🥗 Decoding Cava's Success

Read time: 5 minutes

Good morning! It's Friday, April 12th. Today, we’re looking at Cava, the Mediterranean food chain that's seen explosive growth since its June IPO.

THE FEATURE

🥗 Decoding Cava's Success

Mediterranean fast-casual chain Cava has been on a tear since it went public in June. 

Its initial public offering of $22 per share has nearly tripled to ~$65/share with a market cap of $7.4B!

Investors are increasingly bullish on Cava, believing it can dominate its Mediterranean niche and expand the broad fast-casual segment. 

So, let's take a peak behind the curtain and see what makes Cava so competitive. 

So, What's the Business?

The first Cava restaurant opened in 2006, when Ike Grigoropolous, Ted Xenohristos, and Chef Dimitri Moshovitis collaborated to bring Mediterranean dining to Washington, D.C. 

The three founders got lucky when they met Brett Schulman, a seasoned business leader and finance expert, who saw a way to make Cava a national brand. 

Schulman joined the team as the CEO and opened their first fast-casual restaurant, Cava Grill, in 2011. While Schulman relied on the founders' recipe input, he took a finance-first approach to the new location. 

A major part of that finance-first approach involved reducing food costs, which generally account for 28% to 35% of restaurant costs. 

• Limited menu: Customers choose between bowls or pita sandwiches, which are cost-effective to produce. Schulman avoided adding high-cost items like kebabs and hummus bowls despite them being popular Mediterranean dishes. 

• Ingredient cross-over: Schulman only selected ingredients that were common across all Mediterranean dishes, allowing Cava to issue bulk orders with just a single fast-casual location. 

The average restaurant has a 3-5% profit margin, while fast casuals average 6-9%. Regardless of what category you put Cava in, it blows the competition out of the water.

By purchasing select ingredients through discounted bulk orders, Cava hit a ~26% profit margin with its first restaurant and has, on average, retained it across all new locations. 

How They Win: Saying No to Franchising

While many entrepreneurs believe franchising is the key to rapid expansion, Schulman decided against it. To this day, Cava doesn't franchise and owns all of its locations in order to have complete control over the customer experience, efficiency, and profitability.

Before its IPO, Cava had no problems expanding through private investment. After opening their first casual location, Shulman's pitch to investors was simple: Our first location generates ~$1M in annual revenue at a 26% profit; invest in us, and you'll have a better return than the stock market. 

Cava bolstered its profitability track record with its new locations, attracting private equity firms and bringing $738M in total funding before its IPO. 

That funding helped fund Cava's biggest expansion in 2018, when it acquired competing Mediterranean brand Zoe's Kitchen for $300M, increasing its footprint from 66 locations to 327. 

Key Observation: The Power of Data

When Schulman launched the first fast-casual Cava location, he spent over $20K creating a website and mobile app for the brand, knowing that the customer experience would increasingly occur online. 

Since then, Cava has spent millions on its own in-house app team to optimize the user experience and collect data. That user data, specifically location data, has been a critical asset for Cava's expansion efforts.

In practice, the user location data provides a heat map of where its customers are and where new branches can find success. That data-driven approach was supercharged by the Zoe's Kitchen acquisition, as it gave them millions of new user profiles for Mediterranean food enthusiasts. 

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