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Danny Meyer’s popular burger chain is reportedly contemplating selling its shares on the stock market
Shake Shack is reportedly considering an initial public offering.
Sources close to the matter told Reuters last week that Shake Shack, the popular and ever-expanding burger chain from Danny Meyer, is preparing to go public through an IPO (initial public offering).
Union Square Hospitality Group is on the hunt for investment banks to appoint underwriters for the offering, reports Reuters.
The burger chain, which began as a hot dog cart in Madison Square Park in 2001, became a permanent kiosk in the park in 2004.
Since then, Shake Shack has opened locations all the country, including several more in New York City. Internationally, the chain also has locations in Dubai, Kuwait, Lebanon, Moscow, Istanbul, London, and other cities.
Thus far, Shake Shack has refrained from speaking publically on the matter. If the company does indeed pursue an IPO, it will join a string of other chain restaurants that have also gone public in 2014, including Papa Murphy’s, El Pollo Loco, and Zoe’s Kitchen.
For the latest food and drink updates, visit our Food News page.
Karen Lo is an associate editor at The Daily Meal. Follow her on Twitter @appleplexy.
Shake Shack IPO: Here's Everything You Need to Know
Investors can't stop snatching up restaurant IPOs . As fast-casual franchises take over the mainstream, stocks like Chipotle have shot through the roof, prompting plenty of other restaurant chains to go public. In the last year or so, Noodles & Company, Potbelly, and El Pollo Loco have joined the ranks of publicly held fast-casual players, and Shake Shack could become the newest of the bunch. Rumor has it that the much-loved burger chain is preparing for its own IPO, which could value the company at up to $1 billion.
Bloomberg reported that the restaurant chain has selected JPMorgan Chase and Morgan Stanley to underwrite the offering. Here's everything else you need to know about possibly getting your hands on some ShackBurger stock.
1. You're working with professionals here
Shake Shack is the most successful of several restaurants owned by the Union Square Hospitality Group. Among its other restaurants is Union Square Cafe, which has won five James Beard Awards and been ranked as New York's most popular restaurant an unprecedented nine times by Zagat. Founded in 1985, the company is run by Danny Meyer, one of the most respected restaurateurs in the world. The New York Times recently called Meyer the "Greatest restaurateur Manhattan has ever seen ."
2. The growth potential is huge
Unlike some other restaurant stocks that have recently debuted, Shake Shack is still in its infancy. The burger chain started as a modest kiosk in New York's Madison Square Park in 2004. Its burgers, fries, and shakes gained a fanatical following. Over the years, that buzz fueled expansion in far-flung locations including Miami, London, and Dubai. Despite its international presence, however, Shake Shack only has 56 locations.
Considering that rival Five Guys has grown to over 1,000 locations in North America, and In-N-Out Burger numbers about 300 on the West Coast, it's easy to see Shake Shack growing its number of locations by 10 or 20 times, or even more. Fast-casual star Chipotle now has grown to 1,700 restaurants and shows no signs of slowing. If Shake Shack can maintain its level of popularity, it could certainly follow suit. Thus far, the chain has nailed down choice real estate locations, and its recent openings continue to garner rave reviews. A Shake Shack that opened by Brooklyn's Barclays Center two months ago rates 4.5 stars on Yelp.
3. The price could be nice
While the $1 billion valuation might seem pricey on a per-restaurant basis, valuing each location at about $20 million, the company has been highly profitable -- earnings are projected at $20 million this year. That gives Shake Shack a relatively modest P/E for an IPO at just 50. By comparison, Chipotle stock trades at a P/E of 60, eight years after its IPO, and more recently public chains like Noodles & Company and Potbelly also command a higher valuation.
Shake Shack has not yet publicly confirmed the IPO and so has not addressed any potential expansion plans with the new cash flow. However, the company does not franchise and says it has no plans to do so in the future, a strategy I consider a positive for investors. Though franchising can lead to greater profits earlier on as the parent company reaps rewards from royalties and selling territories, it sacrifices the long-term revenue it would get from operating those stores itself. Not franchising also allows the parent to remain in full control of the brand. In other words, restaurant chains that don't franchise, such as Chipotle, will be more profitable over the long run.
4. This could be the exception that proves the rule
Though investors have been gobbling up restaurant IPOs lately, many have wound up with upset stomachs. After more than doubling on its opening day and then reaching nearly $50 a share, Noodles & Company shares have come up limp, trading today at just $19. Potbelly stock took a similar path, rising to over $30, but worth less than $12 today.
After the success of stocks like Chipotle and Panera, it's easy to see why investors are hungry for the "next Chipotle," but companies like Noodles and Potbelly simply don't have the same fan base. Shake Shack does.
That's no guarantee that its expected expansion will proceed smoothly, but it's a reason to get excited about the stock offering. We'll learn more about the company's post-IPO aspirations when its S-1, the SEC registration statement of a company's plans to go public, is released. Stay tuned. This could be one juicy stock worth wrapping your hands around.
The popular burger chain on Wednesday raised the price for its upcoming initial public offering to a range between $17 and $19 a share, up from $14 to $16.
It shows that demand for Shake Shack stock has been strong as the company meets with potential investors during its pre-offering roadshow.
Shake Shack announced plans to sell shares to the public in December. The company will offer 5 million shares that will trade under the ticker symbol SHAK on the New York Stock Exchange. A date for the IPO hasn't been set yet.
