modify or customize their bowl. So we have, you know, billions and billions of combinations, and most people are making something, you know, specific to their dietary preferences or their tastes or whatever they're feeling that day. It also is something that feels good, and I think that's really important when you think about something you want to eat every day. I don't know if anyone here is a Sweetgreen customer. I hope you all are. If you're not, go try us for lunch today.
But it's something that you're excited to eat, but also feels good, which is unique in fast food. Most fast food, you don't feel so great after you eat it. So just naturally, there is a built-in habituation to the brand because of the way it makes you feel. You know, we've also made it very convenient to eat Sweetgreen, both in store, in the speed of service, but also through our digital channels, whether it be our delivery or pickup channels, which we were early movers on. Loyalty is something. So we have a loyalty program called Sweetpass, and there's a paid version called Sweetpass +. Rolled it out about a year ago.
Sweetpass is really kind of personalized CRM and challenges, and Sweetpass+ is a membership program, where for $10 a month, you get $3 off every day. We've seen, as you mentioned, we've seen mixed results with it. It's not doing, It's not as effective as we would have liked it to be, and we see an opportunity to really optimize that loyalty program to drive more customer acquisition and frequency. So we are very deep into rebuilding that program and plan to launch Q1 of next year, a new loyalty program reimagined, where we see, you know, parts of it being more traditional with points and tiers, but also leveraging a lot of machine learning and the high digital penetration we have to drive that additional frequency.
I think we're very advantaged in doing this, given that 60% of our business today is digital. We have amazing customer data, we have amazing direct relationship with our customer, and we think with the right program, there's a huge opportunity to drive more frequency.
So I think, there's obviously been a few eureka moments in, in the stock market on Sweetgreen this year. I think one of the more recent eureka moments probably had to do with new unit productivity over the past few quarters, not only in terms of sales, but also in profit. And so, you know, if you look back at 2022, there were I guess Wall Street has some questions on how some of the markets opened. It seems to have really turned around. Can you talk about, maybe what has changed in the way that customers are embracing Sweetgreen, or maybe alternatively, talk about why 2022 was just an anomaly?
Yeah, I think there, there's a few things. So we've had a really solid year of opening so far, and I think we've learned a lot about the type of real estate and the right sequencing of how we continue to grow our brand. So, one, I think we're, we have a better sense of where to go and in what order, and we're seeing some really great real estate opportunities. Two, we've learned a lot about how to better open those restaurants, so a huge focus from promoting from within and having managers that have worked with us for a few years take over those new stores, having much more stable, much, more stable operations, which drives that customer experience and frequency. The third is, we've invested a lot more in marketing. One of the things we've been trying.
And changed a lot of our approach. We’ve built a new marketing team and have some different ways of acquiring customers and extending that launch period, with a focus on both traditional 360 marketing, but also community marketing, which is something that we brought back after the pandemic. So all to say, I think we’ve really kind of cracked the code on new openings, specifically in the suburbs. And the last thing I’d say is, there has been a brand awareness unlock for the brand. You know, very intentionally, we knew we wanted to build a category leader and a national brand, so we planted seeds all over the country. Most restaurant companies kind of go into a region and build out that region.
We intentionally wanted to build a national brand and a leader, so we, we opened restaurants in major markets around the country to build that national brand. We're now in a much easier stage because we can now build on those, you know, on those openings and that brand awareness that we, that we have. And what we see is a step change in, in transactions once we densify a market. So in certain markets, once we kinda hit that five or six unit mark, again, something other, other competitors have spoken about, you see a step change in awareness, and that, and, and you see comps continue to accelerate. As it relates to 2022, I'd say, you know, we made a. In the fog of war of COVID, I think we made a lot of mistakes.
And I think they were largely real estate mistakes, but some of it was, you know, it was hard to train people. It was, you know, labor was very tight. We couldn't do our traditional marketing. It was all digital-based. So I'd say, you know, it was almost false negatives on the brand because we didn't execute properly, but now that we're back to executing and playing our game, we're seeing just phenomenal results in the new store productivity. And what's also great is the 2022 class, you know, the 2021 class we've spoken a lot about.
Why it started slow, it's comped and is now hitting at the metrics we expected, and we're also seeing some amazing growth out of our 2022 class and expect that class as a whole to get to where what our fleet-wide metrics of about $2.8 million-$3 million.
I mean, Jonathan, are there any markets that Sweetgreen isn't working?
No. We're working in every single market, and feel very excited about the national potential.
