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- [Narrator] Hyper-local regional specialties, no-frill shopping layouts and updated drive-through models. These are just a few business strategies driving some of the most talked about companies today. "The Wall Street Journal" dives into the surprising tactics brands use to capture consumer attention, starting with Aldi, one of the cheapest and fastest growing grocery chains in the US, thriving by doing more with less. This half gallon of whole milk from Aldi costs $2.18, eggs, 1.87,
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bread 1.29. Aldi is the fastest growing grocer by store count in the country, and its no-frills approach has also made it one of the cheapest. For the past decade, it's been growing at a rate of about 100 stores per year, and when an economic downturn hits, it thrives. - It's about simplicity, and it's about efficiency, and it's about consistent experience all the time. - [Narrator] This is "The Economics of Aldi."
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So how does the company keep its prices so low? Take its store setup. - You walk in and the moment you step foot in our store, you can see all four walls. - [Narrator] Aldi's are typically around 12,000 square feet, about the same as a Trader Joe's, and much smaller than the average supermarket. Operating a smaller space saves money when buying the property, on the lease and on utilities. - The layout at Aldi's is as much designed for our operational efficiency as anything,
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and so, being very specific about the amount of footsteps it takes to service our store and a very limited store size allows us to operate a very efficient operation and that creates a lot of value. - [Narrator] To further its efficiency, Aldi doesn't have extra services, like a customer help desk, a fresh bakery or butcher, and its stocks significantly fewer products. Supermarkets typically carry around 31,000 products. Trader Joe's has about 4,000. But Aldi stocks about 1,600.
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Often, there are just three to five employees on the sales floor, so having fewer items and leaving them in the boxes they were delivered in means employees spend less time stocking shelves. These cost-cutting strategies are critical to Aldi's profit margin, and they're why the company is able to offer items that are cheaper than the national average. But they also serve another purpose. They help maintain Aldi's image as a discount store. Customers make compensatory inferences.
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Basically, marketing experts say when people see an item's price, they quickly make assumptions about the product. If it's cheap, they may assume it's lower quality, which is why Aldi's no-frill strategy is so effective. From the moment customers put quarters in their carts and walk into the store, they can see all the ways Aldi reduces cost. Marketing experts say these tactics all signal to the customer that milk, eggs and bread are cheaper at Aldi
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because of its efficiency rather than its quality. Though the results of its cost-cutting strategies aren't always popular with customers. In a survey of roughly 6,500 people, Aldi scored on par with or slightly lower than many of its peers in categories like store cleanliness and item availability. But there's another key tactic grocers use to aid their low cost images. Known value items. These are staple household products whose prices people often remember.
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As Aldi has expanded across the country, other grocers have reduced their prices in response, particularly on these types of items. - When Aldi comes in, it prompts other retailers to look at their prices again and kind of, you know, surgically examine how to adjust what they sell and for how much. - [Narrator] That's because when people see lower prices for staple goods, they infer that the business offers low prices all around. And when it comes to value for dollar,
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Aldi ranked highest in the customer survey at 96%. But stores can only compete on price so much without hurting their profit margins. So what does Aldi use other than price point to draw in customers? Its private label items. 90% of Aldi's stock is private label. Like its other strategies, this reduces cost for the company. - We take all of our buying power and we put it into the seven most popular or common salad dressings that a customer might buy.
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That allows us to deal directly with manufacturers and make sure that we get the best cost price. - [Narrator] Analysts say that Trader Joe's uses private label items to differ from competitors by creating items that customers can only find there, like its Ube Mochi Pancake Mix and Butternut Squash Mac and Cheese. But at Aldi, you'll find private label items that look quite similar to the most well-known national brands. Instead of Wheat Thins, Aldi has Thin Wheat.
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According to analysts, this is because Aldi wants customers to think they're essentially getting the same product but at a significant discount. - There was a time when the perception was, you know, they're generic brand and, you know, they're just cheaper, but not as good as the national brands, and those days are over. - [Narrator] As consumers felt the lasting impacts of inflation, sales of store brand products increased. From 2018 to 2022, there was a 34% increase
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in industry-wide private label sales totaling more than $57 billion.
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- While some other grocers might have private label offerings, this is the existence of what we do. - [Narrator] Aldi has thrived during recessions. The 2008 financial crisis sparked its growth and decision to add around 100 new stores per year. - What was really interesting is we never lost any of those customers. And as the economy improved and we had a really long run of economic improvement, Aldi grew throughout that entire period of time.
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- [Narrator] And now as inflation drains Americans' wallets, Aldi continues to grow. - In the beginning, that was sort of their target audience, people who, you know, wanted bargains and wanted to buy food for low prices. But in recent years, I think they've really expanded that audience to also go after people who want convenience shopping, who want the necessities and wanna be in and out of stores. (whimsical music) - [Narrator] Meal kit companies set out to disrupt
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grocery stores and change the way we cook at home. Now, there's 382 of them in the US, almost a 3,000% increase from a decade ago when there were just 13. Despite industry-wide growth, the meal kit model faces an obstacle. You. Of all the people who tried one of five major meal delivery services in 2022, about 90% canceled their subscription by the end of the year. - Human behavior is very fickle, especially when it comes to food and beverage. - [Narrator] And now Blue Apron,
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one of the earliest players, is selling. This is "The Economics of Meal Kits."