What started as a hot dog truck in New York City in 2001 has grown to become a chain with 63 locations around the world -- from Istanbul to Dubai. At its original New York City location, the line can wrap around the park with people waiting to order anything from a burger, fries, shakes and frozen custard to beer and wine.
Shake Shack was the brainchild of New York restaurant legend Danny Meyer. The company is owned by Union Square Hospitality Group and earned $5.4 million last year.
Shake Shack isn't the only burger chain wanting to sell shares on Wall Street.
West Coast-based burger chain Habit Restaurants ( HABT ) went public in November. It's stock surged nearly 120% on the first day.
Other burger IPOs may be in the pipeline. Smashburger has been rumored to be considering a public offering for some time. There are reports that drive-in chain Checkers is also mulling one.
These companies, like Habit, all have backing from prominent private equity firms. That increases the chances that they may one day go public.
In the U.S., Shake Shack plans to open 10 new company-operated stores each year starting in 2015, and expects it could grow from 31 company-operated stores to 450 over the long-term, it said in the filing. The company didn’t say how long it will take to reach that target.
Overseas, the company warned of the impact of sanctions enacted by Russia against U.S. imports -- saying that its licensee in the country has been led to ingredients that may be lower-quality than what Shake Shack fans are used to -- and that Middle East volatility has threatened the delivery of Shake Shack ingredients.
Outside the U.S., the company has 20 stores in the Middle East, four in Turkey, two in Russia and one in the U.K.
The company, which will list early next year on the New York Stock Exchange (ticker: SHAK), is aiming for a $1 billion valuation in the initial public offering, people familiar with the matter said in September.
Four chains that could go public
This post is part of the On the Margin blog.
A slowdown in the IPO market this year apparently isn’t affecting the restaurant industry.
There have been 131 IPOs in the U.S. this year, according to data from the IPO research firm Renaissance Capital — down 31.4 percent from last year. Those offerings raised $22.3 billion, down 45.2 percent.
The restaurant industry typically only has a handful of offerings every year, making it risky to extrapolate trends. Yet there were four restaurant industry offerings in 2015, roughly on par with recent years.
And there are indications that more companies are lining up to take their chances at the equity markets.
Public investors have certainly put money into restaurants. The four restaurant company IPOs in 2015 — Fogo de Chao, Wingstop, Bojangles' and Shake Shack — averaged first-day increases of 58.25 percent. Remove Shake Shack, however, and that falls to 38 percent.
That’s much less than the 70-percent pops that restaurant IPOs averaged in 2013 and 2014. But it’s still much higher than the 16-percent average increase for all offerings in 2015, according to Renaissance.
The prices have pulled back in most cases, but they're still trading at strong valuations. So private-equity groups are getting higher returns from an IPO than they would selling to another investor or a strategic buyer.
That makes the public markets awfully tempting, even after a recent bout of market volatility and an unforgiving investor community that has pounded chains that disappoint, like Noodles & Co., Potbelly, Del Frisco’s and El Pollo Loco.
Who could go public? Here are four companies that could go, at least based on recent reports, as well as plenty of rumor and speculation. Some of these could go quickly. Others might have to wait until they get a few more locations under their belts. Some, of course, might not go at all:
Jimmy John’s. The fast-growing Illinois-based sandwich chain is reportedly considering an IPO. Jimmy John’s has private equity investors that are looking for an exit. And while the company’s colorful founder Jimmy John Liautaud has said in the past that he wouldn’t go public, that kind of pressure could force the issue.
Café Rio. The Salt Lake City-based burrito chain is another one that has been reported to be considering an offering. And then in March it hired Steve Vaughan to be CFO. Vaughan is an experienced, public company CFO, having had that position with Sonic Drive-Ins. That has intensified speculation that it might be getting ready for an IPO.
Arby’s. This is pure speculation on my part, but an Arby’s IPO would make sense. Arby’s has made a stunning turnaround. Sales are surging and it’s adding units and remodeling locations. While its owner, Roark Capital, tends to keep its acquisitions, it has had a recent taste of a successful public equity exit in Wingstop. Arby's had been public before, and market comebacks are common.
MOD Pizza. Rumors abound that the Bellevue, Wash.-based concept would be the first fast-casual pizza chain to have an IPO (Rave Restaurant Group was already public when it created Pie Five). It is growing quickly, with plans to be at 100 units by the end of the year. Habit Restaurants had about 100 locations when it went public. Yet MOD might not be quite ready yet.
Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze
As Dave & Buster's readies IPO, the wait for Shake Shack goes on
The publicly traded restaurant group is likely to have two more names for investors to ponder in the months ahead, one a returnee and another that will undoubtedly be met with -- yes -- talk of its "next Chipotle" potential.
As for the first, it's Dallas-based Dave & Buster's, partly a restaurant and bar, partly a game center, which Oak Hill Capital Partners is taking public after an eight-year removal from the market. It's announced definite plans for an IPO after previously withdrawing an earlier filing to do the same.
However, the second -- still in the expected, not formally filed, phase -- will generate greater excitement by far. It's New York-based Shake Shack, one of the "better burger" chains that, along with the likes of In-N-Out and Smashburger, is drawing burger fans who want something other than fast food.
