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CAVA: What its IPO Means for the Future of Fast Casual

RJ Hottovy
Feb 10, 2023
CAVA: What its IPO Means for the Future of Fast Casual

It’s early in 2023, but one of the key themes across the broader retail real estate industry is that restaurants are ready to accelerate expansion plans. While several chains have noted that restaurant construction remains a challenge–including 25%-30% higher per unit construction costs and a shortage in construction personnel that is pushing many openings into the latter part of 2023–the increase in restaurant chains exploring public equity offerings indicates that management teams are likely gearing up for more aggressive expansion plans as operating conditions potentially normalize.

Over the past week alone, mediterranean fast-casual concept Cava filed confidential draft registration statements ahead of a potential initial public offering and the WSJ reported that Panera Brands (the parent company for Panera Bread, Caribou Coffee, and Einstein Bagel) and Fogo de Chao are also looking to test the IPO market in 2023 (recall that Panera Brands had planned to go public via Danny Meyer’s USHG special-purpose acquisition company (SPAC) last year but put the deal on hold last July due to economic uncertainty). This marks the most activity for restaurants looking to tap the public equity markets for funding since 2H 2021, when Dutch Bros, First Watch, Portillo’s, sweetgreen, and Krispy Kreme became publicly-traded companies.

If the transaction goes forward as planned, this will be Cava’s first time as a publicly-traded company. The chain has been one of the fastest growing chains in the fast casual category, including 63% unit growth in 2021 and 37% same-store sales growth. At the end of 2022, the company had 366 units in 24 states, with its heaviest penetration in the Mid-Atlantic states but also a presence in the Northeast, Southeast, Texas, Colorado, and Southern California.

Historically speaking, Mediterranean concepts have not had the same level of demand that burger, sandwich, Mexican, and Asian fast-casual concepts have had, which explains why (1) there really hasn’t been a national player in this category until now; and (2) Cava visit per location has trailed fast casual category averages the past several years. However, consumer taste preferences continue to evolve due to the influence of social media, access to a wider variety of food options through third-party delivery services, greater spending power among minorities, heightened demand for better-for-you offerings, increased television programming devoted to food, and the globalization of restaurant concepts and sharing menu innovations across borders. Although Cava’s visit per location trends have trailed the fast-casual category for the past several years, our data suggests that this gap has narrowed with Cava outpacing the category in 3Q 2022.

How has Cava narrowed this gap? It really comes down to a number of factors, as CEO Brett Schulman has been one of the more forward-thinking leaders in the restaurant space. According to Nation’s Restaurant News, 80% of the Cava’s locations were located in the suburbs before the pandemic, which aligned with consumer work-from-home and migration trends.  With its suburban locations, Cava was also an early leader with digital drive-thru lanes–similar to Chipotle’s Chipotlane locations–and started to develop these store formats well before the pandemic. In the past, Cava has also deployed motion sensors in its restaurants to improve throughput, staffing, and inventory management, helping to fine tune its restaurant design and equipment placement as it opened more stores. The chain has also done a great job of connecting with consumers outside its restaurants, as it currently distributes hummus, dips, and sauces through specialty grocers across the U.S. Finally, the brand has traditionally had higher employee retention rates, which has helped to keep Cava’s speed of service ahead of category averages.

These factors start to become more evident when we compare Cava’s visit per location trends to other Mediterranean fast casual concepts. Over the past two years, Cava is the clear category leader with respect to visits per location, averaging 23.1K visits per location per quarter versus a range of 9K-19K across other concepts (below). With Cava narrowing the gap to other fast casual chains and outperforming its closest competitors, it makes sense why the chain might be looking to access the public equity markets to accelerate expansion efforts.

It’s also worth calling out the gap between Cava and Zoes Kitchen visit per location. Cava acquired Zoes in 2018, and started to convert the acquired locations to the Cava banner. In 2021, the chain received $190M in Series F funding to help convert more Zoe’s locations to Cava. Based on the wide visit per location gap between the two brands, it appears that converting more Zoes locations to Cava should help visit per location trends in the future.

While 2023 still presents challenges from a unit growth perspective, we still see significant expansion opportunities for brands that have adjusted to changing consumer behavior (a topic we discussed with Nicole Miller Regan from 7 Brew earlier this week). Cava’s announcement will not be the last restaurant operator to announce public offerings to support growth aspirations in 2023, but it’s also important to dig deeper into visitation trends to understand the brand’s appeal and operational efficiency.

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank. R.J. also brings a wealth of experience with early-stage investments as a committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he advised over 50 food service companies on more than $200 million in early-stage capital raises and M&A transactions.

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