Invest Like the Best with Patrick O'Shaughnessy - Jonathan Neman - Building the Modern Restaurant - [Founder’s Field Guide, EP. 24]

Starting point is 00:00:00 This episode of Founders Field Guide is sponsored by Clavio. Want to deliver marketing moments that last a lifetime, Clavio is the ultimate marketing platform for e-commerce. With targeted segmentation, email automation, SMS marketing, and more, Clavio helps you create your ideal customer experience. See why more than 50,000 brands, like Living Proof, Solo Stove, and Nomad, trust Clavio to grow their business. Keep your customers coming back.

Starting point is 00:00:23 Get a free trial at clavio.com slash founders. That's K-L-A-V-I-O-O-O-com.com. slash founders. This episode is brought to you by LinkedIn Jobs. 2021 means new opportunities to grow your business. If part of your strategy is adding new members to your team, LinkedIn Jobs finds the right person quickly. To make things better, your first job post is free. With LinkedIn, you get access to an active community of professionals with more than 722 million members worldwide. LinkedIn is the easiest place in the world to post a job and message qualified candidates. Getting started, it's easier than ever, and now you can do all this from your mobile

Starting point is 00:00:57 device. That's how LinkedIn jobs can help you hire the right person faster. When your business is ready to make that next hire, find the right person with LinkedIn jobs. And now you can post a job for free. Just visit LinkedIn.com slash field guide. Again, that's LinkedIn.com slash field guide to post a job for free. Terms and conditions apply. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. believe we are all builders in our own way, and this series is dedicated to stories and lessons from builders of all types. Founders Field Guide is part of the Colossus family of podcasts, and you can access all of our podcasts, including edited transcripts, show notes, and resources

Starting point is 00:01:41 to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Oshonacci asset management may maintain positions and the securities discussed in this podcast. My guest this week is Jonathan Neiman, the co-founder and CEO of Sweet Green. Sweet Green is a fast casual restaurant chain that Jonathan co-founded in 2007 during his senior year at Georgetown when he realized he couldn't find a healthy, affordable, and convenient place to eat.

Starting point is 00:02:27 Today, Sweet Green operates in 11 markets and we'll have about 160 restaurants across the U.S. by the end of 2021. In our conversation, we cover the origins of Sweet Green and how it builds a direct relationship with its customers, how Jonathan thinks restaurants should work with marketplaces like DoorDash, and the economics of operating restaurants. While Sweet Green is primarily a restaurant concept, Jonathan brings a tech-first mindset to the food industry, focusing less on single-store economics and thinking more about customer lifetime value and the importance of owning the relationship with the customer. I hope you enjoy my

Starting point is 00:03:00 conversation with Jonathan Neiman. So Jonathan, with these discussions with founder CEOs, I always like to begin with the origin story of the business, the path that you were on that immediately prior to founding Sweet Green and sort of how this business came to be. Could you start there by just giving us your origin story? Sweet Green started while I was a student in university at Georgetown. And it was really our senior year where myself and my two co-founders, Nicholas and Nathaniel, just identified a problem in our own life that was just nagging us beyond belief. And it was a very simple problem, yet a very complex solution. And that was we couldn't find a decent, healthy, affordable, convenient, accessible place to eat.

Starting point is 00:03:46 This was the same time as senior year, you're trying to figure out what you do with your life. People are interviewing for jobs. you're thinking about what we want to do next. Myself and my two co-founders always knew we wanted to do entrepreneurs. I don't think we knew that we were going to start a business in college and go right into it, but it was this problem that we just became obsessed about. And it started off with what's solve this problem for ourselves. It would be amazing if this just existed here in D.C.

Starting point is 00:04:14 And as soon as we started putting pen to paper on the business model, we realized that this problem was massive. It was not a problem in our lives and a small community. This was a national and global issue around the food that was best marketed, most widely accessible, was quite honestly terrible for you and terrible for the environment. The whole value chain was engineered the wrong way. If you actually thought about the rights, the stakeholders across the chain, it wasn't made for this next generation of what we value.

Starting point is 00:04:47 And we looked around at a bunch of other categories and saw, great companies and brands that did things the right way. And it was really that. It was just an obsession with this thing that in our own life that we wanted and realizing it was a big problem to solve. We spent senior year, first half writing a business plan, scrounging around for money. We ended up raising about $350,000 from over 50 individuals, kind of a Kickstarter before the Kickstarter existed.

Starting point is 00:05:16 And we spent the second half of senior year building the restaurant. It was just trial by fire. are completely learning on the job. And in many ways, I always like to say our naivete, our not knowing what we were doing or what we were getting into, I think was one of our greatest advantages. We didn't approach the problem from, hey, we're going to open a restaurant the way restaurants open it. We approached it without knowing how you do open a restaurant, how you do source food, how you do anything. And so we kind of had a first principles approach to designing the experience. Can you give me an example or two of something you did from a position of naivete that if you

Starting point is 00:05:53 had been in the restaurant industry for 10 years, you would have done a different way, but you guys not knowing any better did something different early on? What's an example or two of that? The biggest one was just how we built our supply chain. I don't think we understood how global food supply chain worked and the complexities that exist within them. So for us, it was how should food be sourced. Well, why don't we go directly to our farmers and build relationships with our farmers? And not knowing where to go, we just went to the farmer's market and started meeting people. I think that was something that was probably done at some high-end restaurants. But for us, it was how do you do that and do that in an affordable and accessible and convenient way.

