Sweetgreen is about two-and-a-half months into its fully automated restaurant in Naperville, Illinois, and one key record has already fallen.
The store's restaurant-level margin in June was 26 percent—"significantly" higher than any new location in its first month, said CEO Jonathan Neman. And the brand expects the stabilized margin to be higher going forward. For perspective, sweetgreen's Q2 restaurant-level margin was 20.4 percent. Usually, new units are well below 20 percent in the first month.
The Infinite Kitchen is a robotic system that dispenses ingredients into a bowl along a conveyor belt. It can produce between 400-500 bowls, plates, and sides per hour, which is 50 percent more than a typical restaurant's front and digital make line combined.
A big part of the bottom-line success is labor. Sweetgreen hired one-third fewer team members than a comparable new location with similar volume, and the unit has experienced "considerably" less turnover.
Also, customers are telling sweetgreen that it's a better in-store experience. Neman said speed of service and consistency are driving factors of the store's over-performance on the top and bottom line. Consumers receive meals in under five minutes, which creates less congestion in the restaurant and allows employees to spend more time with each guest.
As the store continues to ramp up, sweetgreen sees more opportunities to improve margin even further. The fast casual expects the second Infinite Kitchen to open in Huntington Beach, California, by the end of 2023.
"I think first and foremost, really excited about the experience we're delivering to customers," Neman told investors during the brand's Q2 earnings call. "We're getting a lot of positive feedback on everything from the theater of the food, really showing the scratch cooking, the hospitality, the speed of service, and the portioning and accuracy. So [it] does solve a lot of customer experience challenges that exist in the restaurant industry. And so I think that that was a huge proof point for it. Of course, we also expect it to have an economic financial gain in terms of margin expansion and overall improving our returns on capital."
Neman acknowledged that Infinite Kitchen equipment is an incremental investment, but he's confident that it will deliver an accretive return on capital anywhere in the U.S. The chain didn't share the exact cost.
The company is still in learning mode around the innovation, but it does expect the Infinite Kitchen the be part of the 2024 development pipeline. Neman said at the 43rd Annual William Blair Growth Stock Conference earlier this year that all sweetgreen shops will be automated in five years. The brand ended Q2 with 205 stores after opening a net of 10 locations.
"We had a lot of confidence in the technology itself as we've been running with it in a lab setting for a very long time," Neman said. "A lot of what we were really understanding was the overall experience and what are both the first order and second order improvements that we'd see within that experience."
Same-store sales lifted 3 percent in the quarter. This consisted of 4 percent price and a 2 percent bump in traffic, offset by 3 percent mix. That change in mix was attributed to early discounts to spark trial for Sweetpass (the brand's new subscription program) and customers moving toward in-store ordering and mobile pickup as opposed to the expensive delivery channel. AUV was $2.9 million. Total digital sales mixed 59 percent, with approximately two-thirds coming from first-party channels.
The company is making progress toward profitability. Adjusted EBITDA was $3.3 million in Q2, compared to a loss of $7.8 million in 2022. It marked sweetgreen's first positive adjusted EBITDA quarter since becoming public in 2021. In the first half of 2023, adjusted EBITDA was a loss of $3.4 million, better than the loss of $24.8 million last year.
Net loss was $27.3 million in Q2 versus $40.5 million in the year-ago period. The improvement was due to a $7.9 million increase in restaurant-level profit, a $2.7 million jump in interest income, and a decrease in G&A.
Much of the financial improvement can be traced to labor adjustments. At the start of 2023, sweetgreen introduced a new regional manager model that brings "more empowerment at the restaurant level, get our teams closer to our customers, and reduce support center expenses related to field oversight," Neman said. In the spring, the brand empowered head coaches to spend more time on the floor coaching employees and engaging guests.
The brand has also found opportunities to simplify the back of house by receiving pre-made ingredients instead of making them inside the store. For instance, sweetgreen receives pre-packaged dressings—ones that don't have fresh herbs in them.
"As we've talked about before, we're very careful on what we touch around our food ethos. And so we test things," Neman said. "We're very careful about what things we change because we know what people love about us is the quality that we bring. And so we do expect to do more things, but we will do them very carefully over time."
As a result, the company has seen increases in frontline throughput, lower turnover, and better 90-day retention metrics. Overall, the chain experienced a 285-basis-point improvement in labor costs compared to the first quarter. Stores are fully staffed and there's been an ease in wage pressures.
Soon, sweetgreen will test digital and in-store tipping in Northern California. The system will be launched systemwide by the end of 2023.
Because of second-quarter results, sweetgreen adjusted its guidance to reflect a higher restaurant-level margin and lower adjusted EBITDA loss. The chain projects margins between 16-18 percent and adjusted EBITDA loss between $10 million and zero; previously it was 15-17 percent and a loss between $13 million and $3 million. The fast casual also foresees same-store sales growth between 2 and 6 percent, 30-35 net new openings, and revenue ranging from $575 million to $595 million.
"We see pathways for further margin expansion and are unrelenting in our search to find efficiencies in G&A," Neman said. "We are keenly focused on continuing to be a high revenue growth company and becoming both profitable and cash flow positive."