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This graph shows the share of sales in the US between the major meal kit companies in 2022. Sunbasket and Marley Spoon Inc. have 2% and 3%. Blue Apron and Home Chef took 6% and 12% while HelloFresh and its subsidiaries ate up 78%. But no matter their size, many of these companies use the same key ingredients to find and keep customers: price point, convenience, and variety. First, get the customer. Meal kit companies focus a lot on the price per meal.
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- [Participant] Here's how I make fancy meals for under $5. - [Narrator] Get a $1.49 per meal. - Our biggest competitor are the offline grocers. - [Narrator] Which is why HelloFresh and Home Chef say it's cheaper to buy meal kits than to buy groceries. - Wherever you source the ingredients to do home cooking from scratch yourself, that's our competition in some way. - [Narrator] But what makes that possible? - It's all about economies of scale.
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- [Narrator] Brian Choi has done market research on the food and beverage industry for 15 years, and he says that when it comes to keeping prices low for the consumer, grocery stores have an advantage over most meal kit companies because of the volume of product they handle daily. But similarly, the meal kit companies that are best positioned to offer the lowest price point for consumers are the biggest ones, like HelloFresh. - Economies of scale allow us to get better pricing
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to get a better margin on the product and then to reinvest parts of that margin either into a better customer experience or into lower pricing, - [Narrator] Which means that at times the company can compete on price with grocers, but on a per meal basis, buying the ingredients yourself from a grocery store still tends to be cheaper, especially considering that you can always buy fewer ingredients or go for cheaper options, whereas the minimum you could spend on HelloFresh
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and Blue Apron in a week is $60.95. $12.49 cents per meal, at least before discounts. - It's sometimes hard to get people over the purchase barrier. That's why incentives are a key part of our marketing or growth playbook. For every dollar that we spend on getting that group of customers, it takes us about six months to actually earn that dollar that we invested back. - [Narrator] Which makes the next step all the more important: keeping the customer. These are the customer retention rates
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for the same five meal kit companies in 2022. In less than a year, they all lost the vast majority of the new customers that bought their first meal kits in January. One possible reason everyone drops off: the discounts. - They're doing their own mental calculus. They're like, "Wow, $12 meal is very different from the $4, you know, based on the promotional rate." - [Narrator] When you introduce a product to someone at a severe discount, you may get more people
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to try it, but when the discount goes away and they have to pay full price, it may not be worth that new price to them. - One thing about the American consumer is they don't like dramatic change in prices. - [Narrator] So how do companies get retention rates up? One way is to offer the discounts again and hope that they entice customers to return, and another is to add more convenience and variety. - The biggest value proposition is the convenience.
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- [Narrator] The big thing meal kits offer to consumers is a convenient way to cook at home. They ship to your door and give you pre-portioned ingredients for relatively simple recipes. - But when you stack that versus the other options that are available for consumers, the collective value proposition has diminished significantly. - [Narrator] With restaurants and grocery stores offering delivery to your door, it's hard for meal kits to offer a unique convenience to customers
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and getting pre-portioned ingredients may be more convenient if you want to cook for yourself, but Americans only cook an average of 4.5 meals at home per week. But companies across the meal kit industry are expanding their offerings, and one of the common ones isn't a meal kit at all. It's just pre-made meals. - [Announcer] Factor has chefs cook meals for you and then they deliver them fresh to your house. - [Participant] They have oven ready meals with everything included
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and fast and fresh meals that can be done in 15 minutes. - As you grow your customer base and you grow your assortment, you also tend to give customers a lot more choice. - [Narrator] And more choice means you're more likely to get customers to spend more with your company. But it's yet to be seen how much these new offerings will increase retention rates across meal kit companies. Plus, retention rates aren't everything. Looking back at this chart, Blue Apron sits slightly
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above the rest, which Choi says may be because it offers slightly more options and customization. But Blue Apron's revenue has declined greatly since 2017. Then, there's profit. Both HelloFresh and Blue Apron got off the ground by raising hundreds of millions of dollars in funding. In 2017, they both went public. Then their paths split. Blue Apron's revenue has slowly declined with just a slight increase during the industry's pandemic boom. HelloFresh, on the other hand,
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has been consistently profitable since 2017. Looking at its revenue, you see constant growth, even after the pandemic shutdowns ended and people could eat at restaurants again. - Once you establish yourself as the leader in that space, it becomes very, very hard to be disrupted because you need to solve a lot of complex problems over and over again to get to that position. - [Narrator] While both faced stark drops in their share prices,
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the New York Stock Exchange threatened to de-list Blue Apron after its stock dipped below a dollar. The company shifted to an asset light model, scaling down and offloading many of its operations to another company. Then it announced its selling to Wonder Group, a food delivery startup, and returned to being a private company. Another key step is to differentiate. The barriers to enter the meal kit industry are fairly low, which is partly why there are so many meal kit companies today.
