RESTAURANT INSIGHTS | Job Growth Stalls, CMG Earnings, The Sweetgreen Subscription

Facing the Freeze: The Restaurant Industry's Job Growth Stalls Amid Economic Chill

The recent trends in job growth within the restaurant industry reflect the sector's resilience and the ongoing challenges it faces in the post-pandemic landscape. While the slowdown in job growth and the benchmark revisions offer a sobering perspective, the anticipated demand for employees and the positive growth in specific segments suggest the potential for recovery for some. The following offers insight into recent trends and changes in the restaurant industry's job market:

Overview of Recent Job Growth Trends

• Recent Slowdown: The restaurant industry has experienced a significant slowdown in job growth in recent months, with a net decrease of 2,400 jobs in January, following modest increases in November and December.
• Comparison with Earlier in 2023: This recent trend departs from the robust growth seen earlier in the year, with an average monthly increase of 30,000 jobs during the first ten months.
• Potential for Future Growth: Despite the slowdown, there is optimism for continued employment growth in 2024, supported by operator surveys indicating healthy employee demand.

Benchmark Revisions and Their Impacts

• Annual Benchmark Revisions: The Bureau of Labor Statistics (BLS) conducts annual revisions, aligning monthly survey data with the Quarterly Census of Employment and Wages (QCEW). The latest revision resulted in a downward shift in employment levels for several years.
• Current Employment Levels: As of January 2024, employment in eating and drinking places is approximately at the same level as before the pandemic in February 2020.

Sector-Specific Employment Trends

• Full-service Segment: The full-service restaurant segment has been the hardest hit, with 245,000 jobs (or 4%) employment levels below the February 2020 pre-pandemic levels.
• Limited-Service Segments: Contrarily, the limited-service segments, including snack and nonalcoholic beverage bars, quick-service, and fast casual restaurants, have seen employment levels rise above pre-pandemic readings.
• Bars and Taverns: Employment in bars and taverns is also above pre-pandemic levels, although there was a downward revision from preliminary readings.

Implications and Outlook

1. Sector Variability: The data underscores the variability within the restaurant industry, with different segments experiencing divergent trends in employment recovery post-pandemic.
2. Challenges and Opportunities: The full-service segment faces ongoing challenges in recovering pre-pandemic employment levels, highlighting potential areas for targeted support and recovery efforts.
3. Continued recovery Anticipated: Despite the recent slowdown, the overall expectation is for continued employment growth within the restaurant industry, driven by sustained demand and economic recovery.
4. Importance of the Industry: Eating and drinking places are crucial for the economy, employing roughly 80% of the total restaurant and food service workforce, totaling 15.5 million.

Chipotle's Upcoming Q4 Financial Snapshot

On the horizon for Chipotle (CMG) is unveiling its 4Q23, slated for Tuesday, February 6, AMC. Market anticipations hover around a revenue forecast of $2.49 billion +14% YoY (12% in 1Q24) and EPS projection of $9.71 (+17.1% YoY), underpinned by a +7.1% uptick in comparable store sales accelerating from 5% in 3Q23. SSS for 1Q24 is 4.6%. RLM is estimated to be 24.5%, up 2.1% YoY. The only new menu item highlighted last quarter was a limited-time re-introduction of Carne Asada. No other new permanent food innovations were introduced, and the company would focus on the core menu as menu innovation is currently taking a back seat to operational initiatives like improving throughput. In 3Q23, comparable restaurant transactions were up over 4%, with placer traffic up 8%, and the data shows 7% traffic growth in 4Q23.

 

Stock Trajectory & Stock Sentiment:

Since the year's commencement, CMG is up 8.5%, eclipsing the performance metrics of the broader S&P 500 Consumer Discretionary sector and the S&P 500 index. The options market is bracing for a post-earnings stock price fluctuation of approximately 7.4%, a figure within the historical quarterly range of 5-13%.

Concerns From 3Q23:

1. Construction/permitting delays - Permits, inspections, and utility installation delays impact new unit growth, preventing it from reaching the higher end of the 8-10% unit growth guidance range.
2. California wage inflation - California's new $20 minimum wage law will significantly increase labor costs. This is estimated to add 2.5-3% inflation for the company.
3. Throughput still trails pre-pandemic levels - While progressing, peak throughput levels still trail pre-pandemic levels by 2.5-3 entrees. Getting back to pre-pandemic throughput is a priority to drive sales, labor leverage, and margins.