Starting point is 00:06:34 That was probably the biggest example of not knowing how things were done. Soon later on, how technology made its way into the business. I think for a long time, restaurants were scared of technology. For many years, technology had burned restaurateurs. The promise of the next great software never really worked out. But for us, you could just see that transformation taking place, studied other industries, whether that be travel or retail, and just saw what happens when you digitize a vertical. And what you can do with that data, what you can do with being direct to consumer with your consumers. And so very early on, rethinking the experience from a digitally native perspective was probably

Starting point is 00:07:16 the second big one. As you've built Sweet Green and obviously I'm sure been in and around other people starting restaurants of all different types, restaurants get this funny rap for being just terrible businesses. And it's almost in many cases like a vanity project or something. When restaurants go wrong, what do you think the most common reasons for that is? So what is behind that trope of restaurants being like the canonical bad business? The challenge with restaurants is maybe the low barrier to entry, really.

Starting point is 00:07:47 First of all, everyone gets food. Everyone's a consumer in food. Thinks they know a lot about food. It's an emotional thing. Start having a restaurant connecting with guests and creating something that other people want. And I think part of it is that low barrier to entry. I think that's rapidly shifting right now in a way between me even easier. but different. Previously to open a restaurant, you had to go build out a restaurant. I think

Starting point is 00:08:11 some of the shifts in the landscape today are making it actually easier to start a restaurant, but harder to scale. It's very similar to what you're seeing in retail. I think I actually heard someone on this podcast when they say, it's never been easier to start a company. It's never been harder to scale a company. And I think restaurants are pretty similar in that way. The Baird entry has gotten even lower, but the complexity of scale has gotten even much harder, I think. So talk me through that first 350K funded restaurant number one. How did you build it? What was part of that first concept?

Starting point is 00:08:43 And what were the major lessons that you learned building number one? Restaurant number one, we went at it having no idea what we were doing. First thing we did is started looking for a location. Like most things in life, it was right under our nose. It was actually across the street from our apartment, maybe 10 steps from where we were. The location that we had our eyes on was a 550 square foot old burger shack. It used to be a place called the Little Tavern. It was a pretty famous chain of slider restaurants in the D.C. area.

Starting point is 00:09:13 And it had been sitting there empty our whole time while we were in school. Part of it was this constraint of a small space, again, forced us to really focus on what our experience was going to be. I don't think we went into it saying, let's start a place that served salads. We went into it starting, let's solve this problem. around healthy fast food. And that's still how we think about it. Salads have been our first iteration of how that mission shows up in our product. But we spoke to our landlord. We called the number on the door. We get on the phone of the leasing agent. I remember her name. Her name was Marcy Simon. And we call her and we say, hey, we have this idea for a business. We'd love to have a meeting.

Starting point is 00:09:53 Can we come see you? Again, remember no experience. Really, we had a business plan that was maybe four pages, which had a picture of a menu, some financials, and some picture of, like, furniture of what we thought the place would look like. We set up a meeting with Marcy. I remember going to the office. The three of us wore suits. I think it was the first and last time we wore a suit to a business meeting, but we wanted to be taken seriously because we were in school. And she looked at us and she's like, is this a school project? And we're like, no, this is not. This is a real thing. She goes, well, it doesn't really seem real. It doesn't seem like you have the capital for it. Doesn't seem like you have a full plan, but she's like, I like,

Starting point is 00:10:30 I like you guys. It seems like you have a passion for it, and I do agree that the community could use this. So she kind of sent us back, and she's like, go do your homework. You need an architect, a kitchen engineer. You need to show me that you have capital behind this. Go do your homework and come back. That challenge was really good. It was right before the Christmas holiday, I remember, and we went back, and I remember a conversation with myself and my co-founder saying, we're going to do this for real now. We're going to start trying to raise. money. And part of, I've always believed, raising money, this is necessary evil in a way of like going through the gauntlet. You have to believe something so much to have to ask so many people to write you a check.

Starting point is 00:11:10 It forces you to almost sharpen your vision and what you want to do. I met an architect, met a kitchen engineer. We started building relationships with farmers and we started doing food tastings. So my partner, Nick, was our first chef. He's not a chef by training, but is culinary genius in many ways, still does the culinary vision for sweet green, although he's not our chef. It started off by just doing tastings in our dorm rooms. And we'd invite classmates over and try a bunch of things. The first thing he put on the menu is still on the menu today. It's called the guacamole greens. And it kind of gave us a little hint on what the sweet green way of creating craveable dishes was going to be, which was this idea of taking things that people love and are

Starting point is 00:11:56 familiar with and putting a healthy twist on them. Over time, the intentionality around menu design has gone much deeper in how we think about sustainability, nutrition, taste, price, et cetera, like how the food combines? But at the time, it was how do we just make healthy eating cool and delicious? Everyone loves guacamole. What if we just deconstructed it and made it a salad? The rest is kind of history. Say a little bit more about your lessons on effective menu building because I love this idea of taking something familiar and twisting it. You see this over and over and over again in products where there's one foot in the known, one foot in the new. What have you learned about trial and error and success cases and failures when trying to coax a new pattern or

Starting point is 00:12:41 behavior into your consumer's choices? We have a word for how we think about our food. We say food is content. Think about it as our content. And when you're designing, when you're creating content, You got to think about both what the actual food is, but also what's the story around the food. And that's something we learned from looking at a successful restaurant that came before us. There's a story around how each item was created. Some of the things we've learned is name really matters. How you name something and how you position it really, really matters. We have constraints in terms of the nutritional profile and the sustainability, like the carbon footprint of our food.