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- But the barriers to scale and build a big business are actually really high. - [Narrator] And why it's important for each one to stand out if it wants to survive. Take Methodology, a small meal delivery company that started in 2015. It doesn't offer meal kits at all. Instead, Methodology sends out four or five days worth of pre-made meals with ingredients you're less likely to find in other kits like, nopales cacti and purslane. - Our audience is basically who I was
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when I started the business. They're really time starved, so they don't have time to cook healthy meals on weeknights. And as far as their incomes, most are making in the several hundred thousands, if not more than that. - [Narrator] Most other companies compete at a price point around $8 to $15 per serving without discounts. But Methodology costs around 17 to $30 per meal. - Our sweet spot actually is men who live on takeout 'cause they're already doing it three to four times a week minimum.
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They're spending 35 on average per meal. - [Narrator] And it doesn't offer discounts at nearly the same rate as the other companies. The average discount for Methodology kit is 10% off a customer's first week. Nguyen says this model has allowed the company to be profitable from year two. - We have customers who have spent over $100,000 with us because we really are a lifestyle for our target customer. - We're operating in one of the largest consumer categories out there, which is food at home.
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So in my view, a large category will always attract sort of like new business models, new entrants in the category and so on. - [Narrator] Grand View Research forecasts that the revenue across the US meal kit industry will reach $64.27 billion by 2030. - Do I believe the numbers? I think they're probably a little bit too optimistic. - I don't know what the food industry will look like in five or 10 years, but I do think that we can play a really big role
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in shaping the future of the food industry. - I think in 10 years we'll probably see one or two major players in the industry still operating in that space. I'll also expect to see some companies that have gone bankrupt or acquired by some of the larger players.
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- [Narrator] This Sweetgreen salad starts at 14.95. Add avocado and it goes to 16.95. But even as it's sold millions of these bowls to customers, Sweetgreen has been losing millions of dollars a month. With over 200 locations, Sweetgreen is a fast casual restaurant trying to broaden the fast food market to include salads made with fresh ingredients. But building the infrastructure and logistics to accomplish this goal hasn't come cheap. - We're not that fancy yet.
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- They've always sort of branded themselves as a tech company, and so they talked a lot about changing the food system. At one point they said that they wanted to be the McDonald's of better eating. Now, they've had to translate some of those lofty ambitions into reality and that's challenging. - [Narrator] This is "The Economics of Sweetgreen."
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Sweetgreen brought in hundreds of millions in investment before going public in November 2021. In an SEC filing, it reported having about 1.35 million active customers. After its IPO, its stock surged to bring the company's value to over $6 billion. - I'm obsessed. - [Narrator] But its market cap has since fallen to almost 1/4 of that. While individual Sweetgreen locations are profitable, the company has struggled to overcome high overhead costs. In its last quarterly report,
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the company announced net losses of more than $27 million. - [Employee] Hi, what I can get started for you? - [Narrator] The company's costs begin with its salads. - There's a few things that drive the cost off of what we do. We buy really, really high quality food from farmers we know and trust. - [Narrator] Most restaurants source their food through distributors which give them access to a wide range of food at low prices. And on top of that, these distributors handle
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the transportation logistics. Sweetgreen, on the other hand, works directly with farms. Another major cost is labor. Sweetgreen has staff assembled meals and also do a significant amount of food prep. - Most restaurants process their food centrally and ship it out around the country. In order to maximize the taste and the freshness, we believe food should be made closer to where the guests are eating their food. So we actually make our food every day in our fresh prep kitchen.
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- [Narrator] Beyond restaurant level expenses, Sweetgreen has also put a lot of money into technology. - We've built out from just having a pickup channel to building our own native delivery, partnering with some marketplaces and even building catering and our outpost business. We've also been able to integrate machine learning and AI in order to personalize a lot of the recommendations that we give you as well as things like our loyalty program. - [Narrator] Sweetgreen hasn't just built tech
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for customers, it's also built apps for employees to plan out how much food to make at different times of day so food is fresh but ready when they expect customers. - I would say that the founders are trying to be more disciplined now. They've also earned a lot in stock compensation and I think there is certain amount of tech alignment thinking there, but, you know, they are coming down to earth a bit and trying to trim expenses where they can and try to become more efficient.
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But, again, it's gonna take time. - [Narrator] The question is how to do that without changing the parts of the business that customers care about. - Our path to profitability in a net income basis comes from a few lovers. The first is continuing to grow our footprint. This year we're opening about 35 new restaurants. Second is growing sales in existing stores where a huge portion of that increase goes to lifting the profitability of those restaurants.
