Sweetgreen salad chain that thought it was a tech firm looks wilted

"I was an overnight success all right, but 30 years is a long, long night." 

When Ray Kroc founded McDonald’s, he had no more than a high-school education and grease under his fingernails. He took a winding path to eventual fast-food riches in middle age. It is a sharp contrast with the three men who co-founded Sweetgreen Inc. They 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 "30 Under 30" list. The salad chain was valued at nearly $6 billion a day after its 2021 initial public offering.

Pitching Sweetgreen as a tech company that just happened to sell salad helped turbocharge the chain’s financing in the growth-obsessed market environment prevailing at the time. As with WeWork, jargon such as having a mission to "shift the paradigm of food sponsorships," to "connecting people to real food also extends to our goal of building a healthier and more equitable society," made for good marketing copy.

Like the office chain, that language, and its pay structure, should have been a red flag in its official securities filings. Both might have made Mr. Kroc, as well as KFC and Wendy’s founders Colonel Sanders and Dave Thomas, gasp if they were still alive.

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For example, in addition to its sharply rising cash expenses such as food, leases and labor, Sweetgreen has doled out $113 million in share-based compensation in the past three years despite never having had a profitable year. Since 2020, Sweetgreen has lost close to half a billion dollars after taxes.

In fiscal 2022, the company saw modest 13% growth in same-store sales despite a 7% increase in menu prices. It added just 36 net new restaurants. With even more restricted stock awards left to dole out to executives, the three co-founders, Jonathan Neman, Nicolas Jammet and Nathaniel Ru, also own the sort of supervoting "B" shares popular with Silicon Valley wunderkinds such as Mark Zuckerberg.

Sweetgreen, which didn’t respond to questions, wrote in its latest quarterly results that it is taking steps to achieve "disciplined, capital-efficient growth."

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Wall Street is increasingly skeptical. The stock is off by 83% from its first-day close and the company’s market value recently dropped below $1 billion. While it is still sitting on some of the money it raised in its IPO and earlier pre-IPO efforts, its $331 million of cash and cash equivalents as of late December is offset by about $300 million of operating-lease liabilities. Netting out those leases, the chain’s enterprise value is still a rich $5 million per company-owned restaurant. Just on the basis of direct cash costs before corporate overhead, those restaurants were modestly profitable last year.

Sweetgreen had the right concept at the right time for raising money and growing quickly. With private equity and larger chains always on the hunt, even non-paradigm-shifting dining concepts have funding advantages these days compared with mid-20th-century era founders who mortgaged their homes to get started. But actually running a profitable chain and turning a good concept into a sustainable business is far harder in today’s hypercompetitive dining market.

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Unless it is absorbed into a larger, more disciplined company, Sweetgreen’s salad days look to be behind it.