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Build-your-own-bowl fast casual restaurants were among the top performing US stocks of 2024. Now, they have wilted amid renewed price competition from fast food operators such as McDonald’s, at one end, and fast casual dining chains including Applebee’s at the other. Slugging it out for the conscious consumer will squeeze everyone’s margins.
One issue for salad bowl chains is that investors were expecting them to keep growing rapidly thanks to a loyal client base of hungry office workers and yoga moms. Mediterranean-inspired Cava and rival Sweetgreen handily outperformed the magnificent seven last year, to reach astonishing valuations. Cava shares were changing hands at nearly 200 times forward earnings at one point late last year.
A price correction was inevitable at the slightest hint of a slowdown. Cava shares have shed a fifth of their value since Wednesday after the company said customer traffic was largely flat in the second quarter and same-store sales rose just 2.1 per cent. That’s well below the 6 per cent analysts had penned in.
Even these limp results at Cava stand out against Sweetgreen’s woes. Same-store sales for the salad slinger’s most recent quarter fell 7.6 per cent year on year. And despite selling premium salad bowls that cost more than $17, Sweetgreen remains lossmaking. Chipotle, the $58bn Mexican-inspired chain that pioneered the “slop bowl” lunch — in which customers can customise their meals with an assembly line process — reported a 4 per cent drop in same-store sales.
One reason for this dismal performance is that, amid pressure on consumer spending, fast food operators and casual dining chains are fighting back. McDonald’s and Burger King are luring inflation-weary diners with $5 meal deals. At Chili’s, a sit-down restaurant chain, $10.99 gets you a “3 for Me” value meal that includes a drink, an appetiser and an entrée.
The result is that, after four quarters of either negative or flat growth, McDonald’s reported a 2.5 per cent increase in US same-store sales in its most recent quarter. Chili’s, which is owned by Brinker International, has defied the broader slowdown with a 24 per cent rise in same-store sales. Shares in Brinker have more than doubled in value over the past year. Those for McDonald’s are up 12 per cent.
With fast-food joints on the offensive, salad chains have to fight back. One option is to increase portion sizes, which both Chipotle and Sweetgreen have pledged to do. Another is adding products. Cava is rolling out a new chicken shawarma bowl. All three are investing in salad and bowl-making robots and pressing ahead with new store openings.
Despite a 40 per cent drop in its share price this year, Cava’s valuation — at 116 times forward earnings — remains hard to swallow. Contrast with the 15 and 24 times for Brinker and McDonald’s. The salad days of the salad bowl trade may well be over for now.
pan.yuk@ft.com
Dining and Cooking