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Salad doesn't scale like software
Sweetgreen missed its chance to address the unique challenges of building a restaurant that thinks like a tech company.
Sweetgreen debuted on the public market in mid-November to investor fanfare. Its stock price popped on day one, opening at $52 per share up from an initial price of $28. At that price, the company was worth $5.5 billion. Shares have since settled lower, valuing the company between $3 and $4 billion.
Stock price alone doesn’t determine a business’s success or even future promise, of course. But it is a signal that investors see potential in the business model for future growth — it’s why they back it with their actual dollars. The promise of future growth is also why investors backed the business in multiple rounds totaling a reported $478 million since its inception.
After one particularly lucrative round of fundraising, Sweetgreen was flush with $200 million at a valuation over a billion dollars — “unicorn status” in tech speak. An Inc. profile of the company at the time explained how its founders thought of it as a tech company, not a restaurant. It would be a refrain that followed Sweetgreen through the years, helping to define its growth story and ultimately contributing to its success. But... the company makes salads that people pay money to eat. It can call itself whatever it wants; at the end of the day, that’s a restaurant.
During its IPO, with all eyes on the company, Sweetgreen’s leaders missed an opportunity to explain — and, frankly, to own — the differences between building a restaurant business and building a technology business.
Until recently, most of what we knew about Sweetgreen the company was what Sweetgreen executives told us. Take that now-infamous Kara Swisher interview in 2018 when Sweetgreen co-founder and CEO Jonathan Neman said that the company was profitable. Or in 2020 when the company told the New York Times its revenue “topped $300 million.” After the company’s IPO filing was made public, Axios reported some discrepancies — the company was not, in fact, profitable. Further, its 2019 revenue fell at least $26 million short of the number it told the Times the year before.
In restaurant tech, unprofitability doesn’t equal doom. Just ask DoorDash! In fact, Sweetgreen’s real numbers probably would have bolstered its claim that it was operating like a tech company, optimizing for growth and scale while continuing to build the sort of brand and infrastructure required to be the ubiquitous fast food chain of the future. Without disclosing during the Swisher interview that he was talking about adjusted figures, Neman gave a statement that was misleading at best, but also untrue without proper context.
This profitability claim cast the rosy glow of success on Sweetgreen as it grew its tech-salad empire. On IPO day, a CNBC host asked Neman about the profit vs. no-profit discrepancy. Neman said he was referring to adjusted figures in the 2018 interview — the sort of math that a business uses to measure its own success. It’s common practice, but these figures are not a standardized accounting metric across companies, and they’re certainly not what the average person understands as “profit.” (The host didn’t ask about the missing $26 million in revenue from 2019. Chalk it up to a rounding error, I guess?)
I’m not privy to any internal Sweetgreen discussions, nor did I speak to company reps for this piece. But the information we’ve been given speaks for itself: Sweetgreen wasn’t profitable when it said it was, and revenue numbers reported to the press were higher than the numbers on the balance sheet, just as Axios first reported.
Ironically, by doing this, Sweetgreen was acting like a tech company. Silicon Valley has become known for its fake-it-til-you-make-it culture, with founders and company leaders inflating numbers, hyping products that don’t yet exist, or just lies by omission. There’s an actual federal trial happening in Northern California about this very thing. Elizabeth Holmes, the disgraced former leader of Theranos, a blood testing startup, has recently taken the stand in her own defense against charges of defrauding investors. The case has received an incredible amount of attention, including plenty of speculation about what it means for the future of startups in Silicon Valley with a history of “celebrating aggressive innovation at the expense of the complete and whole truth,” per one expert quoted in the New York Times.
To be clear: Sweetgreen is absolutely not Theranos, and the stakes at each business are very different. But, again, Sweetgreen is also not *just* a tech company. It’s a buzzy restaurant business with 140 locations that served 1.3 million customers in the three months before it filed IPO paperwork. The company wants to earn the same hockey-stick growth that its peers in the tech space show investors, because growth and scale and market penetration and total addressable market are the names of the games in investor-backed businesses. But salad doesn’t scale like software.
I wish Sweetgreen’s leadership had taken a moment to address this pressure. Restaurant businesses aren’t the same as technology companies, as badly as they want to be. They shouldn’t be expected to follow the same growth trajectories nor net the same returns. When external pressures hold them to the same growth or returns standards, they create seriously unreasonable expectations that — honestly — should not apply to a business trying to make healthy food for the masses.
This discrepancy played out in headlines this week from Insider and the Wall Street Journal: Insiders at Reef, the ghost kitchen company that uses a mix of parking lot trailers and brick-and-mortar locations to house its shared kitchens, say that the company’s rush to grow quickly has created literal dangerous working and food safety conditions, all while the company skirted local regulations and permitting in the name of “innovation.”
"It's a typical example of a tech company trying to run a restaurant company like a tech company," a former director at Reef told Insider.
As a restaurant / tech company hybrid, Sweetgreen is clearly aiming for the sort of big disruption popular tech companies have already enjoyed, vaulting them into infamy and indispensability. It recently purchased Spyce, a salad restaurant where the food was made by robots, and it plans to scale the tech in its restaurants to create better margins and faster service, all things that will bolster its market position.
There’s nothing wrong with shooting for the stars here — but Sweetgreen should do it as a restaurant, not a tech company. Acknowledging its trajectory, addressing unreasonable pressures, and setting a standard for responsible forward-thinking restaurant growth would be the real disruption.