Starting point is 00:13:21 food, which is something that makes what we do hard. And then we have to take that and spin it and make it delicious and sexy. So maybe I'll give you an example. Last year, we wanted to do a partnership with one of our friends, David Chang. And the idea from the beginning was how do we create a bowl that celebrated sustainability? And we want it both him and us at the time. We're really obsessed with this ingredient kelp, because kelp is an ingredient that's not only sustained, but actually sucks carbon out of the environment. In certain cultural, is actually loved Revere, people love it, but it's not really a sexy ingredient. You really want to eat kelp? So that was the creative challenges. There's this ingredient that is really good for you.

Starting point is 00:14:02 It's really good for the environment. How do we make consumers actually want it and be that trusted partner that like trust us, we're going to make it taste good. It's going to be accessible. It's across all our channels. It's going to be affordable and it's going to be good for you. But it's got to taste good and be really well branded. And so for For us, it was partnering with a famous chef like David Chang. We took a page in a lot of ways out of Nike. How do you build an aura outside of the dish beyond just, hey, this is a dish with kelp in it? There's a concept around it.

Starting point is 00:14:35 It reminds me to maybe zoom all the way to the end here. Have you lay out what the sweet green network looks like today? And I use that term network very deliberately because I want to talk about how the way that you build items is almost platform-esque. You sort of have like infrastructure that is individual ingredients that can be sort of remixed and a narrative can be built around these core elements. And I know you think about this in terms of Sweet Green being a platform for health, the network being important, more software-like concepts that you've applied to food. Give us a sense for what that network looks like today and how you think about this as a platform.

Starting point is 00:15:13 That's how we do the business. Sometimes we call it a full-stack restaurant. And maybe you help to understand how most restaurant companies actually, operate. Large restaurant companies in the United States actually don't own their restaurants. They're really just marketing and brand companies in many cases. So they actually don't own or operate their restaurants, nor do they have much control over their supply chain. Unfortunately, probably don't have much control over direct relationships with their customers. So for us, we knew that as a brand that wanted to control the experience, we had to control the full

Starting point is 00:15:46 stack of the value chain all the way from, we actually, in many cases, go to the seed, level with our farmers thinking about what seeds to design and where to grow. We pay a lot of attention to the soil help that our farmers grow in because that's what drives the nutrition and taste of the food. Hundreds of local farmers we work with across the country and they're regionalized. And so when we go into a new city or a new market, we're building out a local supply chain, which is why you see Sweet Green today will end this year with about 160 restaurants around the country, but we're only in 11 markets. something most restaurants do is have a commissary kitchen. So they have a commissary kitchen

Starting point is 00:16:26 where the food goes to is prepped and almost shipped to the restaurants. So it's really easy to make there. What you typically see in those situations is quality is sacrifice. There are very few people that have been able to do that in making the level of quality. So we made a decision that we were not going to use a commissary model. Instead, we were going to create a scratch cooking kitchen in every restroom. That was important because our customers value the freshness of the food, which is very hard to do when you're centrally producing it. We make all of our food from scratch every day in every single kitchen. But in order to do that, it required us to really think about the operating model within that kitchen, as well as a lot of the software and tools that are going to

Starting point is 00:17:10 enable us to create these high-volume kitchens at each local note. Within our kitchen, we have something that I call them the Sweet Green OS, the operating system of how we run the restaurant. It's a suite of tools that we've built from how we forecast demand by school level, how we then schedule our labor based off of that. And then you have the prep and production tools around both cold prep, hot prep, and production, all connected to say, if you're running the oven at Sweet Green, And you're not guessing how much chicken to put in the oven at a certain time. You have an iPad software that we built that said, based off the weather and the product

Starting point is 00:17:51 makes it in the time of day, at 1102, you should put exactly this much chicken in the oven to be ready. So you have this much chicken available fresh at this moment. We have a similar tool from a cold prep perspective. And then it all comes together in how we actually assemble the holes. It's software led. We have a pacer tool, which helps you make sure we're meeting our customers from an accuracy and calmliness perspective. So that's the restaurant operating engine. Again, most restaurants

Starting point is 00:18:18 franchise model, they're actually not even operating the restaurants themselves and in many cases are running things pen and paper or expecting humans to do all of the work. We do believe that technology can only take you so far in a restaurant. Great restaurants are still defined. Great leaders, great general managers, great assistant managers. We call our managers and our restaurants, our head coach, they are the most important position in the restaurant by far. We kind of like focus on that head coach and the assistant coaches and supervisors because they drive that restaurant. Things for us like head coach stability, having a head coach in place for over two years are things that really drive the experience and profitability. So for us, within the restaurant,

Starting point is 00:19:01 it's a focus on the culture and the leadership as much as it is on the software and tools that that job easy and help our team members become proficient really quickly. That kitchen engine is important for what we do because we operate very high unit volumes in our kitchen. We operate over $3 million unit volumes in about 2,500 square feet across five different channels. So we operate an in-store channel, a pickup channel, a native delivery channel, which is delivery on our own platform. We offer delivery through some of the marketplaces, and then we offer what we call Sweet Green Outpost, which is virtual pickup hotspots anywhere. It's kind of like a personalized catering. So we've had to build the system where we can