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The third is being very disciplined on our cost structure to make sure that the incremental profit we're making is flowing through the bottom line. - [Narrator] Sweetgreen has closed some restaurants in cities like Boston and New York. It's also had some layoffs. - One of the challenges for the business has clearly been the pandemic and the recovery from the pandemic. - [Narrator] In 2019, Sweetgreen stores were concentrated in urban centers, but recently it's been focused
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on expanding outside cities. - I think we're going to continue to build out in the markets that we currently operate in and looking to open up one or two new markets a year for the next several years. - [Narrator] Sweetgreen recently hired two former Chipotle executives to help make its menu appeal to a wider range of customers, especially as it expands past major cities. That's important because its path to profitability centers on having enough profitable restaurants to offset overhead.
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To make each restaurant more profitable, it's also counting on increasing loyalty and leveraging technology. Sweetgreen has experimented with loyalty programs for years and its most recent effort is something called Sweetpass. There are a few tiers in the program. In the paid version of Sweetpass, customers pay $10 per month to get $3 off one salad per day. So a customer would have to spend at least $40 on salads per month to come out ahead. - In general, restaurants are really pushing
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these loyalty programs because it makes a lot of sense to try to get someone hooked. You know, it's harder to advertise to a new customer than it is to try to just keep current one coming. But, you know, if you're going to eat that every day for lunch, that is gonna add up. - [Narrator] Sweetgreen hasn't shared how many people have signed up for its loyalty program, which it still considers a pilot. Another key strategy moving forward is automation. In 2021, Sweetgreen bought Spice Food Co,
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a startup that makes automated food assembly lines. And earlier this year it opened its first so-called Infinite Kitchen in Naperville, Illinois, where salads are assembled robotically. That enabled it to hire 1/3 fewer staff without sacrificing efficiency. Sweetgreen plans to continue rolling this out to new locations and hopes to retrofit an existing location in late 2024. - Probably the biggest improvement for our customers is much faster throughput. Typically, you can order your salad
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and have it ready in under three minutes, even in a very busy store. - We believe what this will allow us to do is provide a superior economic model. This will significantly impact and improve our unit economics, which will allow us to continue to scale in a profitable way and over time may even give us some pricing power as we think about creating healthy food that is truly accessible for everyone. - [Narrator] Sweetgreen has made some progress towards profitability.
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Last quarter the company announced it was profitable for the first time. Though this comes with some qualifications. Sweetgreen is only profitable based on a measure called EBITDA, which excludes a variety of costs such as taxes, acquisition costs, restructuring costs, and stock-based compensation. It's a measure that's popular with tech companies, but doesn't follow generally accepted accounting principles. - It's a pretty heavy list of things that aren't included,
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but by doing this, I mean they can say that they just had their first profitable quarter, which is in Q2, and they wanna show some progress to investors and I think that does show a certain magnitude of progress, but it's not all the way there. - [Narrator] The company though is confident that it can become a national business based on three things. It creates a new category in the market, has capital to expand, and maintains a loyal customer base.
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- We see Sweetgreen as having all three of those ingredients as we move forward. - You know, I think there will continue to be challenges as we scale, whether it be how we scale our supply chain, how we scale our technology, how we scale our leadership, but I think the big thing is proving that this type of offering can work all around the country. - I think they're pretty honest that they're trying to become a more mature business now and, you know, for a young company
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founded by young founders, that makes sense that that's a little bumpy.
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- [Narrator] Shake Shack has always made it clear, it isn't fast food. Everything is made to order and that customization means customers have to wait. But as Shake Shack expands, it seems to be taking a lot of ideas from fast food. It's building drive-throughs, adding rest stop locations and installing ordering kiosks. As Shake Shack tries to compete in spaces traditionally dominated by fast food,
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it's got to speed up operations because many customers expect to get their food quickly. But this is a major challenge for a company built on a guarantee of fresh cooked meals every time.
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This is "The Economics of Shake Shack."
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Long lines have been part of Shake Shack's DNA from the beginning. - When they first started this popup roadside hot dog and restaurant stand in Madison Square Park, there was lines, so it really had this kind of cult vibe around it in New York. - [Narrator] But as Shake Shack continues to expand, it has to speed up. - We want it to be a little more convenient, we want to be a little more consistent on our speed and our execution. - [Narrator] A big part of this initiative is drive-through.
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That's been a major priority for Shake Shack since the pandemic dampened walk-in business in some of its main markets. Shake Shack has opened more than 30 drive-through locations in the past few years, and it's planning to build about a dozen more this year. - Have a good one, alright. Take care. - [Narrator] Drive-throughs can be significantly more profitable than dine-in service because customers cycle through the restaurant faster and they do big business.