Every stock is different, but whereas last year simply being a restaurant almost guaranteed bountiful returns, 2014 has seen the group at large flatten out. For the restaurants that have gone public recently, results have been unimpressively mixed. Potbelly (PBPB), public since last October, trades under its IPO price and is down 49% this year. Noodles & Co. (NDLS) had its IPO in June 2013, and it recently traded at an all-time low. Papa Murphy's (FRSH) never flourished. On the positive side, Zoe's Kitchen (ZOES) and El Pollo Loco (LOCO) remain well above their offering prices but are beneath peak levels.
Wall Street is what Wall Street is, and turning these names out to the public is all part of the system. But predicting winners and losers among them won't ever be easy. Still, with the next (likely) two, one has more going for it than the other. Perhaps a great deal more.
Shake Shack hasn't confirmed an IPO, although published reports from Reuters and Bloomberg indicate it's happening. The frenzy that will attend this may not be reminiscent of, say, Facebook (FB), but it will almost certainly qualify as deafening for a restaurant.
Doesn't it just sell hamburgers and such? True. But, as with Shake Shack, traders, bankers and financial journalists are all over New York. They know Shake Shack, and they know other restaurants that are part of its parent firm, Union Square Hospitality Group -- venues such as Gramercy Tavern and Union Square Cafe. And a well-known restaurateur is behind it. If you don't like hysteria, avert your eyes and plug your ears.
However, noise notwithstanding, Shake Shack does have interesting qualities that would serve it well as a stock. "Better burgers" have resonated with consumers across the land. The company already has a foothold overseas, with 20 of the 49 locations listed on its website outside the U.S. The lunch lines are real. The announcement of "no hormones and no antibiotics" in its beef is in line with the "better ingredients" trend. That said, Shake Shack isn't making money on low-calorie offerings: A single ShackBurger and an order of fries is listed at a combined 1,000 calories. Visit the original Madison Square Park location, add a Coke to your order, and you'll pay just under $10 for your meal. Add a chocolate shake, and that's another $5.15 and 640 calories.
According to food industry research group Technomic, the better burger stores, part of the fast-casual group, had sales of $2.4 billion last year. Five Guys was almost half of that. Size and buzz have helped them outpace established chains, but the fast-food operators, including McDonald's (MCD) and Burger King (BKW), are exponentially larger, with sales of nearly $70 billion last year. In comparison, Technomic puts Shake Shack's revenue for last year at about $62 million.
Also worth considering is whether other better burger chains eventually decide to follow. Being first will surely help Shake Shack, but if it were to go public and trade at elevated levels, Wall Street would find a way to develop an appetite for similar names. Investors have favored, for a time anyway, new stocks that potentially have elements of Chipotle (CMG) -- that is, combining the promise of better ingredients, buzz that separates them from the daily chains and profits for shareholders. The "next Chipotle" is still being sought.
But with Shake Shack, it's got a small store count, with room to expand. It's fast casual. It has a New York base. And it's not McDonald's. It could be loud.
Back in town
Meanwhile, Dave & Buster's, in returning its beer, foods and games to investor scrutiny, probably won't get quite the same build-up. Since it's already been on the market before, a calmer reception may be in order, especially if traders figure its future is anything like its past.
Before it was taken private by Wellspring Capital in 2006 and then sold to private equity firm Oak Hill in 2010, it did have a mostly positive history. The down years were bad, however. According to FactSet data, the stock's three negative calendar years had an average loss of 40%. In seven positive calendar years, the average gain was 44.9%. In all, the compound annual growth rate was 7.3%. The shares, FactSet calculates, generally traded at about 17 times earnings (D&B hasn't yet estimated a price range for the stock) last time they traded.
A price-to-earnings ratio of that level would be below the average of a large set of restaurants Yahoo Finance tracks but in line with several operators, including McDonald's, Red Robin (RRGB) and DineEquity (DIN), the owner of Applebee's.
Of course, none of those are half arcade. D&B's games component accounts for more than 50% of its overall $636 million in revenue, a fact that provides help during times of climbing commodity costs. The games side, as a percentage of revenue, costs about half as much as food and drink procurement.
Notable is that D&B has a rather aggressive expansion plan, so that won't happen cheaply. It's currently got 69 locations, and it believes it can have more than 200 in the U.S. and Canada. At its expected annual growth rate of 10%, it would accomplish that in 10 or 12 years, assuming no locations close and it can pay for this. That's around double the pace of the past few years, considering that, when Oak Hill took over, it had 56 stores.
Lately, PE-backed IPOs haven't starred in the new issue market. Whether D&B's continues that trend or not, it's difficult to see it keeping pace with Shake Shack, at least initially. Maybe that's OK, though.
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The disruption to global commodities supply because of the pandemic is also a new factor that can support prices, he said.Other policy priorities, such as cutting steel production to make inroads on China’s climate pledges, or boosting the supply of energy products, whether domestically or via purchases from overseas, are other complicating factors when it comes to assessing import demand and prices for specific commodities, according to analysts.(Updates copper price in 11th paragraph.)More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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The upscale burger chain filed regulatory documents Tuesday saying it will sell 5 million shares to the public at a price of between $14 and $16 each. The company plans to list shares on the New York Stock Exchange under the ticker symbol SHAK.
Shake Shack first announced plans to go public in December, about 10 years after it opened its first location in Manhattan's Madison Square Park.
