The Salad Chain That Believed It Was A Tech Company Has Gone Under

It is impossible for Sweetgreen to compete as a restaurant chain with the cost structure of Silicon Valley.

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“Sure, it was an overnight success, but 30 years is a long time.”

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When Ray Kroc founded McDonald's, he had a high-school education and grease under his fingernails. It was a long and winding road that ultimately led to his eventual fast-food riches in his middle years. On the other hand, Sweetgreen Inc., which was founded by three men, has seen a 2.4% increase in shares since it was founded. The three of them met in an entrepreneurship class at Georgetown University, raised hundreds of millions of dollars in venture capital funding, and were all named to a Forbes list of the "30 Under 30" of the year. A day after its initial public offering (IPO) in 2021, the salad chain was valued at nearly $6 billion.

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When Sweetgreen was positioned as a tech company that sold salads, the marketing strategy helped turbocharge the chain's financing efforts within the growth-obsessed market environment prevailing at the time. WeWork has also used jargon such as 'shifting the paradigm of food sponsorships' as part of its marketing copy to the tune of 'connecting people to real food also contributes to the goal of building a healthier and more equitable society'.

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Like the office chain, that language, as well as the pay structure, should have been a red flag in its official filings with the Securities and Exchange Commission. Whether or not they were alive, both of these events would have caused both Mr. Kroc and the founders of KFC and Wendy's, Colonel Sanders and Dave Thomas, to gasp.

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Despite not having had a profitable year in the past three years, Sweetgreen has managed to dole out $113 million in share-based compensation in the past three years in addition to its sharply increasing cash expenses, such as rent and food. Sweetgreen has lost close to half a billion dollars since the year 2020 after taxes.

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There was a modest increase of 13% in same-store sales for the company in fiscal 2022 despite a 7% increase in menu prices. A total of 36 net new restaurants were added by the company. Aside from the restricted stock awards that have not yet been granted, the three co-founders that have not received their restricted stock awards, Jonathan Neman, Nicolas Jammet, and Nathaniel Ru, on the sort of supervoting "B" shares that are popular among Silicon Valley wunderkinder like Mark Zuckerberg.

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In its latest quarterly results, Sweetgreen wrote that it is taking steps to achieve disciplined, capital-efficient growth.

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Wall Street is becoming increasingly skeptical. Compared to its first-day close, the stock market value of the company has dropped below $1 billion and the stock has fallen 83% from its first-day close. Even though the company is still holding some of the money that it raised through its IPO and earlier pre-IPO efforts, as of the end of December it had a total of $331 million in cash and cash equivalents, which are offset by about $300 million in operating-lease liabilities. Even after subtracting the leases, the enterprise value of the chain still amounts to a healthy $5 million per restaurant that is owned by the company. On the basis of just the direct cash expenses before corporate overheads, those restaurants were modestly profitable in the past year based only on their direct cash costs.

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Sweetgreen had the right concept at the right time so it was able to raise money and grow quickly at the right time. Even non-paradigm-shifting dining concepts can now obtain funding advantages because of the presence of private equity and larger chains constantly on the hunt for the next hot concept, as compared to the days when founders of classical dining concepts had to mortgage their homes in the mid-20th century. The reality, however, is that running a profitable chain and making a good concept into a sustainable business is much harder in today's hypercompetitive restaurant industry than it used to be.

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Sweetgreen's salad days appear to be over unless it is acquired by a larger, more disciplined company.