The quick-service restaurant, or QSR, business is going through a lot of disruption. On one hand, there are restaurant chains that serve junk food and face challenges in attracting customers. On the other, there are those that serve healthy food and have a rapidly growing customer base aligned with rising health consciousness.
So it is not surprising that the industry is inundated with new entrants seeking to tap into this emerging opportunity. While maintaining quality of food and service as one grows bigger in this model is a challenge, chains such as Chipotle (CMG 0.92%) have proven it can be done.
I am usually wary of QSRs, but I visited Cava Mezze Grill recently for the first time to try out its Greek-style offerings. Like Chipotle, it has a limited menu, an efficient operation and friendly staff. I was so impressed with the food and service that I dropped a brief note to the team praising its effort and asking a few questions about the privately owned company's business strategy.
This led to a meeting with Cava CEO Brett Schulman. On a sunny afternoon, I met him at a Cava outlet that was bursting with diners. Few other restaurants in that location were only moderately occupied. There's no doubt the restaurant is extremely popular. So I started my conversation by asking Mr. Schulman what makes the company so successful.
Mediterranean cuisine is the fastest-growing food category, as our country is becoming more international and blended. The food has naturally healthy profile and robust flavors. Everything is made in-house from scratch. The menu is a medley of options to suit every taste and generation, including kids. From customers' point of view, QSRs require lower time and budget commitment. People are willing to knock off a little more from their wallet for a healthy meal.
Work culture
In restaurant industry, human capital is a key resource. The morale and attitude of employees get easily reflected in the service and directly impact revenue. Chipotle has done a wonderful job in creating an exceptional work culture by adopting a decentralized approach, paying higher wages than the industry standard and offering opportunities for internal promotion to high performers. Cava Mezze echoes the same philosophy.
Work culture is very important. I started my career working in a bank. So I grew up in a hierarchical organization. I realized that this structure is counterproductive and hinders the growth of a firm. Hence, we have kept Cava Mezze's structure flat. We explain our business model to general managers and show them what drives the [profit and loss]. We do not squeeze wages to expand our margins. In fact, we pay our employees above the industry standard. We link their bonuses with the growth of restaurant and customer service to create a coherence between our and their targets. We believe in promoting employees from within. As our firm is in growth phase, we provide great opportunities to hard-working people which inspire them to put their best foot forward. We do not micromanage. Our goal is to ensure that our employees are passionate toward their work and know that we care about them.
Performance and growth strategy
Chipotle has three pillars of success -- Food, labor and real estate. Its management has always been prudent about investing in real estate to ensure that the cash flow from operation justifies the price it pays. By saving money on real estate, the company is able to spend more on higher quality ingredients while still charging reasonable price. It has been investing everything back into the business to tap into the network effect -- a reinforcing mechanism in which as positive reviews from customers grow, the product and service look more attractive. Cava Mezze has taken the same path to establish and grow.
Our net income is positive. We are growing in high double-digits and meeting our targets. But it's work every day for us. We are investing everything back into the business. We are doubling our store count every year. But we are disciplined toward expansion. We keep an eye on real estate to identify a potential neighborhood. If we like something, we sit tight for [the] right opportunity. By saving money on real estate, we are able to invest extra cash in high-quality raw material to prepare our food. We are using our momentum to grow. However, the most important piece of setting up a new outlet is having the right team in place so that our operation does not get affected. We are working toward having a better understanding of our customer base. Right now we are focusing on opening more outlets in D.C., Virginia, and Maryland. As restaurant business has a network effect, we hope to expand at a higher rate in future. After opening 10 outlets in our target area (right now five), we will explore more places in the U.S. Also, we will not make our restaurant a franchise as we do not want to dilute our brand. That puts more responsibility on our shoulder to correctly assess market opportunities.
Going public
When asked about going public, Mr. Schulman responded:
It is not something which is going to happen tomorrow. But we certainly see that as a viable option in [the] future. Last year, we had a second round of fundraising from private market. We do not want to take more than we can chew. As we do not want to compromise on service and food, setting up a fully operational team remains our key criteria.
Foolish takeaway
Though Cava Mezze Grill is too small to threaten Chipotle, we cannot ignore its growing popularity and the network effect. The company is taking its business into the right direction, and it has all the ingredients to succeed. Since the company is not listed yet, investors will have to wait to get a piece of it. But food lovers can always go and grab a bite!