What started as a hot dog truck in New York City in 2001 has grown to become a chain with 63 locations around the world, everywhere from Istanbul to Dubai. The line can wrap around the park at its original New York City location (where a kiosk, currently closed for renovations, replaced the truck) as people wait to order a burger, fries, shakes, frozen custard, beer and wine.
Shake Shack, the brainchild of New York restaurant legend Danny Meyer, opened seven locations in the U.S. during 2013. That drove annual sales up 40% to nearly $79 million. The company is owned by Union Square Hospitality Group and earned $5.4 million last year.
Shake Shack isn't the only so-called fast casual burger chain on Wall Street.
Shares of West Coast-based burger chain Habit Restaurants ( HABT ) surged nearly 120% when the company went public in November.
Other burger IPOs may be in the pipeline. Smashburger has been rumored to be considering a public offering for some time. There are also reports that drive-in chain Checkers is mulling one.
These companies, like Habit, all have backing from prominent private equity firms. That increases the chances that they may one day go public.
Chipotle, But For Cheeseburgers? Shake Shack IPO Sets Expectations High
The "fine casual" burger chain will hold its initial public offering Friday, with the buzz swelling to the point of cultish fanfare. But how much will Shake Shack have to grow to live up to the hype?
Posted on January 29, 2015, at 5:23 p.m. ET
It's easy to see why the buzz around the initial public offering of Shake Shack, the New York-based upscale burger chain, is reaching the point of frenzy. Burgers have remained the most popular item ordered across all classes of restaurant in the United States, and in the booming fast-casual dining space where Chipotle is king, Shake Shack is the first to hit the public markets.
"It seems to be that our desire for and our love affair with burgers doesn't end," said Bonnie Riggs, a restaurant industry analyst at consultancy NPD Group. "We're ordering burgers at all types of restaurants for different reasons."
What's more, Shake Shack burgers are good. Really good. Just ask the analysts and prospective early investors who, according to sources, salivated over celebrated Manhattan chef Danny Meyer's masterpieces when Shake Shack served them on its road show to drum up potential interest in the IPO.
The strategy appears to have worked in charming the financial forces controlling investment in the earliest available shares of Shake Shack, those up for grabs before the company even begins its first public trade on the New York Stock Exchange Friday. The expected price range for the IPO has already increased by 50% from $14 to $16 per share to a price of $21 per share Thursday evening.
"This is going to be an extraordinarily well-attended IPO," said John Gordon, a restaurant industry analyst and founder of the Pacific Management Consulting Group. "Five Guys and Smash Brothers did not get an IPO done, so they beat the other burger chains. Shake Shack is the first real fast-casual burger operation to come to market."
Shake Shack's Manhattan beginnings have also worked in its favor, both to attract early investors, many of whom are familiar with its storied product, and to command a high average ticket per customer.
"They're based in New York City, and sales numbers per store are extremely large in Manhattan," Gordon said. "But there's only one Manhattan, and as you get further out, there's no way you can hit those numbers. Stores in other parts of the country aren't going to hit those sales numbers."
Kathleen Smith, an IPO expert and principal at ETF manager Renaissance Capital, agrees, adding that Shake Shack may not be able to cultivate the kind of following it has from New York investment industry types outside of the city.
"When Fairway went public, a lot of New Yorkers were familiar with it and it reached great heights, then it came back down to earth," Smith said. "They have high margins in their New York locations the question is how do you hold up those margins, because it's a different kind of economy. New Yorkers will pay for it. [Another] question is, when do you add stores and what do the stores look like that you're adding?"
Shake Shack is already considering the answer to this question, and its filings surrounding the IPO, the company said it plans to have 450 locations across the U.S. in the long term. There are currently just 30 Shake Shacks in America.
According to Smith, the 450 figure doesn't seem too extravagant.
"We didn't question that number," she told BuzzFeed News. "It passed our sanity test."
But in Gordon's estimation, the average Shake Shack ticket is roughly $15 per person, higher than the $10 per person figure the company has ascribed to the average check. This, he said, will potentially make it difficult to find enough locations for Shake Shack to be able to scale its business and an IPO valuation of around $745 million.
"Generally what happens is every restaurant that IPOs says they can get to a certain number of units," Gordon said. "Whether restaurants work or not, it's a very complex situation of finding enough people, pricing appropriately, and finding the right locations, which has been difficult for a decade. The average ticket is about $15 per person, that is going to mean that it's not going to work for everyone everywhere. It will have to be in densely populated urban areas with a higher income bracket."
Another potential hurdle for Shake Shack is the issue of the fast-casual bubble. Call it the Chipotle effect: Fast-casual chains like Noodles & Company, The Habit, Potbelly, and others have boomed in recent years, experiencing huge pops on IPO day and then slowly but surely coming back down to earth in the following weeks and months as interest dies down.
"These IPOs have really gotten kind of out of hand," Gordon said. "There almost needs to be an asterisk that the first years, the price to earnings multiple is always high, because investors continue to chase the next Chipotle. Everyone wants to get in on the next Chipotle, but the world has changed a lot."
Gordon adds that there remains a general shortage of publicly traded restaurants, as many were delisted or bought out by private equity from 2008 to 2011, and the industry is struggling to recover.
"So there is demand and interest for restaurant IPOs," Gordon said, "but historically they IPO and then they cool off."
Smith remembers this very theory manifesting itself in the form of Potbelly and Noodles & Company, shares of which are currently down 37% and 27% from their respective IPOs in the last two years. She believes Shake Shack could be setting investors up for a similar disappointing return once the IPO hysteria dies down.
