Cava Group(NYSE: CAVA) is a Mediterranean-themed restaurant chain that just went public in 2023. And the initial public offering (IPO) was a smash hit, raising over $300 million. The shares have continued to climb since its debut, soaring to a rich valuation because investors believe in Cava's long-term potential.
And management is certainly promising a lot. As of July 9, the chain only had 279 locations, but it plans to operate more than 1,000 by 2032. This sounds like a daunting challenge for Cava to achieve, but fortunately the company has a genius solution that could help it get there.
Cava's secret weapon?
Analysts primarily talk about Cava's restaurants. Therefore, many investors may not know that the company also offers consumer-packaged goods (CPG) in over 650 grocery stores around the U.S. The CPG offerings include some of the dressings and dips it serves in its restaurants.
This is actually an under-the-radar trend in the restaurant industry. Consider that privately held Chick-fil-A started selling its sauces in grocery stores in 2020. However, its enormous brand awareness has caused this to be very successful.
As a privately held entity, up-to-date details in all aspects of the business aren't necessarily available. But Chick-fil-A sauces are made by Lancaster Colony(NASDAQ: LANC), which means it's possible to peek behind the curtain, so to speak. During Lancaster's fiscal 2020 (prior to launching sauces in grocery stores), Chick-fil-A accounted for 16% of its $1.3 billion in net sales. By comparison in fiscal 2022, which ended in June 2022, Chick-fil-A accounted for 24% of Lancaster Colony's nearly $1.7 billion in net sales.
In other words, Chick-fil-A has added over $180 million to Lancaster's net sales since launching sauces in grocery stores. The public clearly has an appetite for CPG products from restaurant brands.
How this can help Cava
Cava's CPG business is nowhere near as big as Chick-fil-A's. In 2022, the company only generated $7.1 million in CPG revenue or just 1.3% of its overall revenue. But it still has a grocery-store presence nevertheless. And that's the point I'm making here.
Whereas Chick-fil-A leveraged its massive brand awareness to find success in the grocery store, Cava hopes the reverse works in its favor. In some markets, it may have greater brand awareness in the grocery store from its CPG brands, specifically in the Chicago market -- the third largest U.S. city.
This came up in Cava's conference call to discuss financial results for the second quarter of 2023. The company intends to open its first locations in Chicago in 2024. And William Blair analyst Sharon Zackfia asked how it plans to build brand awareness in the Windy City.
Cava's management believes it already has a degree of brand awareness in Chicago based on nearly nine years of CPG sales in that city. The same could be true of new markets in the future as well.
The benefit here for Cava could be twofold. First, as an entirely company-owned business, Cava is responsible for its own marketing efforts; it doesn't get help from franchisees. Having a long-standing brand presence in Chicago grocery stores could make its growth there require less marketing spend.
Second, Cava's average-unit volumes (annual sales per location) may start higher in Chicago than they otherwise would, supporting strong profitability. Thanks to its already impressive average-unit volumes of $2.6 million, Cava just reported record profitability of $6.5 million in Q2. Starting strong in Chicago could allow those new locations to support strong overall profitability for the company.
I'm suggesting that Cava's grocery-store presence may help it get off to a quicker start in Chicago. But even if it doesn't, the company will likely still find success there in time. Same-store sales have consistently tracked higher for Cava in recent years, even jumping a whopping 18.2% in Q2. Therefore, it's reasonable to expect the brand to eventually find its feet in Chicago even if it starts slow.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
