Cava Group (CAVA -1.90%) is a fast-casual restaurant that applies the assembly-line concept of Chipotle Mexican Grill to Mediterranean food. It has caught on quite nicely with consumers, noting that the 2023 same-store sales growth came in at an impressive 17.9%. And yet Cava is reducing its growth plans in 2024. Here's why it is probably a good decision.
Cava's opportunity is huge
Chipotle has over 3,400 restaurants that allow customers to build their meal by selecting from a collection of fresh items in an assembly-line ordering process. Cava uses the same assembly-line approach with its Mediterranean food and has around 309 locations. That suggests that the Cava concept could grow tenfold and still have even more room to grow.
Image source: Getty Images.
Chipotle expects to open as many as 315 new locations in 2024. Note that this is more than the entire Cava chain. But here's where things start to get interesting. It's not like Cava has been crawling along -- 2023 was a year of very rapid growth. The restaurant chain opened 72 new locations. That means the company expanded its store base by a huge 30% in 2023. By comparison, Chipotle grew its location list in the high single digits.
It is clearly easier to grow from a smaller base. But that doesn't mean that growth is easy. Opening a new restaurant requires finding a location, negotiating a lease, building out the restaurant, training staff, and integrating the new location into the company's supply chain. It is a complex and difficult task to execute. After a year of massive growth, Cava is tapping the brakes in 2024 with plans to open "just" 48 to 52 new locations.
Cava is making the right decision
From a new location perspective, going from 72 to 52 is a reduction of nearly 30%. If it opens that number of stores, the overall store count will grow about 17% in 2024, with the low-end target of 48 new locations suggesting growth of 15%. That's still around twice as fast as Chipotle's growth in 2023.
NYSE: CAVA
Key Data Points
So while Cava is slowing its pace of growth, it certainly isn't bringing growth to a halt. But it is giving itself a chance to integrate the huge number of locations opened in 2023. That will allow management to learn what works and what does not. Indeed, it is highly unlikely that all of the locations opened in 2023 will be winners.
Also, the company's plan to reduce the pace of new store openings suggests that management is capable of pushing back against Wall Street's seemingly unending demand for growth from smaller companies. This is a particular problem with restaurants, where the quickest way to grow is to open new locations. Moving too quickly is a frequent mistake among restaurants and carries a few common issues.
For example, sometimes customer demand doesn't keep up with the new store openings and the restaurant effectively oversaturates the market. When that happens customers and Wall Street move on to other ideas. Another common problem is that new locations are placed too close to existing ones, which ends up cannibalizing old locations. While the top line will still be growing thanks to the new location, the existing store base struggles. This often shows up in the form of weak same-store sales, which only looks at restaurants opened for at least a year.
And then, of course, there's just simple execution. As noted, opening new stores is a complex task and it doesn't end when the first customer arrives. There's a learning period on the operations front in the first year or so at each and every location. Cava giving itself the leeway to learn after such a large growth year seems like a prudent decision.
Getting it right up front is the better option
It would be easy for Cava to go pedal to the metal and open up new locations at an ever increasing pace. That might actually make some on Wall Street happy, but it would also increase the risk of a disaster. That management is slowing down is a good sign. And, if Chipotle is any indication, there's plenty of room for growth and no need to rush. It is better that Cava figures out how to take advantage of its growth opportunity in a judicious and structured fashion. Long-term growth investors should like what they see here.