Focal Points for Observation & 2024 Guidance:

Critical narratives to monitor include insights into consumer spending behaviors and foot traffic patterns, the impact of digital sales and culinary innovations on growth, fluctuations in commodity prices alongside restaurant profit margins, and the specifics surrounding the expansion and development agenda for 2024.

Is Sweetgreen's Loyalty Program Too Generous for Its Own Good?

Sweetgreen's introduction of an annual Sweetpass+ subscription tier is a forward-thinking move that aligns with a potentially innovative approach to customer loyalty and engagement. By offering a more flexible and cost-effective way for customers to enjoy the benefits of the Sweetpass+ program, Sweetgreen enhances the value proposition for its loyal patrons and sets a new standard in the loyalty program landscape within the fast-casual dining industry. Will it work?

Introduction to Sweetgreen's Loyalty Evolution

Sweetgreen, a leader in the fast-casual dining sector, has significantly enhanced its customer loyalty program. By introducing an annual subscription option to its Sweetpass+ loyalty scheme, Sweetgreen not only aims to deepen its relationship with its customers but also seeks to offer more value and flexibility in how they engage with the brand.

The Annual Sweetpass+: A Cost-Effective Option

Launching on February 1, 2024, the Sweetpass+ annual subscription is priced at $100, providing a cost-effective choice for loyal customers. This pricing strategy allows subscribers to enjoy the benefits of the monthly Sweetpass+ membership but at a reduced overall cost, equivalent to paying for ten months instead of twelve.

Benefits of Sweetpass+ Membership

The monthly and the newly introduced annual Sweetpass+ memberships offer a range of enticing benefits. Members are rewarded for frequent orders with a daily $3 discount on one order, alongside other personalized offers and exclusive access to VIP brand experiences. This approach indicates Sweetgreen's commitment to fostering a closer community of brand advocates through meaningful rewards and experiences.

Strategic Marketing and Membership Growth

Michael Kotick, the Vice President and Head of Marketing at Sweetgreen, emphasizes the importance of connecting people to Sweetgreen through exclusive experiences and personalized rewards. The introduction of Sweetpass+ and its subsequent tier expansions reflect Sweetgreen's strategic approach to marketing and customer engagement. Since its initial launch in April 2023, the Sweetpass+ program has seen a 25% membership increase in the latter half of the year, showcasing its growing appeal among customers.

Competitive Landscape and Industry Comparison

Sweetgreen's multi-tier subscription model echoes a broader trend in the fast-casual dining industry, with competitors like Panera Bread also offering annual subscriptions for their loyalty programs. Sweetgreen's competitive pricing and the added value of its loyalty program set it apart in a crowded marketplace, potentially driving higher customer retention and satisfaction.

Monitoring the impact on costs and margins will be necessary. Still, the move seems strategically focused on the long term, with Sweetgreen likely betting on subscriber loyalty, leading to growth and economies of scale over time. A few considerations around potential issues/costs:

1. Increased demand from loyal subscribers could raise food costs in the short term. However, the higher volume may eventually lower costs through economies of scale; thus, Sweetgreen may be betting on long-term growth.
2. The volume of uses will be essential as food costs are variable, allowing Sweetgreen to cover basic food costs, even with discounts.
3. Not every subscriber will maximize the offer and order daily. The $100 fee likely factors in average expected order rates.
4. By incentivizing prepayment, Sweetgreen gets an upfront cash flow boost, allowing flexibility in managing any near-term food cost increases.
5. Over time, customer data and retention from loyal subscribers could hold significant strategic value beyond any short-term food cost impacts.
6. No other publicly traded company has a subscription plan this aggressive.

I also wonder what the new COO thinks about the promotion. Sweetgreen has appointed Rossann Williams as its new Chief Operating Officer. Williams was at Starbucks for 18 years, most recently as Executive VP and President of North American retail. She left Starbucks in June 2022 amid tensions over the company's anti-union push. Williams oversaw around 16,000 stores at Starbucks and was credited with improving same-store sales, opening thousands of new stores, and navigating the pandemic. Sweetgreen's previous COO, another former Starbucks executive, Chris Carr, left the role in March 2022 for personal reasons. Williams has experience leading global brands and teams at companies like Blockbuster and Toys "R" Us. Sweetgreen CEO Jonathan Neman praised Williams' proven track record of driving growth and profitability. Williams said she is aligned with Sweetgreen's mission-driven approach. Her appointment comes at a time of significant growth for Sweetgreen as it pursues its "next chapter."