"It's going to be a hot deal on day one," Smith said of Shake Shack. "It's a bit of a cult stock. You could get a 50 times earnings multiple, which is a stress on the name. It's starting to defy fundamental logic. They have some things working in their favor, like a high ticket value, [but] what they're targeting is a huge jump from their current base."
Still, other industry experts believe as long as Shake Shack is serving burgers — the kind that are so good they're unlike anything else in this burger-loving nation — then it should be able to thrive.
"What fascinates me about Shake Shack is that when I started doing this 37 years ago, the most popular thing people ordered in a restaurant was a hamburger," said Harry Balzer, chief food industry analyst and vice president at NPD Group. "And the most popular item people ordered yesterday was a hamburger. It can't lose! As a consumer, we all have this desire to try new things we already know. In this case, I don't have to go far to find people saying I'll try a new hamburger."
Mariah Summers is a business reporter for BuzzFeed News and is based in New York. Summers reports on hospitality, travel and real estate.
Shake Shack May Go Public Chain Considering IPO - Recipes
When they were still undergrads at Georgetown University, Jonathan Neman, Nicolas Jammet, and Nathaniel Ru weren't yet superfriends. They knew one another because Ru sat behind Neman in Accounting 101, and Jammet's freshman dorm room was next to Neman's. But after they graduated, in 2007, they decided to try opening a 560-square-foot salad and frozen-yogurt shop: Sweetgreen. Their friendship grew with the business. By the time the company had 20 locations, from D.C. to Philadelphia, and they were raising money for a national expansion, the three had become so chummy that it made their potential investors nervous. Were these brothers-in-salad for real?
"It was unusual, and quite frankly, a concern," recalls Steve Case, CEO of Revolution and a Sweetgreen board member. "They were co-CEOs who shared the same office and, when we invested, at least two of the three shared the same apartment." (Ru and Neman lived in a townhouse in Georgetown. Jammet lived across the street.) "On one level, it's like, isn't that sweet? How Kumbaya. On the other hand, when push comes to shove, how are decisions going to get made here? How is that really going to scale?"
Jammet, Neman, and Ru call their philosophy the Sweetlife. It means projecting earnest bonhomie always and everywhere, treating their customers, employees, and vendors as they would treat close friends. Sweetgreen's posted core values include "Add the Sweet Touch" (to "create meaningful connections every day") and "Win win win" (for the company, the customer, and the community). Every dish on Sweetgreen's menu is made from scratch, has fewer than 800 calories, and contains no added sugar (except maybe a little local maple syrup). They treat their local farmer-suppliers like stars, listing their harvests on chalkboards and crowing about the new season of vegetables like it's a movie premiere, whether the debut vegetables are "visionary and flavorful" koginut squash, or humble sunchokes. And they skip normal ads in favor of offbeat events, most famously the massive Sweetlife music festival, which they ran from 2011 until 2016, a 20,000-person dancing-and-lettuce bacchanal that spread buzz far beyond any 30-second TV spot.
So far, the founders' sunny approach has yielded glittering results: Ten years after its founding, Sweetgreen operates from coast to coast, with 93 locations and 4,000 employees. The chain is profitable, with its stores' operating margins approaching Chipotle's at its peak (around 20 percent). Systemwide sales have grown over 40 percent three years in a row. More than a million people have downloaded the Sweetgreen app social media is full of fans describing their love for Shroomami grain bowls in ways normally associated with milkshakes, cheeseburgers, or Beyoncé. There are 10,000-plus elite customers, known as Sweetgreen Gold and Black members, who spend more than $1,000 on the chain's salads every year.
In the world of chain restaurants, fast-growing cult brands generally serve their investors one thing: an IPO. Until last November, most everyone expected Sweetgreen to go public and--like Starbucks in the '90s, Chipotle in the aughts, and Shake Shack in 2015--become the food industry's most coveted stock.
Instead Neman, Jammet, and Ru made an announcement so Sweetlife-y that even some of their own executives wondered if the three friends had finally gone too far. Sweetgreen could no longer be a mere salad chain, they declared--it had to be a tech company. This was the only way the company could not only serve customers, its community, and itself--to achieve the win, win, win--but also fix the entire restaurant industry and improve the health of the world.
"We see Sweetgreen as being more than just a restaurant . but evolving into a food platform," Neman told CNBC in December 2018. Of course, Sweetgreen's rank-and-file had heard this sort of talk from the founders before. "Thinking like a tech company" had become an internal mantra over the previous few years, as the chain developed its own mobile app, added digital ordering options like Uber Eats, and made many of its stores cashless. (And, as a result of those efforts, sales from digital channels already made up over half the chain's revenue.)
But this latest tech push was far riskier and more dramatic. The founders had raised $200 million--five times any previous Sweetgreen funding round--an investment that vaulted the company's valuation to well over a billion dollars. In media appearances, they sounded like men possessed by Silicon Valley ghosts: Sweetgreen was a "platform" and its food, "content." They said the company was at work on an A.I.-powered mobile app and kitchens in the cloud, all in the name of "frictionless experiences." They even planned to leverage the blockchain. Not everyone has been able to stomach the shift--already several nervous executives and a board member have left the company, at least partly because of their concerns.