Starting point is 00:19:48 then fulfill across multiple channels. And then, of course, it ends with the customer where 80% of our business today is digital. So we have connectivity to that customer can both personalize the content and the marketing to them and have that direct line of communication with them. And in many cases we're actually beginning to run some of our logistics. As you see, we kind of run this full stack from seed all the way through logistics for the customer in that customer relationship, which is very different than most restaurants that really run the brand and then have other operators running the restaurants. And they're usually buying from large national distributors. And it kind of goes back to when we started the company, we thought about food,

Starting point is 00:20:37 and how food should come out of the ground. And when you think about, let's just take McDonald's, the fact that they celebrate that a Big Mac is a Big Mac everywhere and their French fries taste the same across the world, isn't that crazy? When you think about it, all year long, across the world, the food is exactly the same. Food comes out of the ground,

Starting point is 00:20:58 and it should taste different in different places of the world. It should be different in different places of the world, and it should be different at different times of the year. Say a bit more about, there's a couple things that this all brings up. I'm going to latch on to a few ideas here. First, being 80% digital business. How do you think that stacks up to the average, I'll call it fast food concept or restaurant concept? Like what percent digital might they be? And what literally does digital mean? Does that mean that the customer is known to you somehow and that they're executing the transaction

Starting point is 00:21:27 through an application or through some sort of ID or card or something? Like just fleshed that out a little bit because it does seem that the first 20 years of the internet was cheaper, better, faster. And that will persist, of course, but that personalization is sort of a fourth category that becomes really important. And you're sort of hinting out of here. So flesh that out, what you get out of knowing the customer, why that makes running the restaurants different, et cetera. Clearly, COVID has changed everything when it's coming to the digital penetration of restaurants. Pre-COVID, we were running just over 50%. The competition was, you know, I think best in class behind us was in the 20s.

Starting point is 00:22:03 It was growing, but it was far ahead of any of the competition there. COVID is radically shipped that. As consumers have been, both restaurants of the software ecosystem has accelerated and made it really easy for restaurants to go online. So the Shopify occasion, I don't know how you even say that as a verb, but is beginning to happen in restaurants where it used to be you had to build these things yourselves. Now you can go to some really great software partners.

Starting point is 00:22:30 that can take you online almost immediately. And that's shifted it. So now you are seeing a lot of restaurants over that 50% threshold. And the question is going to be how many of those restaurants have direct relationships versus marketplace relationships, which is, in my opinion, the greatest existential risks facing our industry reminiscent of both the retail, Nike versus Amazon, Disney versus Netflix, Four Seasons versus Expedia. It's a very similar story of whoever owns the customer extracts more value in that value chain.

Starting point is 00:23:07 And I think that's been a huge focus for us. It has been for years. It's continuing to own our customer because we're able to tell our story better. And like you said, personalize that experience. To answer your question on what we mean by digital customers, yes, someone who is on a native digital platform ordering through essentially a sweet green web or app property. so we can directly communicate with. So does that literally mean?

Starting point is 00:23:31 I'm just like kind of crazy to think. If I were to just walk into a sweet green and place an order in a line, that's a non-digital order. Do I have that right? Unless you use our scan to pay, so you can use our digital wallet, and then it would map back.

Starting point is 00:23:45 So the non-digital would be you coming in, ordering on the line and using your credit card would be the non-digital piece in. What have you learned about converting people into your ecosystem, getting from not owning to owning a customer relationship, because it's a point of friction, right? I got to download something. I have to give you information? How have you gotten better at converting people into your owned ecosystem? The first thing, I think I credit the penetration we had

Starting point is 00:24:13 from a digital perspective in the early days and being so far ahead of the industry. A lot of people talk about the technology itself, it starts with the product in the brand. If you don't have something that people want, they're not going to download your app. There's going to. goes the app is. So it really starts there. What really drove a lot of the digital penetration that we had, just the lines. To a sweet green in many cities at lunchtime, there'd be lines around the block. That ease of convenience, I can have my sweet green exactly when I wanted and just go pick it off a shelf and just saving that time. Just step one. Two has been kind of CRM loyalty. So once you're in, how do we reward you? How do we first take you down that consumer journey where we reward you

Starting point is 00:24:55 for how you interact with the brand. Part three is around personalization and expanded content. So a lot of the things that we've been doing today has been around what we call exclusive content on the platform. We want to make ordering through the street green digital properties to be the best way to order sweet green. And there's a lot of things, as you'd imagine, we can do on digital that is very hard for us to do in store.

Starting point is 00:25:19 Let me give you an example. In store, when you think about this, it's actually pretty archaic, right? When you think about what is a menu item, it's a collection of ingredients that come together. At Sweet Green, we've 10 to 12 menu items at any given time in our restaurants. A lot of that is built off of the constraint over, one, the paradox of choice for the consumer of not wanting to have too many things, but two, the memorization skills of a team member. So how many things can I ask a team member to memories versus what the consumer may want? as that relationship moves digital, I can start to personalize, one, what you see to solve for

Starting point is 00:25:59 the paradox of choice. So if you're a vegetarian, I can show you more things that are vegetarian. And then on the flip side, when it comes to making the bowl, the team member no longer has to memorize things because the software we've built within the kitchen, they're actually just following instructions of what to make. You've unlocked the menu from 12 items to millions of playing with that over the past few years with a number of what we call digital exclusives. This past season, we launched a few digital exclusives. We launched three influencer bowls, as we called them. One was with a streamer named Valkyrie.