And I wanna let the IT team know that our countdown disappeared, so we may just be up here until lunchtime. If somebody doesn't restore the countdown on the monitor. I think we're gonna talk about Infinite Kitchen. I think that's certainly something that investors can intuitively understand the moat that that builds around the business. But I wanna talk about the other moats around the business before IK. Including, you know, how you've used technology that most of us don't see, you know, in your supply chain, in the way that the prep is done. Because, you know, frankly, your food, for the most part, isn't cooked, so freshness is imperative. And I get asked all the time, like, couldn't anybody open a salad chain?
So can you talk about, I mean, you spent a lot of money building this brand. A lot of it was on tech, part of it customer-facing, but the behind-the-scenes stuff, and then we'll get into IK.
Absolutely. So we spend a lot of time and energy figuring out how to bring our, the Sweetgreen experience to life consistently across the country. And I think what we do differently, we have a regionalized and much of our supply chain is local, so how we source is very different. We also make our food from scratch in every restaurant. So we're bringing in fresh produce. We're washing, chopping, cooking everything pretty much, you know, across the day. And so we've had to develop some tools in order for us to do that efficiently and manage our labor and also manage the quality of the food and the freshness.
So there's a suite of tools in the back of the house that we've developed, some that we've, you know, things that are more off-the-shelf around things like workforce management and how we plan our, our cost of goods and inventory, but many that are proprietary. So we have a tool called Cold Prep, and another one called Hot Prep. These guide our team members, thinking about it as like a Google Maps for the kitchen. So as you're thinking about, you know, we have 65 fresh ingredients that have to be made every day. What do you make? When? How much of it at any given moment? We have these proprietary apps, and if anyone wants to tour our restaurants, we can show you how these work, where instead of kind of guessing as a team member what you have to make, you're guided through it.
It allows us to track productivity of our team members and again, maximize the freshness of the things that we're putting out there. We also have, you know, separate tools around how we manage our throughput, around pace, you know, pacer tools, around how we manage our digital throughput. And of course, we have invested a lot into our consumer-facing digital channels and been very early on that. One of the first to introduce mobile order and pay in 2010, leading to our very high digital penetration.
So we have to talk about IK's because people are very excited about it. Obviously, it holds the potential to structurally change your margins. Can you talk about, I know there are only two so far, but can you talk about what you've seen in those two? And when you think about new units, how you're thinking about the returns on those relative to traditional Sweetgreen?
Absolutely. So we really do believe the next platform shift in restaurants is going to be automation. If you look at what's happened in labor in this country, both the availability, cost, and quality of labor, it's structurally changed from what it's been in the past 20 years. Probably all follow the California $20 minimum wage. That's something that's likely to follow the rest of the country, whether it be regulatory or market-driven. We think wage is gonna continue to go up pretty significantly. We also know that the, you know, we wanna make the restaurant experience for our customers consistent and fast, and we wanna make the restaurant job for our team members a lot easier and more joyful.
When we think about how we scale the Sweetgreen experience, you know, there's our supply chain, there's what we do in our store, which is, we prep food, we cook food, there's the assembly, the production, and then there's the hospitality. Most companies, as they scale their business in the restaurant world, they in order to scale and find consistencies, they cut corners either on the supply chain or the prep. So they say, "Okay, I'm gonna reduce the quality of the food to drive COGS efficiencies, and/or I'm gonna make all my food in a commissary somewhere and ship it out in bags, in order to then do the assembly in the restaurants." We thought about it differently.
We said, "We want to preserve those things." The supply chain, and the quality of food, and the making it fresh, is what people love about us, and we want to buck that trend of reducing the quality of the experience as we scale. We thought that technology could be a really great way to take away that rote, menial piece of production. If you've been to our restaurants, you know, we run very, you know, very high throughput. You know, we run. Most of our stores are, you know, have a front line that does over 150 orders an hour, back lines that do 200 each. And so many of our stores are doing 500-1,000 orders an hour, at their peak. So timeliness and consistency is a huge opportunity.
So, we've been working on automation for quite a while, we acquired a company called Spyce. It was a restaurant company that had used automation to open two restaurants. We acquired them almost three years ago, and we saw a way to implement their technology, adjust it, and scale it into our experience. You all saw with the video. So what we've seen, it's still very early. We're excited about its potential, but I do like you say, it's super early. We have two stores. One's been open a year, another one has been open about six months, but the results have been pretty exciting. What we've said is we expect at least seven points of margin expansion from this technology.