By now, any follower of the startup world is familiar with the so-called "pivot to tech," the notion that a company in a nontech industry is actually a disruptive innovation machine. Are the Sweetgreen founders visionary or just chasing the latest shiny object?
In 2016, the founders relocated from Washington, D.C., to a twee mall in Culver City, Los Angeles, unironically called Platform. It's an artisanal Disneyland: A visitor can grab a Vegan Cherry Heartbeet cone at Van Leeuwen (an ice cream shop first made famous in Brooklyn), wait for a single-origin pour-over coffee at Blue Bottle (originally of San Francisco), or step over to Aesop (of Melbourne) to pick up a bottle of parsley seed facial cleanser for $60. Then there's the blond wood temple of lettuce, the Sweetgreen flagship store, where lunchtime adherents wait in a perpetual line, heads bowed to their iPhone screens, as a dozen employees in T-shirts reading "passion + purpose" tong salad and ancient grains into compostable bowls.
Upstairs you will find the Treehouse, a.k.a. Sweetgreen corporate, where 175 employees work at long white tables surrounded by motivational slogans ("BE PRESENT" reads one in giant block letters on the elevator doors). Neman, Jammet, and Ru share a glass-walled office close to the entrance. They sit together, their tabletops clean except for three laptops, three pale green Moleskine notebooks, and neatly squared piles of paper, mail, and books such as Derek Thompson's Hit Makers, which someone recently gave Neman to inspire him to think about food the same way "music producers think about making viral content," he says.
From there, they lay out the future of the restaurant industry as they see it. "In the past, everyone got a car, and the drive-thru was the answer to that. Now, everybody has a phone," says Neman, teeing up their vision: Restaurants need to appeal to consumers who encounter the world through their mobile screens and expect to have food brought to them--at work, at home--without ever needing to look up.
To adapt to this new world, most stores' online orders are filled at dedicated salad assembly lines, and then deposited in special pickup areas near the entrance. With their sans serif black type and left- and right-justified imagery, even Sweetgreen's menu boards resemble a mobile Web layout, as if to ease the transition for phone addicts when they finally do look up.
But, argue the founders, none of this sufficiently prepares Sweetgreen for the new world. To do that, they have to blow up the whole idea of a restaurant.
"How do you think about the menu in your hand in a digital way? How do you think about the experience in the kitchens in a digital way? How do you completely break this notion of what a 'restaurant' is and what a 'menu' is?" Neman says, finger quotes firing away. "This menu of 12 things, why does it even make sense?"
If you were to break down the three co-founders into the holy trinity of hustler, hipster, and hacker, Neman is most certainly the hustler. The 34-year-old CEO is a fast talker who's prone to making grand pronouncements, often starting with the phrase "At the end of the day" (as in: "At the end of the day, we believe modern consumer companies are going to have to own the platform and the content" or "At the end of the day, we want to replace McDonald's as the global iconic food brand").
The hipster of the trio is wavy-haired Ru, 33, who on the day I met him was wearing all black except for bright white Nikes and a belt with little rainbows on it. ("I got it at a place in Tokyo.") He oversees the company's marketing efforts, and is the one who ultimately figures out the customer experience, both on the phone and in actual physical space.
That leaves Jammet, 34, as the hacker, even if in Sweetgreen's case he's a whiz with salad dressings and vegetable flavor combinations, not machine-learning algorithms or Python. Jammet grew up around restaurants in New York City, where his parents owned and operated the legendary La Caravelle, and he oversees Sweetgreen's locally focused supply chain, store development, and culinary R&D.
Neman says he first recognized the trouble with scaling Sweetgreen the same way as every other food chain whenever he watched customers mosey along the salad bar. It served too many conflicting goals at once: Customers had a few moments to pick an option on the menu board above. Employees, meanwhile, had to both cheerfully accommodate these indecisive customers and prepare the food as quickly as possible. Offer too many options and the line moves too slowly and sales volumes plummet hurry them along and you become Subway.
He came to think of the line as the symbol of Sweetgreen's past. "Our BlackBerry keyboard," says Neman, referring to the hard-buttoned smartphone interface driven to extinction by smooth glass touchscreens.
The company's future? Apple. Netflix. Amazon Web Services.
This isn't the first time Sweetgreen has reimagined its ambitions.
When Neman, Ru, and Jammet started Sweetgreen fresh out of college, the trio's aspirations were campus-size: to build a quick and healthy option for Georgetown students accustomed to wolfing down deli subs at Booeymonger or the "chicken madness" at Wisemiller's Deli. To distinguish their little shop, they renovated a historic old burger joint, hired a fancy architecture firm, and bought veggies from the Dupont Circle farmers' market rather than go through the usual distributors.
The following year, they got schooled in the mechanics of retail. The place they leased had no plumbing, electricity, or space for cold storage. They failed to predict that very few people would buy salad in December. Soon, they had burned through the $375,000 they had raised from friends and family. Meanwhile, "our classmates are at these big investment bank jobs, and we're sitting there trying to figure out plumbing in a restaurant," says Ru. "Nobody understood why we were doing this." It was alienating, but it also bound the three together. "We had each other to share the risk."
Then, Sweetgreen hit its stride soon the little place was profitable, and by 2008, the founders had raised $750,000 and opened a second location. It didn't take long for the trio's vision to swell from viable salad shop to a lifestyle brand. In 2011, they hatched the Sweetlife music festival and a Sweetgreen in Schools nutrition program. From there emerged their Sweetlife brand ethos. "We'd like to get into fitness, apparel--anything that falls under a healthy, balanced, and fun lifestyle," Neman told the Washington City Paper in 2011.
