Marksman Monday Update

Sweetgreen (SG)’s adoption of the “Infinity Kitchen” presents a unique opportunity to enhance the company's operational efficiency, cost structure, and customer engagement. This technology has the potential to create immense value for Sweetgreen, strengthening its competitive positioning in the healthy fast-casual space. This new technology could help mitigate labor costs, optimize the use of resources (ingredients), and drive scalability to support their expansion strategy. 

Background: What is the “Infinity Kitchen”? 

The Infinity Kitchen is a robotic kitchen system that prepares the bowls for customers. The implementation of this technology aims to improve the customer experience, reduce labor costs, and streamline operations. Customers can order via in-store kiosks or on the Sweetgreen app. The system allows employees to focus on ingredient prep and customer experience. They claim automation can produce up to 500 bowls per hour, 50% more than a traditional kitchen while reducing labor needs by about half. 

Current Status and Performance of the Infinity Kitchen

The fully automated system, based on an acquisition of Spyce in 2021, is Sweetgreen’s strategy to develop fully automated salad-making robots and shape the future of health and fast-food restaurants. The first kitchen opened in Naperville, Illinois, in May 2023. This technology is characterized by its speed and accuracy in preparing food as well as reducing labor costs by limiting the number of staff needed. Sweetgreen has also opened two additional locations, one in Huntington Beach, California and another in Penn Plaza, New York City. The success of Infinite Kitchen has been evident from its initial implementation to several months after. The kitchen just outside of Chicago (Napervile, Illinois) reported a 26% increase in restaurant-level margins over its first few weeks, according to Nation’s Restaurant News. Additionally, Sweetgreen reported that for fiscal year 2023, Infinite Kitchens experienced a 10% increase in average checks and a 7% improvement in margins. While the infinite kitchen is able to handle 500 bowls per hour, according to Sweetgreen, the demand has not yet matched this capacity. However, the CEO, Jonathan Neman, expects to expand the use of the infinite kitchen to include seven new restaurants and three to four large, urban stores by the end of 2024. Given its success in the 3 locations where it has been implemented coupled with the promise of opening in large urban areas with higher customer bases, the infinite kitchen is poised to deliver significant returns to Sweetgreen. 

Cost Control Benefits of Infinity Kitchen

Sweetgreen said on its Q4 Earnings Call Thursday that tests of its Infinite Kitchen automated system yielded improvements in throughput, order accuracy, and labor turnover. On average, tickets at those units were over 10% higher than in surrounding markets, showing how Sweetgreen is able to take full advantage of their higher prices to boost their revenue. CFO Mitch Reback noted that each Infinite Kitchen incurs an extra $450,000 to $500,000 in development costs, yet could deliver a 7-point margin increase where it's implemented. This added per-unit cost of the Infinite Kitchen is roughly equivalent to the yearly salary of about 14 full-time kitchen employees, based on the current back-of-house rate of $16.63 per hour. Neman said the automated installation has the capacity to make 500 bowls an hour, and that it hasn’t reached that level of demand in the current test markets. But Neman believes “some of the places that we’re going to be testing this year are going to be those heavy urban environments where it does have that [level of demand]. So we do expect a sales lift in those restaurants.” Incorporating the fact that physical labor will be significantly cut down within these stores as there are less people to pay wages for, Sweetgreen will inevitably outperform its current valuation as profit is bound to increase in the long run. 

Risks: What Could Make The Infinity Kitchen Not Work? 

Sweetgreen operates in the highly competitive fast-casual restaurant sector, focusing on differentiating itself through healthy food and technological advancements. The initial launch of the first Infinite Kitchen has been successful for Sweetgreen based on their earnings call and they aim to open 7 more Infinite kitchens in the year. While the infinite kitchen has seen initial success, rapid expansion of it does come with risks especially while Sweetgreens aims to expand to more rural areas in the future. With the technology being complex and the change it brings to restaurant operations, it could lead to potential problems with implementation and raises the question if Sweetgreens will successfully transition towards a completely new form of operations while expanding to new locations. 

The implementation of Infinite Kitchens also comes with high up-front implementation costs while they are transitioning to this completely new form of operations. If Infinite Kitchen does not improve Sweetgreen’s margins and does not prove to be operationally efficient it puts the company under severe risk financially. Transitioning to a completely new form of operations also brings the question if Sweetgreen can make the technology and the concept sustainable without having many operational disruptions in terms of maintenance and technological issues. The final risk comes with consumer acceptance. While a lot of consumers may take well towards the advancement, there also comes the risk of consumers preferring the traditional and

more personal approach to food preparation. The concept also has not been adopted by a lot of competitors. While it might make Sweetgreen different, it also raises the risk of any operational disturbances that could affect its consumers, especially the repeat customers it has. With the highly competitive nature of the industry, Sweetgreens would have to be very careful with implementing the Infinite Kitchen. While it does pose significant potential for success, there is a margin for risk as well.  

Bottom Line

Sweetgreen's adoption of the Infinity Kitchen offers a transformative opportunity to enhance operational efficiency, reduce labor costs, and improve scalability, potentially bolstering the company's competitive position in the healthy fast-casual sector. Early implementations have shown promising results, including increased restaurant margins and higher average checks. However, risks such as high upfront costs, operational disruptions, and customer acceptance challenges must be managed carefully. If executed successfully, the Infinity Kitchen could drive significant long-term growth and profitability for Sweetgreen.

Disclosure: At the time of this publication some members affiliated with Marksman Research own stock, options or other interest in SG.