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McDonald's, for instance, does about 70% of its multi-billion dollar US business from drive-through. - They can be very efficient, you can do a lot of sales quickly. There's not the expense of maintaining a dining room in the same way, so you really save in certain ways. Particularly, if you can get the volumes of people who are able to go through your drive-through at peak. - [Narrator] This has led lots of companies to get into the drive-through business,
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and they compete fiercely over wait times. Taco Bell, for instance, has a four-lane drive-through outside Minneapolis with dedicated pickup points for mobile orders and delivery drivers. Chick-fil-A has used so-called upstream ordering for years where staff come out with tablets and take orders in person. That avoids a bottleneck of customers waiting to reach the menu board all to save precious seconds. According to Mystery Shopper data, Taco Bell
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and McDonald's drive-throughs had total wait times of about four to seven minutes, which includes the time you're waiting to order, ordering, paying, and then receiving the food. Shake Shack doesn't disclose wait times for its drive-throughs, but it's said on past earning calls that just filling orders typically takes it around six to eight minutes. Decreasing wait time has been a major initiative for the company. - We do a couple of things a little bit differently
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in our drive-throughs than we do in our restaurants. It's not compromising the cook fresh, but it is really on the technology side. - [Narrator] They start cooking orders as soon as customers place them, rather than waiting until they pay. - Hello, how are we doing today? - [Narrator] Similar to Chick-fil-A, they sometimes send staff to bus orders. Maintaining a premium feel is important to justifying its prices. Shake Shack is middle of the road for a fast casual restaurant,
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but much more expensive than fast food. - It is a tension that we battle every day between speed and cook-to-order food. We can't compete on speed because we want to cook our food in a certain way. But we can certainly emphasize our hospitality and certainly delivering on the high quality of the product. - [Narrator] They've also done time-motion studies to maximize efficiency in their kitchens. - We've been working on a bunch of different ways of how we're flowing food throughout the kitchen
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to really optimize and reduce the number of steps that our team members have to take. For example, we used to wash and cut all of our lettuce in house. We've then transitioned to precut lettuce, so now our team members focus on, you know, making sandwiches and not having to sit there in the back of the house and cutting up and washing lettuce all day long.
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- [Narrator] Shake Shack operates most of its own restaurants, but it's increasingly relying on licensed locations as it expands internationally at the rest stops, stadiums and airports. That means it selects outside companies to partner with, and those companies pay fees to Shake Shack. That's been a major driver in Shake Shack's rapid expansion. Shake Shack opened its first permanent location in 2004. Its sales pitch to customers emphasized fresh ground antibiotic-free beef,
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and it was founded by fine dining leader Danny Meyer, known for his restaurants like Eleven Madison Park, which gave it cachet. It's now a $4 billion company with over 500 locations around the world. The company says its international locations have also helped to develop new products, particularly limited-time offerings. - We learn a lot from our licensed locations. Even our Chicken Shack sandwich was actually born out of the international licensed business
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for our Shacks that did not serve beef. We also had locations that had kind of more of a regional flavor profile, like the Korean fried chicken sandwich that we brought over here. - [Narrator] But operating at this scale with fresh ingredients and a premium experience has challenges. - It's important for them still to be premium and have that vibe. I mean, people are paying more for Shake Shack than they would at Burger King, and so you have to believe that the food's better
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and the brand's better. - [Narrator] Shake Shack's had to invest significantly in data operations so it doesn't order too much or too little food. - The ability to get a sales forecast very, very tight really sets the tone for how the profitability can be at that location and across your entire fleet, means that your waste is within control and that you're not selling out of items and you're able to meet guest demand. We're not having to make decisions on a particular menu item
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which might have a negative impact, we're literally just getting smarter at our operations. - [Narrator] Shake Shack has ambitious expansion plans led by its new CEO, who brings experience growing major chains in the quick service restaurant industry. Over Rob Lynch's time at Arby's, first as CMO and then as president, sales grew over 20%. At Papa John's, he helped the company recover from a significant slump and opened hundreds of new restaurants, though the chain has been lagging recently.
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- It's challenging to take a homespun New York City brand or any brand that's, you know, grew up in a certain geography and push it out nationally. I mean, the company is really working now to try to be more efficient, to try to make its restaurants run better, and they are having some success. But I think the real focus on Shake Shack now is can they keep running these restaurants profitably and to continue to grow. (gentle music)
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- [Narrator] Fast casual chain Cava has turned Mediterranean dishes into a nearly $4 billion business. But most of its growth came from an uncommon strategy: buying a competitor quadruple its size and converting all its locations into Cavas.
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- I like to say I went to bed running about 70 restaurants and woke up running over 250 restaurants. - [Narrator] The strategy turned Cava into the country's biggest Mediterranean restaurant chain, leaving many to compare it to where Chipotle was a decade ago. Its success depends on how long the Mediterranean diet can remain popular. The company says it's using lots of customer data to strategize where to open new locations, but now that Cava can no longer rely on an acquisition
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to scale up, how can it continue to grow at such an ambitious pace? - Growth takes time. It's expensive. It's variable, and I think that's a little bit of coming down to reality. - [Narrator] This is "The Economics of Cava."
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Cava has been rapidly expanding for years. - Cava really likes the suburbs. They really see potential there and some of those communities probably don't have other Mediterranean food options or readily, you know, marketed to them options that they might seek out. - We've built a really robust real estate model that includes demographic and psychographic analysis, and we then use mobile analytics to understand where our guests are coming from, where they're going,
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and then kind of create a DNA of our guest base, and then heat map that DNA across the country to then show us where we have the highest likelihood of success. - [Narrator] In 2018, Cava bought Zoe's Kitchen, another chain of fast casual Mediterranean restaurants, for $300 million. At the time, Zoe's Kitchen had 261 locations, compared to Cava's more than 70. But Zoe's Kitchen was burning through cash. - It was a melting ice cube and we didn't want it to turn into a puddle.