In 2013, the founders raised $22 million with their eye on becoming the next great food chain. Over the next four years, with the help of new professional operators with decades of collective experience at places like Chipotle, Jamba Juice, and Pinkberry, the company added 60 locations. In the press, Steve Case began referring to the fast-growing salad retailer as "the Chipotle of healthy options."
Privately, however, Neman told Case he didn't like that comparison. The founders' vision was now far bigger than that--they imagined the company's sustainable supply chain model could revolutionize the whole world of quick-service food. (Ultimately, Case and Neman--who can be indulgent with his brand comparisons--agreed to refer to the company in the future as the "Starbucks of healthy options").
By the fall of 2017, stores were profitable, and the company had 3,500 employees and a supply chain capable of distributing 67,000 pounds of organic mesclun, arugula, and spinach every month. The growth had come with some pain--in its rush to expand, Sweetgreen had run afoul of employment regulations and missed bad actions by store managers. (Between 2014 and 2017, Sweetgreen was sued by its own employees at least three times, with allegations including pregnancy discrimination, sexual harassment, and violations of overtime and break regulations.)
With discipline, Sweetgreen could soon get on track for an IPO, its operators assured the founders. At long last, after 10 years of work and $127 million in venture capital, a payoff was finally in sight. "We were sitting here with a very easy path: Open more doors, go public," says Jammet.
Yet, much to the chagrin of their option-holding executives, the founders couldn't get comfortable with the strategy of a restaurant company IPO: Their goal was far more ambitious.
Over the past year, a new breed of employee has been surfacing at Sweetgreen HQ: data scientists from Amazon, product czars from Uber, digital mavens from big food chains like Starbucks and Domino's. This small tech army is building the Sweetgreen of tomorrow: a food platform that is as dialed into each customer's microbiome and barre routine--and perhaps 23andMe profile--as it is tracking its farmers' crops through the blockchain for peak freshness and taste. A platform that can take the shape of a quick-service restaurant reimagined in the spirit of an Apple Store--where customers order salads from digital kiosks or tablet-wielding free-roaming employees while sampling local radishes from a tasting bar--or perhaps not a physical store at all. Amazon rented out servers why couldn't Sweetgreen do the same with serveries, letting chefs harness its delivery network and supply chain?
This is not a vision everyone at Sweetgreen bought into. In late 2017, before the company raised $200 million to execute the pivot-to-tech strategy, some senior executives and board members warned the founders that these plans were too much, too soon. Better to focus on store operations, profitability, and metrics investors typically care about when they value a restaurant IPO, they said.
"Transformation is a requirement for successful companies, so begin the transition don't step on the accelerator and reroute the ship totally," says Karen Kelley, who was Sweetgreen's president and chief operating officer at the time. A chain with fewer than a hundred locations still has a lot of growing up to do before it can change the industry forever, argued Kelley, who held executive positions at Pinkberry, Jamba Juice, and Drybar before joining Sweetgreen.
On the board, at least one Sweetgreen director worried that raising hundreds of millions of dollars to disrupt Sweetgreen's own business might do more harm than good. "Having too much money in the business is very dangerous--it can be toxic," says Gary Hirshberg, the founder of organic yogurt maker Stonyfield Farm, who joined the board in 2010.
The founders acknowledge those concerns, and did even at the time. "We're a capital-intensive business, and back then we were running out of cash--we almost ran out of cash," says Neman. "We changed the risk profile and the execution strategy completely. We went from a model that was copy-paste to saying, we want to be the Nike or the Apple or the Spotify of food." In other words, the founders wanted to completely revolutionize how companies and consumers behaved in their industry.
Ultimately, they decided to push ahead. "We were afraid we were going to get Blockbustered, for lack of a better word," says Ru. "The thing about Sweetgreen is, because there's always a line out the door, you're blinded by the fact that it's working. Most investors say, 'This is amazing. You should build 5,000 of these things.' But what we realized is we were actually building a legacy store over and over again."
In December 2017, Kelley decided to resign from Sweetgreen (she is now chief of restaurant operations at Panera Bread). Four more vice presidents departed soon after--by spring 2018, the entire senior staff was gone other than the founders and the chief financial officer. In 2018, Hirshberg resigned from the board. (Both he and Kelley still own shares in Sweetgreen.)
Now, over a year later, Sweetgreen is gearing up to roll out a hundred new locations in a dozen markets--only it will also experiment with all kinds of prototypes, Neman says. In 2018, the company began its delivery service to Sweetgreen drop-off points, called Outposts--of which it now has more than 150--in office buildings and co-working spaces. When Sweetgreen heads for Houston and Denver later this year, instead of stamping out one expensive restaurant after the next, it will deploy an assortment of large flagship stores, smaller retail locations, and kitchens invisible to the public solely dedicated to delivery orders. All this will be communicated with the kind of targeted online marketing tactics used by direct-to-consumer companies.
When Sweetgreen does build those flagships, each will be split into two distinct zones: experiential and utilitarian. In front will be a tasting bar, where customers can hear tales about the local farmer-suppliers and sample salad ingredients like they're ice cream flavors (and then order at those kiosks or on tablets). On the other side will be a relentless salad factory, where orders are assembled as they come in--be they from the store, Sweetgreen's mobile app, or third-party delivery services.