In Q1, we shared that those two stores ran about a 28% margin versus an 18% margin for the fleet, so we saw a little bit more in those two stores. In those two stores, they were very intentionally suburban stores, so we're not really capturing what the revenue uplift opportunity could be by driving higher throughput. They're kind of sleepy, suburban stores doing, you know, we said on average, those two stores were running about $2.6 million in Q1. We see, as we look forward, we see an opportunity to leverage that Infinite Kitchen experience to both drive the margin, but also, we think that there's an opportunity to drive higher AUVs by capturing more throughput, and that's something we're gonna learn in the next few months.
This year we have plans for seven new Infinite Kitchen stores, so new builds, and about four new retrofits. We're actually in construction on one of the first retrofits currently. We'll be opening in the summer in New York City, so we're excited about that first one. We're gonna learn a lot about a retrofit. How long do we shut down? How much does it cost? What's the revenue uplift, and what's the margin? And we're really gonna start to, you know, understand what the return on invested capital is. Today, you know, what we expect is an equal or greater return on capital for an Infinite Kitchen store versus a classic store. So, as you'd expect, there is an incremental capital cost, but the margin leverage should offset that.
But if you then look at a 10-year lease or a 20-year lease, and you think about the labor, what we're gonna see in terms of labor inflation and the hedge this provides against it, the IRR of the stores, the net contribution over 10 or 20 years is significantly higher, and it will become again, a hedge against labor. I think gives us some opportunity around pricing power and other things we can do. So we're very excited about it, but still very, very early.
I think as we think about that New York retrofit, which you could share the location if you want to during this presentation. But you know, I guess, how quickly do you think customers are aware of the fact that the line is faster? So I'm thinking digitally, if I order, I'm assuming the algorithms will adjust very quickly, and what might have been a 20-minute pickup time now moves much earlier, right? So your cart abandonment improves. But it, I'm thinking of also the walk-in speed. So how many months do you think it takes before you have a good idea of what the uplift is?
I think we'll learn pretty quickly. So, you know, the experience is a different experience. You're no longer walking down a line. You're coming in, and you're ordering either from a kiosk, and since that video, we've actually implemented concierge ordering, so you can order directly from a team member. So we have the ability to flex as many kiosks as you want, so you kind of put your orders in right away, and the machine can produce about 500 orders an hour. So today we're putting it in stores that have throughput that are demand curves or capacity less than that 500. Interestingly, we actually have a few stores, there's only a handful, that are running higher than that.
In those instances, there may be places where we keep a front line and have put an Infinite Kitchen just to take our digital orders, is an opportunity for us. There may even be places where we would put two Infinite Kitchens. But I think we'll learn pretty quickly what that throughput increase is. And I do think that the other thing that we'll see is how the average ticket holds. We are seeing, again, consistent with the industry, about a 10% lift in check through the kiosk. And so I think it'll be interesting to see if that holds as we continue to do this.
So, the next question that's usually asked is: How quickly do you retrofit the whole fleet, right?
That's what I asked my team, too.
Can you talk about the pushes and pulls on that discussion? And I think also, is there just a different way to storm a market? So if you have a really busy Sweetgreen, is there an opportunity to have, like, a digital-only small IK nearby that might be another way to kind of crack that code?
Yeah. So I'll answer the second part first. Absolutely, and that's something we're looking a lot at. We think formats are gonna be a huge part about how we densify markets, so working right now on a smaller format. We do have one digital pickup store. It's not IK-enabled, but you can imagine how you start opening small footprint, IK-enabled pickup stores and use that to densify markets. So something we're actively working on right now. It also enables us to do drive-thru drive-through, where we were not able to before. We do have a mobile pickup drive-through, similar, it's called the Sweetlane. Very similar to the drive-through experiences you've seen for other fast casuals, like a Chipotle lane, where you mobile order and pick up on a window.
It's very hard for most fast casuals to enable true drive-through as an order and pickup, given the speed of service. With the Infinite Kitchen, speed of service, you know, you're making orders in sub 90 seconds, and so you can actually enable true drive-through, which is again another massive unlock for us. As it relate, what was the first part of the question, remind me again?
Retrofitting the whole [store].
Retrofitting!
Yep.
Oh, my goodness. You know, we're doing four this year, and I think we're gonna learn a lot. I think there's a lot to learn in terms of how much it costs, how long we have to shut down, and then what that return on capital is on the back end. Clearly, if you look at the AUVs at around $2.9 million, just take it that, you know, 1/2 the stores do revenue above that, and the top quartile has very, very high AUVs. So you can assume that, you know, somewhere between the, you know, 25%-50% of the stores at least have an opportunity for this.