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- [Narrator] Zoe's Kitchen, Shulman said, had lost its identity, serving as a cautionary tale for Cava. - I think over time Zoe's had lost its focus, it had added many menu items. I think the consumer was kind of confused as to what the brand really stood for and what their core competency is, versus at Cava we're really about these modern Mediterranean flavors. 38 ingredients, very simple, focused operation. - [Narrator] Most of the new restaurants Cava opened
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from 2019 to 2023 came from converting existing Zoe's Kitchen locations. This meant Cava could scale faster and at half the cost of building new restaurants from scratch. - When we looked at the Zoe's real estate portfolio, we saw many sites across the portfolio that we would love as a Cava site that we felt was really underperforming its potential. So we felt like this would be a way to rapidly expand our brand in a part of the country we were trying to enter into
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and we could do it in a much faster way than if we were trying to source these deals one by one. - [Narrator] Cava converted its last Zoe's Kitchen in October 2023, which means that now it has to build new locations from the ground up. Cava is currently in 24 states plus Washington, DC, and it went public in June 2023. As it looks to grow, it hopes to capitalize on the rising popularity of the Mediterranean diet, which it hopes to appeal to a broad range of customers across the country.
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Right now, only 1.4% of US restaurants primarily serve Mediterranean cuisine. In its last quarterly report, Cava group reported a net income of $6.8 million with a restaurant-level profit margin of 25.1%. Cava is now the largest Mediterranean style restaurant chain in the country. But is it the next Chipotle? - Chipotle was really taking Mexican nationwide in a very unique way that's an assembly line style of creating burritos and bowls. And Cava is seeking to take Mediterranean food nationwide
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with also kind of more of an assembly line, fast casual style of service. But Chipotle was getting going when fast casual really was barely a blip, so there was a lot less competition then. Cava has a lot more competition now. - [Narrator] Whether the restaurant succeeds may largely depend on whether customers continue to seek Mediterranean food. - Mediterranean has gotten a lot of good buzz, right? It's seen as healthier, it's good for the heart and, you know, overall body.
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That said, it's still new. Harissa, tahini, falafel, for a lot of communities these are still new kinds of foods and that's still a question mark. Do people want to eat this day in and day out as opposed to just trying it? - [Narrator] As of October 2023, Cava finished converting all Zoe's Kitchen locations into Cavas, but it's told investors that it will continue growing its number of locations by at least 15% each year. - I think the biggest question is can they grow in the way
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that they've said that they're going to for their investors and do it organically. Now they have to open their own sites, find their own sites, make sure the sites are good, be able to afford paying for this real estate and construction costs and other costs. - [Narrator] It plans to open at least three restaurants in Chicago, which will be its first major foray into the Midwest. It's targeting 47 to 50 new restaurants in 2024 with locations based on a significant amount of customer data.
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- I think restaurants are a blend of art and science, and so we love the science part and understanding how do we use data to inform our decisions. So it gives us great visibility into being able to take this brand to the 26 states we're not in today and to go broader and deeper in the 24 states we already currently operate in. - [Narrator] But it's a difficult time to be expanding a fast casual restaurant. The economic slowdown has led to many restaurants struggling
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and while chain establishments are better positioned than independent ones, the market is saturated. Despite this, Cava is planning for 15% growth in store numbers next year. - If you look at where US-based restaurant chains are now, I mean, Wingstop, which is mentioned as the big growth engine is something like you know 11%, and I believe Cava is projecting even more. So they have grown very quickly and they've really promised more growth at a very high rate,
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and so investors are gonna be looking for those numbers every year. (gentle music)
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- [Narrator] Rice balls. - [Customer] Look at that. Michelin type of ramen. - [Narrator] Collaborations with famous restaurants like Santouka. Milk tea. This is 7-Eleven in Japan. But in the US the company is more known for Slurpees and hot dogs. - It's just not as appealing. My perception is people go in there when they need to. - [Narrator] The world's largest convenience store chain has over 13,000 locations in North America alone and made over $72 billion in sales last year.
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But now it's working to bring more Japanese inspiration to its American stores. Convenience stores have historically made their money selling tobacco and gas. But now as cigarette sales continue to decline and many expect gas sales to slow, many are racing to find other sources of revenue and doubling down on food. But shifting a business this massive is a major undertaking. This is "The Economics of 7-Eleven."
