What to learn from two brands dubbed 'the next Chipotle'

Cava, the newly public fast-casual chain called "the next Chipotle" by investors, and Noodles & Co., which held that title a decade ago, just reported two very different quarters that were a study in contrasts—and offer a warning for Cava.
Cava and Noodles & Company
It was a great quarter for Cava. Not so much for Noodles & Company. | Image by Nico Heins.

In the mixed bag of third-quarter earnings, two fast-casual chains reporting on Tuesday offered the perfect study of contrasts. 

First, we have Cava, the newbie to the public markets, which reported a stellar third quarter, with same-store sales up 14.1% driven by a 7.6% increase in traffic.

Then we have Noodles & Company, which reported a decrease in same-store sales of 4.3% at company-owned restaurants, driven by a 6.7% decline in traffic.

Sure, these are apples and oranges. One is all about bowls, like the seasonally returning Balsamic Date Chicken with eggplant dip, red pepper hummus and roasted corn with a balsamic-date vinaigrette. The other is about classic noodle dishes from around the world, including its most recent hit: Chicken Parmesan.

But they have more in common than one might think.

A decade ago, Noodles & Company was the darling of Wall Street after its IPO in 2013 doubled the company’s stock price and raised more than $100 million, which at the time was a big deal. 

Hailed as “the next Chipotle,” Noodles at the time was something new in a growing fast-casual world crowded with burritos and better burgers. The concept of noodle dishes from around the world offered the appeal of global flavors through a familiar vehicle: pasta. And, at least from a chain perspective, it had little competition.

Cut to 2023. Now it’s Cava that has analysts and investors excited after its IPO sent the chain’s stock soaring. Cava raised $318 million that first day and its market value came close to $5 billion. Now Cava is being called “the next Chipotle,” though CEO Brett Schulman prefers to say it is creating a new "cultural cuisine" category.

As Noodles hoped to do, Cava is also carving out a new space in fast casual with a healthful, boldly flavored and customizable Mediterranean menu, with no real competitors that have come close in unit count.

And, while it may be cruel to compare a 10-year-old public company with one freshly out of the gate, the differences in performance during the third quarter are instructive. 

Cava over the past year has been very cautious on pricing. The chain increased menu prices 3% last year and then held off on further hikes this year because the macroeconomic picture was uncertain. 

The company said Tuesday it plans to return to the historical cadence of 2.5% to 3% increase in January 2024, but Schulman said the brand is positioned to offer value at a time when guests are feeling the pressure of inflation from other parts of their life. 

“We think that’s what’s translated to the results this quarter,” he said. “And we’re leaning into next year, to continue to not only be resilient, but grow market share in the face of those macroeconomic concerns.”

Noodles, meanwhile, took menu pricing too far. 

“We do believe that we were too aggressive with price in totality during 2022, as well as early 2023,” said CEO Dave Boennighausen. In February, Noodles hiked menu prices 5% bringing prices up 13% year over year, which was blamed for dampening traffic, and that has continued into the third quarter. 

Menu price increases accounted for 3.9% of sales in the third quarter, and now Noodles is looking to take a more surgical approach to future increases, and is testing a “net neutral” price structure. That work is part of a larger overhaul of the menu in the works that will be aided by consulting firm The Culinary Edge. 

For the full year, Cava upped its guidance and the chain is accelerating growth. 

The company now expects comparable sales to grow between 15% and 16%, rather than the $13-15% projected earlier. The 290-unit chain, which does not franchise, expects to see 70 to 73 net new openings this year, and next year another 47 to 50, with an annual growth rate of 15%. Margins are projected to hit at least 24% for the year, up from 23% expected earlier.

Noodles, on the other hand, downgraded its guidance, saying same-store sales will likely be negative in the low single digits. 

Revenues are projected to total $502 million to $506 million, down from prior guidance of $500 million to $510 million. For the year, the 465-unit chain (including 92 franchised) will grow about 5% (down from earlier projection of 7.5% growth), mostly from company-owned restaurants.

Still, Noodles’ stock price was up on Wednesday, no doubt because the third quarter marked some sequential improvement from the second quarter this year. Things were bad, but they were less bad, and Boennighausen has a plan for getting the brand back on track.

In the second quarter, Noodles revenue was down 4.5% to $125.2 million and same-store sales were down 5.9% at company-owned units with traffic down 9.1%, so the third quarter marked an upward trend.

The company said it has a hit with a new Chicken Parmesan dish introduced in September, which has become a top seller—and it has particular appeal to younger and lower-income consumers as a value offering. Noodles also saw a 33% increase in rewards program sign-ups in the two weeks before the new dish launched.

Conversely for Cava, the stock price dipped on Wednesday.

The very-good-all-systems-go third quarter results were a slight moderation of even-better results in the prior second quarter. Things were great, but they were slightly less great.

And company officials made it clear that Cava’s high-flying numbers—perhaps boosted in part by a lingering “IPO halo”—are not the chain’s “normal.”

The chain will have to lap these double-digit sales increases next year, of course, which could be a challenge (though one imagines Schulman saying “hold my beer”).

And during the third quarter, Cava raised wages and rolled out healthcare benefits to part-time hourly workers, which will also impact margins, although potentially for margin-boosting reasons.

These are investments designed to position the brand for its planned growth. Cava has also implemented an “Academy” system to develop a strong network of general managers, a key role for well-functioning restaurants. Schulman would like 75% of GMs to come from internal ranks, giving hourly workers a clear career path.

Where might the paths of these two chains converge?  

With catering. Both brands see catering as a huge opportunity.

Cava is still working on the best way to do it. The company has eight hybrid restaurants with an expanded back of house to better support the increased production of catering, for example, but its also testing other formats. The goal is to launch a national program without interfering with other channels.

Noodles, meanwhile, grew its catering sales 35% during the third quarter and Boennighausen feels the diverse menu with no veto-vote is perfect as a catering option. The brand overhaul effort will focus on catering as a key pillar for driving sales.

But the point is not that these two brands are competing any more than any fast-casual brands might.

It certainly captures attention when results are good in the months following an IPO. But the real proof of a company's business model is consistent performance over time and the ability to weather the ever-shifting macro landscape.

Time will tell which chain will be the next Chipotle—a company that has certainly weathered storms of its own. And, perhaps, in time investors will be looking for the next Cava.

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