The IK is pretty flexible in terms of the types of places it can go, but there's a lot of things to consider. Time left on lease, you know, layout, et cetera. And so I'd say we still have a lot to learn, but we do, you know, I think the reason we've prioritized those retrofits is we think in the next few years, there could potentially be a big retrofit opportunity for us.
I think one of the other interesting things about the margin advantage of IKs is just the optionality you have. So, which, you know, other companies may or may not have similar optionality. But can you talk about whether, IKs unlock the opportunity for smaller markets, and, you know, whether that also unlocks the opportunity to maybe give more value to the customer over time? Because you could harvest all the margin, or you can reinvest part of it, correct?
Yes, we see both.
Mm-hmm.
We do see it as a TAM unlock. As it increases the store level margin, it allows, you know, it unlocks stores that maybe would not make sense at certain AUV levels in certain markets, where we can now, you know, have stores that, instead of making 20%, make closer to 30%. You do the math on the return on capital, all of a sudden, you know, it unlocks, you know, stores at lower AUV bands that once were not possible. It's also given the fact that not only this. One thing I didn't mention is, the stores with the Infinite Kitchen have a much lower turnover.
So if you take that store base and look at the number of employees we have to hire on the outset, and then take the fact that the turnover is significantly lower, the cumulative number of employees we have to hire and train in an Infinite Kitchen model is significantly less. We're talking about about 75% less than in a classic Sweetgreen restaurant. And that is a huge advantage for us in terms of having that, you know, the hidden cost of turnover is very, very high, and so by having more stable teams, we create better customer experiences. It costs us less in the cost of turnover on hiring and training, and we think that's a huge opportunity.
As it relates to leveraging the Infinite Kitchen for price, we also think that is, that is a huge advantage, a huge opportunity for us. You know, today, we've taken less price than most of our competitors. You've seen the price of fast food increase. There's, you know, a lot of press on that in the past month, where, you know, fast food versus where we sit, we're talking about about $2.67 different from going to McDonald's versus Sweetgreen. So the relative price value has gotten better, and you can imagine a world where they, you know, with their labor inflation, they're gonna continue to take price. And if we can just have a hedge on labor, imagine the world where, you know, you have this higher quality experience, this higher quality food for a similar price point.
I think that is kind of the holy grail.
I think we have time. We have the countdown back, so we have time for one more question. I know you slowed development a little bit this year to kind of align the IK production. You're accelerating next year to 15% expansion. I think you've said for the year after that, back to 20%. Can you talk about the visibility on the real estate pipeline and, you know, how we should think about IKs playing into that pipeline?
Absolutely. So our pipelines, you know, when we look, we're built about 18 months out right now, and have very good visibility into the 2025 pipeline, beginning, you know, pretty much putting the finishing touches there and building out the 2026 pipeline. We are accelerating the percentage of Infinite Kitchen restaurants next year. We haven't spoken the exact number, but it will be a pretty significant chunk of those restaurants will be IK. Open question on how many retrofits. As you mentioned, we feel confident in at least the 15% growth number for next year. We will, in that, be testing some of these different formats, really focused on driving our CapEx down through smaller units, including both smaller classic stores, pickup kitchens, and testing true drive-through.
And then in 2026, we'd like to get closer to that 20% unit growth number, and have pretty good confidence in that as we've seen greater success across all of our markets, it's just opened up a ton. The other interesting thing is, we've kind of done the hard work of, I spoke to this earlier, of opening a lot of these new markets, and our business has a lot of economies of scale at the regional level. So I actually see a lot of opportunity for us to densify the markets that we are currently in without having to take the risk and difficulty of going to more new markets. So you'll actually probably see less new markets from us in the next few years, and really a huge focus on going deeper in markets that we're in.
Just a couple of examples: We have less than 20 stores in Texas. We should have 200. You know, we opened a bunch of stores in the Midwest, Upper Midwest, you know, that are doing great. Places like Milwaukee, that have, like, two or three stores, or Michigan, that has three or four stores, Indianapolis. Like, these are all markets that have three or four stores and should have, you know, at least 10-20 stores in the next few years. So, huge opportunity to go much deeper where we've already established the brand and kind of follow customers home.
Thank you, everyone. We'll see you on the breakout.
Thank you.