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7-Eleven started as an American company, but it went bankrupt twice. Once in 1932 during the Great Depression and again in 1990 as it struggled with debts. - 7-Eleven is now owned by a Japanese company, Seven & I Holdings. - [Narrator] A majority stake was bought by Ito Yokado, a Japanese supermarket chain that had been operating 7-Eleven stores in Japan for more than a decade. From the beginning, the Japanese owners said American 7-Eleven, both its central operations
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and its franchises, had a lot of catching up to do. - The Japanese model was a lot more data driven. They would pour over what sold well at what time of day, break it down by gender and age and use that to inform their next order decisions. The American system just wasn't as sophisticated as that. - [Narrator] There were some major differences between US and Japanese 7-Elevens. The US stores were typically larger and attached to gas stations. The Japanese stores didn't sell gas,
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but had a much wider array of fresh food. Japanese stores only stocked items that would sell quickly. They had a proprietary distribution system that made multiple shipments to stores every day. Orders were customized by store based on sales data, demographic trends, and local weather forecasts. American 7-Eleven stores were getting two deliveries per week and some items were never being purchased. When American operators began counting items
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in their stores, some found that 40% of their products were selling less than one unit per month.
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Now American 7-Eleven has its own distribution system where franchises place orders every day based on company recommendations of what's selling nationally and regionally and their own store data. - They're making decisions every single day on what they're going to order, based on what they understand the customer wants to purchase, what new items are going to be made available. - One of the most interesting lessons that we've learned from 7-Eleven Japan
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is their approach to operations and to retailing, which they call tanpin kanri. And tanpin kanri is basically this idea that we localize our assortment to the needs of customers. We actually help our stores localize their assortment so that they have the right balance of a consistent assortment of products that consumers and customers would expect to see nationally, as well as items in the assortment that are perfectly appropriate for a given store's location.
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- [Narrator] This is especially important when it comes to food. 7-Eleven Japan is known for its wide array of meal options. - You're not gonna believe the choice of food in a convenience store. - [Narrator] American 7-Eleven also has a big food and beverage business. In total, it sold over $17 billion of food last year, about 24% of its overall sales. That included 315 million cups of coffee, 153 million Slurpees, and 99 million slices of pizza. But next year it hopes to make 1/3 of its sales
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from store brand goods, including food, up from less than 1/4 in 2022. That's particularly important given shifts in the convenience store industry. - So if you think about what convenience stores sell, there's fuel, there's tobacco products, and there's food and snacks. Gas is already a low-margin business and it's at risk long term if electric vehicle adoption increases over time. Tobacco very profitable, but people are smoking less. Food though is a category
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where demand just isn't going away. So for convenience stores it makes sense that they would wanna double down on that. - [Narrator] 7-Eleven currently has 17 so-called commissaries around the country that make food for all of its US locations. Now it's working on upgrading them. It's partnering with Warabeya, a supplier for 7-Eleven Japan, to spearhead the effort. Warabeya's new factories in Hawaii, Texas and Virginia can make a wider and more localized
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range of food than 7-Eleven has been able to stock in the past. - Things like being able to cook rice en mass, new protein capabilities, all which helps 7-Eleven introduce new types of products in the food area to our customers. We recently launched a product that's a spicy miso ramen soup, not something you would typically think about being sold at a 7-Eleven. - [Narrator] It's adding a lot of items to its menu. The main question is how many customers will buy them,
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and this is where data comes into the question. - When customers come into our stores, they're in an immediate consumption mindset. - [Narrator] Capitalizing on this is a key priority for the company, and it plans to use its massive data operation to do it. American 7-Elevens monitor daily sales and for loyalty members, they collect demographic information on who's buying what. The company's loyalty program has 95 million members. Building on that, the company's investing
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in targeted advertising on screens and TVs throughout stores. That's to spur impulse buys. - It helps not only 7-Eleven, but also our advertisers, our vendors to target our customers at the point of purchase. So for example, in the morning we may target our customers with a message around a hot cup of coffee and a donut, whereas later in the day we may target our customers with an advertisement that's around a snack and a beverage from our cold vault. - [Narrator] And for potential customers
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who aren't at the store, there's delivery, the fastest growing part of the company's business. It's highly profitable for the company since delivery orders tend to be for about double the amount of in-store purchases. - How the brand's grown for nearly 100 years starts with what's the customer want, where do we think they're going and how do we meet them where they're going. - [Narrator] A big question is whether American customers will match the enthusiasm 7-Eleven sees
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in some of its other markets - In Asia, I think there is so much excitement around convenience stores and the types of food and snacks they offer. So if they can bring even a little bit of that excitement to the US- - [Customer] We're gonna get some Musubins. - That would be a great success.
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♪ Breaking the law, breaking the law ♪ - [Narrator] This isn't what it looks like. These kids aren't cracking open beers, they're hydrating. With Liquid Death, a water brand that ditched the serene mountain springs for skulls, punk rock and viral chaos. What started as a joke, marketing water like booze, has evolved into a company with a $1.4 billion valuation, and it's all built on one simple idea: making the plainest drink in the world feel rebellious.
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- The success of the bottled water industry is really the success of the marketing industry. (energetic punk music) - [Narrator] This is "The Economics of Liquid Death."