Starting point is 00:26:35 So if you're in the e-sports world, you maybe know who she is. And the idea is how do you make it tell some stories around being healthier, even if you're playing video games as your profession? So she made her favorite bowl and featured on the sweet green menu. We did one with Harper Waters, who's a famous ballet performer. And then we did a third one with Ali Love from Peloton. You got to give the consumer more and more reasons to transact the digital. And the reason we do it is because the combination of the digital relationship and the frictionless

Starting point is 00:27:05 experience it provides, as well as the food that we serve, which is just by its nature habitual because it's healthy. Once we have you within the ecosystem, you go from a once-in-a-while guest to pretty much a subscriber. It's not subscription yet. One day can be. It becomes something where you're ordering very, very often from Sweet Green. So we see customers using Sweet Green less as a treat and a once and a while restaurant, but really more as a utility. I call it a real food utility. It's something that is just part of your routine. You've mentioned to me before this desire to create win-win situations and everything that you do, whether that's partnering with the farmers or the community or the

Starting point is 00:27:47 customer and your own business, your workers, et cetera. How does that work on the partnership side? So you're partnering with a ballet performer, a famous chef, Peloton instructor. What have you learned about creating win-win partnerships with that sort of agreement with a person or an influencer or another brand? Our first core values to agree on is win-win-win-win. And it's kind of our way of saying conscious capitalism. That is the core of how we approach things. And it has been from day one. And it's this belief that you can be good for society and good for business at the same time. Just from a personal level, I kind of consider that my personal purpose in life. Conscious capitalist is a very important word in that, is that it should make us more money when we do good things.

Starting point is 00:28:32 And part of that is how we think about balancing all our stakeholders. And so, for example, when we do partner with chefs, it's very important both chefs or partners that we pay them appropriately, whether it be launching something on our menu that we did last year, which was a new Thai crispy chicken mole. We partnered with the most famous Thai chef in L.A. Didn't feel like there was any sort of cultural appropriation. We were working with him to respect to the culture and then paying him fairly for it. We pay our partners well. We think equitable pay from our farmers to our team members to our collaborators is an important part of the ecosystem.

Starting point is 00:29:10 You mentioned the marketplace winners or a few players that have really come to dominate the ecosystem, especially in COVID. I mean, these things have become almost like essential services for a lot of people. From an entrepreneur's seat who has both owned channels and also participates in some of these marketplaces, just talk us through the tradeoffs. What is good, what is bad about the marketplaces? How do you think about these? We won't name specifics, but just kind of generally speaking, what are the pros and cons from someone that runs a restaurant group? The way you have to think about the marketplaces, they do two things. One is their logistics companies. You're able to tap into their platform to deliver food for you efficiently. These platforms have built incredible liquidity where they can now deliver food much more affordably than you can probably do it yourself unless you have real scale. They also are marketplaces that drive revenue. The big question, as you think about these, is the idea of incrementality. When a lot of them began, in restaurants were searching for growth, you could add a delivery channel and make the argument

Starting point is 00:30:14 that this was incremental revenue. You could pay a high fee or sometimes they charge up to 30%. You could pay that because your rent was fixed, your labor was largely fixed, you had your food cost so your incremental gross margin was high in order to pay for it. But what happens when that business becomes not incremental? Now, what happens when the platform becomes your biggest competitor. And I think if anyone thinks that that's not going to happen, we're being foolish. Delivering food is not a very profitable business. COVID has accelerated this by five to 10 years, and it's still not really like that profitable. But there is a lot of profit within the food value chain. And so the way to extract it is to actually become an operator yourself. I do believe that what you

Starting point is 00:30:57 saw happen with Netflix is going to happen. It's already happening. Restaurants better take control of their destiny sooner and really think about their own digital experience and how they're going to own the customers so they quite honestly don't get eaten alive by the marketplaces. We have great relationships with the marketplaces. We've, I think, figured out a way for it to be symbiotic where they do run our logistics. We do partner with them on a marketplace perspective. For us, we think about it as customer acquisition and brand awareness and then hope to move those customers into our own digital ecosystem. That's kind of how we think about it. You have all your delivery on the marketplace. Well, they own your data. They own your customer and you may have a

Starting point is 00:31:39 really good deal where they're charging you, let's say, 15% commission. You're selling burgers. And so they learn that that customer loves burgers. Well, the next day, they're getting an ad that says, try this burger. And you don't know, but they happen to make 30% on that company making burgers. So like, we've all seen this story before. And the question. question is, have we learned anything? Have we learned anything? Are we going to let it get so far where it's so hard to claw back? And you've seen companies successfully win this aggregator marketplace world. The one I think is really interesting is watching Nike over the past few years. They've had to make real investments in it. You can't ignore it. And the earlier you do it,

Starting point is 00:32:21 the better. There's Disney. Imagine if they hadn't waited so long. They hadn't just handed the to Netflix, what it would be like today. I'm a believer that content is king. As technology becomes commoditized, you want what you want, whether that you want to watch the Mandalorian, or you want your sweet green salad. You want to watch what you watch. One day, the technology, some of these technologies become commoditized. Streaming is commoditized. You don't go to Netflix because it has better software. You go there because you want to watch what you want to watch. And so, ultimately, the power shift is at first convenience via technology, but then quick, we'll move back to content. You mentioned in the food value chain, there's potentially a lot of

Starting point is 00:33:01 profit to be had. And I think the problem is, you know, these aggregators play a very specific role that I find completely fascinating. But in a generic sense, just walk us through like the economics of a restaurant, typically speaking. You can use your own experience or just sort of generalities. Obviously, we know what the revenue is. People are buying food from you at different levels. But give us a sense of like the cost structure of the business, what gross margin is good and bad in restaurants and anything that Sweet Green does uniquely as it thinks about customer acquisition, average revenue per customer that can go up, et cetera. I'm just fascinated by sort of the economics of the business itself. Most restaurants view their business as box businesses.

