Quick Service restaurants (QSR) for health-conscious minds have enjoyed a lot of momentum in the past five years. From an owner's perspective, this business model is replicable, scalable, and has attractive economics. From a consumer's perspective, QSR is the best place to go to if you're conscious about taste, budget, time, and health. No wonder this win-win business model has seen great success and continues to be a promising category going forward -- just look at Chipotle.
I met Cava Group CEO Brett Schulman around 16 months ago, when we discussed the advantages of serving Mediterranean food, having a limited menu, and the importance of work culture. Two reasons I decided to circle back with him last week: First, I constantly hear great reviews about Cava's food from more and more people. Second, knowing that the company was primarily focused on the East Coast (per our last conversation), particularly the Washington D.C. area, I was surprised to find a Cava Grill in Los Angeles.
Here are some key points we touched on.
Key to success
An amalgamation of profitability and a great work culture isn't easy to achieve, but Mr. Schulman gave me a perfect explanation of why both culture and profit actually go hand in hand. Lack of enthusiasm, or lack of commitment among employees, affects the company's performance. A company with a low retention rate usually has low productivity and high training costs.
According to Schulman:
The investment in our employees to reduce turnover rate gets reflected in the performance of the store. Our best stores are the stores with the lowest turnover rates. A store with a stable team runs better in every way -- a happier team, and a happier customer.
Cava's retention rate is far above the industry average.
Growing the old school way
There's a stack of companies in private and public markets these days that don't mind burning cash as they grow every quarter, hoping that scale will one day help them be cash positive. Cava Grill believes in growing the old school way. Each of the company's stores is profitable on its own.
The CEO has a simple philosophy: "If we won't make money, how will we pay our employees?" He thinks that unprofitable growth isn't sustainable in the long run. Those chickens will come home to roost at some point.
The company's operating margins are similar to that of the best players in the industry. The cash-on-cash return of the best company in this class is 33% -- Cava's returns are exceeding that by far.
When I asked Mr. Schulman how the company manages its cost while paying its employees handsomely, he said that the company invests a lot in the assembly-line formation that allows it to be efficient. As a result, it can run a restaurant with a lower head count.
Challenges of serving high-quality food
While the news of an E. coli outbreak at Chipotle sent its stock down more than 35% from recent highs, it has raised a bigger question for the industry: Is it possible for companies to maintain their due diligence standards while sourcing their suppliers from small-scale farmers?
Brett Schulman thinks that there is a bit of unfair characterization of the whole problem. If sourcing from local farms would have been the real issue, it shouldn't have affected the restaurant at a larger scale. He said:
It's true that those farms aren't that sophisticated, and that's why our role as a food restaurant company becomes more important than ever. So, you have to break the chain of service into two parts. First is getting the ingredients from farms or shops to our backdoor and then distributing them within the company. We can fully control on what goes on within the company, but you have to choose your suppliers very carefully, monitor their standards regularly, build a relationship so that they understand your standard requirement. Our customers don't just pay for the food and culinary we are serving them, but they also pay us for the way we are sourcing our food. We keep this in mind and hence our cost structure incorporates high-quality check standards. As you scale up, maintaining the quality gets tougher, which is a challenge, as well as an opportunity. With the current technology and tools, we think that maintaining the food quality is quite possible.
The Foolish bottom line
Cava Mezze has a great business model in place. It calls itself its biggest competitor. So far, each of its stores has shown more growth prospects than the previous one, and the company is building on that momentum.
Because the company isn't looking to fund growth through the public market anytime soon, you will have to wait if you want to be a shareholder. But you can enjoy some great Mediterranean flavor in their grills and some dips in Whole Food Markets.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Rana Pritanjali has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.