By separating the customer experience from manufacturing and fulfillment--keeping the salad eaters away from the salad tossers, basically--Sweetgreen says it can boost speed and personalization, offering less commonly used ingredients in limitless variations. Customers, it says, will be able to scroll through their personalized recipes the same way they currently surf Netflix, and a machine-learning algorithm will figure out their dietary profile. The founders say that someday soon, using blockchain technology, Sweetgreen will be able to track and show its customers the seed-to-salad journey taken by each individual ingredient.
With all the tech trappings also come new metrics. Instead of same-store sales or foot traffic--the traditional retail measuring sticks--Sweetgreen wants to prioritize numbers like active users, lifetime customer value, and, above all, frequency. Order interval, the number of days before a customer orders the same dish again, will become its most critical new measurement. "It's almost like when you're binge-watching a Netflix show and you're like, 'Episode 2--play it right away!' " Jammet says. A Sweetgreen dish "needs to be binge-worthy," he says, before catching himself. "Well, we don't want to use the word bingeing for food," he says. "We want a metric around crave-ability."
All of this Silicon Valley-speak, the brand metaphors, and the notion of pivoting a salad company into a technology platform, can come off like a crude attempt to make the company, and its founders, be perceived as something sexier--and more visionary--than the age-old business of selling produce. One gets the sense that Sweetgreen's founders, who have been at this for over a decade and are still only in their early 30s, considered the idea of building a typical restaurant chain and cashing out simply unglamorous, boring. "It's a little bit of a hamster wheel," admits Ru, describing the conventional strategy. "Your growth is defined by opening new restaurants and driving more customers into busy restaurants."
Sweetgreen is not alone in reframing what it's in the business of. There's Hampton Creek (renamed Just), the plant-based food startup famous for its mayo alternative, whose founder describes it as "a tech company that happens to be working with food" and says "the best analog to what we're doing is Amazon." (It raised $247 million and has a unicorn valuation.) There's Peloton, the maker of an internet-connected stationary bike, which its CEO describes as a technology and media company, now valued at $4 billion. And, in March, WeWork, the $10.4 billion-backed co-working behemoth, reordained itself the We Company, with the newfound mission "to elevate the world's consciousness."
Youngme Moon, a Harvard Business School professor who has served on Sweetgreen's board since 2016, says it's easy to be cynical about Sweetgreen's latest pitch. " 'We're not a food company, we're a tech company'--I'm sure you've heard it a million times," says Moon, who owns shares in the company. "But what Sweetgreen is doing is unusual. They aren't just using technology to build in efficiency but true intelligence into the system. Very few companies do that, because it's quite hard to do."
So what is a tech company in 2019, anyway? Defining yourself as one is undoubtedly a way to boost your valuation and potentially hold out for an even more lucrative IPO. "We've been trained to think that technology is always advancing, moving, and therefore it's the future--so investing in tech means putting a bet on the future, rather than putting a bet on, oh, salad," says Michael Duda, the co-founder of boutique venture capital firm Bullish. "If salad retail is worth X, but a tech company is worth many times that, which narrative would you go with?"
But Ru argues that the benefits run much deeper than that. "Some people think it's weird that we call food 'content,' because why would you ever do that?" he says. "We find that, especially internally, it helps shift people's minds. That slight change in semantics--these crazy guys who are calling food 'content'--it helps people understand how we're moving the business." Being a tech company, says Jammet, is no longer confined to selling software or hardware. "Technology is the enabler," he says, "but it is not the product."
NEW YORK AND BEYOND
Shake Shack has developed a fervent following since it was founded by restaurateur Danny Meyer in 2001, but the challenge will be to replicate the success it has found in New York in the rest of the US and overseas. The company has 31 company-operated and five licensed locations in 10 states and Washington DC, and 27 locations abroad.
The chain believes it has the potential to increase the number of domestic company-operated Shacks to at least 450 and analysts say that finding new locations with affluent consumers is critical.
Consumers such as Leticia Garza, 33, a middle school teacher in Austin, Texas, help illustrate the brand’s potential in other parts of the country, but also the challenges. Garza says she is excited to hear that Shake Shack planned to expand to Austin.
Still, she notes that she has many similar options.
“There’s definitely going to be some competition because we have recently gotten an In-N-Out, and a couple of local versions that are similar to In-N-Out: P. Terry’s and Mighty Fine.” She adds: “We have Smashburger, too.“
Indeed, the market may be just a few years away from being saturated with too many fancy burger places, some analysts say. Furthermore, premium burger chains are not the only ones offering more personalised options: McDonald’s is rolling out a new “Create Your Taste” program this year that will give customers a choice of sandwich toppings.
In December, the world’s biggest fast food chain, which has not had a monthly gain in sales at its established US restaurants since October 2013, said it also planned to cut the number of items on its US menus. It also plans to use fewer ingredients in food, in an effort to reach consumers who want simpler, more natural choices.
McDonald’s is cheaper than Shack Shack and competes for a less affluent consumer. Still, industry watchers say such efforts could put pressure on premium burgers.
“We’re always looking for the latest version,” said Harry Balzer, an analyst at NPD Group, a market research company. But, he said, “there’s a limit to the burgers we’re going to eat.”