Starting point is 00:33:39 So they consider them as a replicatable node. Restaurants are, as you probably know, are relatively low margin businesses. I think why they're valued the way they are is that can is just so massive. There is a moat around the complexity to execute at scale. There's just a lot of runways in case. You get something that works and you can just do it thousands and thousands and thousands of times. Each individual unit is not that profitable on a percent of revenue perspective, but on a return on capital perspective can be very profitable. So the way a typical restaurant will work is obviously you have your revenue. There's a line most people don't think about, but it's call it discounts and fees today. It could be your delivery fees, could be your loyalty, CRM, employee meals,

Starting point is 00:34:28 but there's like a discount bucket. Then you have your food costs, which typically run about 30%. You got your labor costs, which typically run another 30%. You got your rent, which for most restaurants will run occupancy around 10%. And then other. And so if you're a great restaurant at scale, you're making north of 20% at the unit level, but there's very few examples of that. The ones that are there are the very successful ones that large Chapult is north of 20% at their peak. They were about 25% unit level margins. You see Shakejack in the low 20s. Those are kind of like the best in class examples. Most restaurants operate closer to the 10 to 15% margin. Clearly revenue is a huge driver of that. There's so many fixed costs in the system. I think

Starting point is 00:35:17 restaurants look like variable cost businesses, but a lot of the labor is fixed, the rent is fixed, and a lot of your operating costs are fixed. It's kind of a 70% gross margin business, but the labor being partially variable, almost a step change variable. Typical restaurants think about unit level economics, and the key metric in our world is return on invested capital. We're going to spend a million dollars building store. It's going to return X hundred thousand per year, and it's that payback period. If you have payback around, I'd say two years is probably best in class, and it can go up to five plus years. That is the traditional metric that restaurants look to drive. It's your return on capital and your run at your camp. The way the world is shifting,

Starting point is 00:36:02 and kind of how we look at the business differently is we actually look at a lot of customer level economics. Because of the digital connectivity that we have, we're able to understand our customer acquisition costs, which are a blend of both our organic acquisition, largely driven by our actual location, which are our best driver of organic acquisition, plus paid acquisition and spend. And then you look at that compared to LTV. And I think most restaurants don't consider the business that way. I believe they're not actually allocating capital properly

Starting point is 00:36:34 because they're not thinking about the lifetime value of the customer. We have this level of granular data and customer cohorts. We're able to actually see one of our key metrics you used touchdown was Arpoo is average revenue per user. Once we have a customer, how much do they spend? We look at it in a 90-day period. For us, our two key metrics are number of digital users in Arpoo. Say a bit about how you as a capital allocator behave differently when you're focused on the actual customer versus the box versus the store as the unit. When the customer becomes the unit, but you're doing the same thing as a box as a dominoes or something, you're serving

Starting point is 00:37:13 an individual customer. What are the biggest changes that that drives in how you allocate capital and run the business? Probably the biggest one that's relevant to what we were just talking about is around how we promote marketplaces versus native properties. It's relatively easy and actually efficient. The marketplaces have gotten very efficient at customer acquisition, similar to what you've seen Amazon do and others like the way that they're actually going to make money. and you've seen this with InstaCard as well, is becoming ad partners. Pay to play. Pay to play on the marketplace.

Starting point is 00:37:49 And they're actually really efficient from a revenue driving perspective. You can allocate all of your marketing dollars on platforms and drive sales really efficiently. The question is, are you driving sustainable sales or are you just getting a short term pop? For us, what that's meant from a capital perspective is allocating a lot more capital to, quite honestly, internally, from a G&A perspective, building out our technology. We have to make sure Sweet Green is the best place to order Sweet Green. There's a lot of more capital in the Sweet Green owned native experiences, as well as driving both exclusive content, personalization, and CRM performance-based marketing

Starting point is 00:38:34 within our own properties versus allocating that capital on our marketplace. Another interesting way to think about capital allocation is as we think about building out of a market or a region. And a typical capital allocation, thinking about investing from a box unit economic perspective, you would try to maximize the return on capital of every unit within a market. But if you think about it a little bit,

Starting point is 00:39:00 if you think about customer level economics, you may decide to build one, say, flagship store that really builds the brain or do certain brand driving experiences within a market that you have a much lower return on capital for that single unit, but you may see a lift across the market as you build that market out. You've seen Nike, again, as an example of doing this with their tentful moments and flyshifts, and then they see the whole market take up, kind of getting a lift from that

Starting point is 00:39:31 because they're able to view it at a customer level of respect. So as you think about other technologies that are progressing quickly in and around health, not necessarily even food. How do you square those advances with your own plans for Sweet Green? And I know you and I are both fans of all these things, levels and the aura ring and ways to understand our own health better. Food obviously is a critical thing in health overall, preventative health, et cetera. Tell me a little bit about how you think about other technology trends and how they impact your own roadmap. This is something that I'm really passionate about. I know you are too and very excited about I do believe will be a huge part of what Sweet Green second act. Let me back up. Let me back up.

Starting point is 00:40:11 up for a second, talk about the problem, which most people probably know. Let me just quantify a little bit how big this is. Today, we spend twice as much on health care as we do on food. In 1960, we spent three times as much on food as health care. Think about how that relationship has switched. If you think about chronic illness in this country and ones that could be prevented by food and lifestyle, estimates are between like 75 and 85% of chronic. illnesses that we're treating are things that could have just with simple food and lifestyle changes could have been prevented. 40% of this country is obese. There's estimates that this idea of metabolic health, about 88% of this country is metabolically unfit. The cost on the system

Starting point is 00:40:59 is just massive. Becity costs alone last year, directly treating obesity was $150 billion in the U.S. in terms of actual spend on health care, I think it's a $3.6 trillion spent on health care. Food spend in the United States is $1.5 trillion, almost equally split between food at home and food away from home. Think about the relationships between how much we spend on food and the, quote, cost of food and then what we're doing to ourselves and you probably seen the things around life expectancy coming down and all of these things. So we're sick. And I didn't even talk about environmental impacts of this. So I like to say when you eat something like McDonald's, people think it's cheap, but I would argue it's the most expensive thing you can eat.

Starting point is 00:41:48 If we're actually calculating the cost appropriately in terms of what it does to your health, your productivity, and the cost of an environment, this is a big problem that we clearly have to solve. For me, I'm really passionate about this health crisis as well as climate change, and I think food is just a huge part of solving that. So now on to these trackers. You're at the very early stages of having more information about what's going on in our bodies. And I think that's really exciting. If you think about technology over the past 20 years, it's changed the way we buy things, whether it be consumed media or buy goods and it's changed work.

Starting point is 00:42:24 But what is it really done for health is very little. If you think about our bodies, it's still this black box. What is going on inside? And you read all these studies, but the reality is it's different for different people. Health is very personal. You look at what Apple is doing and investing their investments in health care and even Tim Cook's statements that their greatest contribution to society will be around health. It kind of sends this signal that like there is, to your point, in the next five or 10 years,

Starting point is 00:42:51 our understanding of what's going on inside of our bodies is going to radically shift. And with that information, I believe we'll be able to make much better decisions. We talked about the O-Ring. I'm a huge fan of. The simple thing, tracker around sleep, has done. quite honestly changed my life. I was actually always valued sleep and was healthy, but it's just helped me measure it. And as we know, what we measure, we manage. And I feel like I haven't gotten sick since I've had an o-ring. My productivity has gotten much better. My happiness has gotten

Starting point is 00:43:19 much better. And it's just working. I'm currently wearing a levels patch. This is super interesting. It's a continuous glucose monitor. So they've taken a diabetes tracker and built some cool software on top to help you understand how your lifestyle combination of your exercise, sleep, and diet impact your glucose levels. And glucose spikes, put simply, are really bad for you. Glucose spikes are what lead to a lot of the chronic illnesses and the weight gain that people try to avoid. When you take the combination of these things of like now actually knowing what food does

Starting point is 00:43:54 you, are you going to eat the same when you know this much? And I think the answer is probably no. And so for us, our goal is to kind of meet this convergence of health and technology and be the food platform that supplies it. So as you're able to get more information around, let's say, your levels tracker, you start to understand your personalized health and nutrition. And it comes down to the idea that it's very personal. Not only is your health personal, but your taste is personal. In this world, we've gotten really good at recommending the perfect Netflix show for you to work. watch, but when it comes to your food and your health, we have no idea what's good for you.

Starting point is 00:44:34 And so that's our vision is, I kind of put it simply, we want to create the Spotify of food. You're able to decide how you want to learn more about yourself with whatever tracker you want to use. And we will be the food plugin to say, based off of what you know, here is what you should eat. I absolutely love it. I think paired with the way that you uniquely think about a market rather than an individual box or store, the way you own direct consumer relationship, build a lot of technology. Again, it starts to sound much more like a business that happens to sell food, but is being built like the best modern technology businesses are being built. Are there any other frontiers other than those that I just sort of ticked off? The quantified self, the marketplace players, the investment in

Starting point is 00:45:17 technology, direct to consumer, all these things that we've talked about, which have been so fascinating. Is there any other major strategic area that you think about often that we haven't touched on yet that you think is important for the future, either of sweet green or for restaurants, more generally speaking? Yeah, there's a few areas. I'd say one I've touched on numerous times is sustainability and climate change. Clearly, if we haven't woken up that this is the challenge of our generation, we only have to realize that's something that we have to solve. We have a timeline in order to solve it. Food is, I believe it's about 25% of carbon emissions come from food. So we're one of the biggest categories in terms of carbon output. There's a lot we have to do

Starting point is 00:45:58 in order to get to carbon net zero, carbon neutrality. We recently announced a commitment to be carbon neutral by 2027. That should make us, if not the first, one of the first food companies to do so. But what allows us to do that is inherent in our business model, largely the fact that we partner with local farms and sell mostly vegetables. There's a lot of other things we do around packaging and building standards, et cetera, but the way we're able to get to carbon neutrality is the fact that we sell a lot of vegetables and we don't sell meat. And meat has huge impact on the environment. So I do believe that I think a carbon tax is probably likely in some way and probably should be if we're going to tackle this the right way. I do think that some of the

Starting point is 00:46:42 things that you've seen recently around the capital flows and the expectation of companies around sustainability is shifting. I think the Larry Fink letter at the beginning of this year was a transformational, like a real statement. I mean, the business roundtable has been saying it for a couple of years, but when you have the largest asset manager in the world saying we're only going to invest in companies that have sustainability initiatives, I mean, money moves markets. BlackRock can move markets in that way. ESG, you're seeing the tip of the iceberg there. So the incentive system is driving people to do the right thing.

Starting point is 00:47:19 And so for me, I don't care if it's the incentive system we want to do it to make more money or you want to do it because it's the right thing. For me, the conscious capitalism, hopefully it's both. That's something that there's going to have to be a lot of innovation around. And I hope it's not just around things like the impossible foods of the world. While I do appreciate what they do from a sustainability perspective, they're not great from a health perspective. How do you not solve one problem and then create another one? It comes down to like, Mother Nature really knows best, eat more vegetables. And you'll solve both. They're both delicious.

Starting point is 00:47:54 They're good for you and good for the environment. One of the things we haven't talked about, you strike me as just an incredibly systematic thinker. You're effectively designing a set of systems that interlock and have the customer as the North Star, if you will. There's these two phrases that you've mentioned in me before. One is add the sweet touch and one has live the sweet life, which I think are a fun place to sort of close our discussion around how you think about building this business because systems can be quite cold. The product could be quite warm and enticing. But just say a little bit about the importance of what these two ideas are and why they're important to the business to help you stand apart.

Starting point is 00:48:27 You stated two of our core values, but the one that you talked about at the sweet touch is our way of saying it's about that customer obsession and our way of saying go above and beyond to make someone's day. And whether that's a customer, a team member, it's just this power of hospitality that creates that wow moment that you go tell someone about. It's a part of our culture that we, in the early days, built our brand this way, not having marketing budgets. We realize the best marketing was word of mouth marketing. And the best way to do that was just to do something unexpected, that random act of sweetness. And so it's become an ingrained part of our culture, that extra thoughtful handwritten note, remembering someone's birthday, just going out of your

Starting point is 00:49:15 way to do something a little bit extra human in this world that's becoming incredibly less human that I think stands out more and more. The idea of lived the sweet life is often actually misunderstood. Many people think, oh, the sweet life, like, I'm on vacation, I'm partying. That's how it's used. It's not actually what it means. The idea of the sweet life is the sweet life is where your passion and purpose come together. And it's this idea of a growth mindset full of curiosity. We believe the sweet life is one in which you're continuously growing and learning. We like to foster an environment both internally and promote one externally around that continuous growth and learning environment. I love it. It's such a nice place to close.

Starting point is 00:49:58 I think the way you guys have built your business and endured through challenges COVID, I'm sure not being the least of them, to get to the scale you're at is incredibly impressive. but probably more interesting to me is where this could all go. The confluence of things that you've talked about, the big trends in the world that matter and the way that you guys are positioned to meet them is just makes for an absolutely fascinating business. And I really appreciate walking us through it. I asked the same closing question of everybody.

Starting point is 00:50:20 What is the kindest thing that anyone's ever done for you? I was thinking about this because I know you ask. I thought about it in two ways. One, I'm a new father. I have a young son. He's now seven months old. His name is Ness. It's been a transformative life.

Starting point is 00:50:35 experience, as it is probably from all fathers, has made me think so much about the sacrifice that my parents made. And it's such a reminder of like, I didn't even realize all that they did to, one, just keep me alive. You know, like keeping someone else alive is part one. And then I have a big team and leading people for many years now. And so I always think about it in terms of what I've learned from leadership. But man, what a leadership challenge. If it doesn't take everything you've tried to learn from a leadership perspective and apply it to creating a family and how you think about it's not capital allocation, it's time and energy allocation and all the things around empowerment and giving them ownership and letting them fail and grow,

Starting point is 00:51:21 like all of those same things that we use internal, like we think about and work, how those apply to building a family. That's been a huge one. And then on the more professional side, I can never forget when I was starting out. I actually read this book called Never Eat Alone by Keith Farrasi. It took it to heart where it was like stranger interviews, mentors, just like call and ask for help. And I think there's something special about when you start a business when you're really, really young. Like we were 21. There's something where I think people want to help you. You're like the underdog and people are rooting for you. I remember having felt that all along, we've come up across so many challenges. But I remember like being 20.

Starting point is 00:52:03 and like calling people further on in my career, I just like imagine how busy they were. Certain people that went out of their way to talk to a bunch of like 23 year old kids and take us under their wing, specifically two of our mentors, these two gentlemen, John Cohen and Rob Stone, who were the founders of Fader and Fader magazine as a music magazine in Cornerstone. And we had a couple restaurants in D.C. and we told them we had this vision of hosting a music festival and infusing music more into the DNA of Sweet Green. These guys are like big time music executives that have one of the most successful music agencies and magazines. They just like spent the time. They took us under their wings and they helped us create a music festival. And it was just

Starting point is 00:52:46 out of the kindness of their heart. I think they just like love to see other young people kind of doing cool things. And so I always remember that. And I try to dedicate a good amount of time to paying that forward because I wouldn't have been where I am if it wasn't for the graciousness of time that so many people gave to me along the way. Fantastic stuff. I love both answers so much. This has been such a fun conversation. Thank you for your time and for all the insight. Thank you. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quote,

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Invest Like the Best with Patrick O'Shaughnessy - Jonathan Neman - Building the Modern Restaurant - [Founder’s Field Guide, EP. 24]

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