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These are some of the top luxury bottled water brands in the US. Evian highlights its water's journey from the French Alps. Smartwater markets its vapor distilled H2O with added electrolytes, and Fiji emphasizes its aquifer and pH level of 7.7. Liquid Death has none of that. - The traditional marketing strategy for bottled water as a premium product was all about purity. - [Narrator] And that strategy has a lot to do with the distrust of tap water. Experts say 59% of American water users think
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that bottled water is safer than tap. - Bottled water brands are just sitting back, you know, they don't need to do anything. This distrust is out there and people are buying this water. - There's not really anything that's incredibly different about our water or our products, but there really is nothing incredibly different of any product almost anywhere. It's all just brand differences and packaging differences and that's why people buy things. - [Narrator] Liquid Death's CEO Mike Cessario
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wanted to compete with luxury brands like Fiji and Evian. - We're premium, you have to be, but we don't wanna be far and away the most expensive thing on the shelf. - [Narrator] To target a consumer willing to spend money on luxury water, the company focused on differentiation. - We've seen it as an aspirational product, we've seen it as a kind of Goop-esque health product, but we haven't seen it as this like counterculture product. (energetic punk music) And that's just enough
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for someone when they're passing the water aisle to do a double take. And even those matter of seconds when it comes to consumer marketing, those ar seconds that marketers will spend millions of dollars trying to buy from you. - [Narrator] Thanks to that identity, the company didn't have to spend millions on ad agencies. Instead, it relied on going viral from the very start. - Liquid Death, especially in the beginning, relied a lot on organic marketing.
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You're basically cutting out millions of dollars in distributing your ads. - [Narrator] This paved the way for a move into physical retail, like grocery stores, convenience shops and bars. - A really good thing of distribution that they've done is getting into bars quite early on. You know, we don't really see that so much with the newest soda brands, for instance, which prioritize retail and wholesale. - [Narrator] The company targeted audiences in places
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where it would want its hands photographed and shared. A 2021 partnership made Liquid Death, the exclusive water sold at Live Nation concerts nationwide. - So many people have told us, yes, the first time we ever heard of Liquid Death or saw it was at a festival. And then eventually you have to imagine those people then see our marketing elsewhere or the next time they're in a store like, "Oh, there's that water that I had at the concert."
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- [Narrator] In just a few years, Liquid Death has become one of the most followed beverage brands worldwide, outpacing luxury water brands and trailing energy drink giants, Red Bull and Monster, and the company has secured distribution in 113,000 retail locations in the US and UK. With retail scan sales rising to $263 million in 2023, a nearly 140% increase from the year prior. - Now we've got a lot more sophisticated. We can target specific kinds of people with social,
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geo targeted around a specific store. Hey, within a 10 mile radius of this store, we can reach these people and try to give them a specific offer or a reason to go into that store and purchase and be able to track that. - [Narrator] But Liquid Death's competitors aren't necessarily just other bottled water brands. It's also targeting competitors like non-alcoholic beers, better-for-you sodas and functional beverages. - What they're trying to be is a beverage company.
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- [Narrator] A year after the original Liquid Death launched, the company started selling sparkling water. Almost two years later, it introduced flavored sparkling waters. Last year it added iced teas. And to target users of refillable water bottles, liquid death released flavored electrolyte packages called Death Dust. - The minute you go into the world of flavor and texture in the sense of adding fizz, then you can start to sell a product that is a little bit more unique to you
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and therefore you can charge a little bit more for it. - [Narrator] Today, the company says the majority of their sales come from sparkling flavored water and iced tea. - Over 60, 70% of our business now is not plain water. - [Narrator] But some new launches are still played for the joke, like the brand's collaboration with Van Leeuwen, which introduced a limited edition flavor Hot Fudge Sundae that the company says was Amazon's best ever grocery limited-time offer.
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- We thought it was gonna be a month or two of inventory, we sold out of it in six hours. - [Narrator] It also sells things like an almost $6,000 cold plunge, a $250 Murderhole game set, and a mysterious country club membership for the small price of your soul. - Most beverage brands don't have fans. We have people who they're spending 30 bucks on a T-shirt and we're selling out of it. We've sold over a million dollars worth of Liquid Death gold watches. The brand means something more to people
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than just like the functional difference of the liquid. - That's all marketing. It's all just a ploy to get that name out there and to get PR and publicity. It's gonna be the drinks that are gonna make them money. - [Narrator] But as trends shift and new brands emerge, Liquid Death does risk becoming flat. - It's just gonna be really interesting to see as a brand like this get bigger and bigger, can they still sustain this idea of we are a punk rock independent company,
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when by the very virtue of growing and growing, you're probably not gonna end up doing things that differently. And the question will be whether consumers like the products enough to keep buying it then or whether there'll be some kind of pull away when they think that they've been lied to.
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(energetic rock music)
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- [Narrator] Store beer sales have gone flat, but non-alcoholic beer is growing fast. Since 2020, its sales have seen double digit growth every year, heating more than $440 million in sales in 2024.
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And in the US, Athletic Brewing is leading the way. Less than a decade old, Athletic has driven about 1/3 of all category growth for the past four years. - When Athletic entered the category, there was basically one style of non-alcoholic beer available, very few brands, very poorly distributed. - [Narrator] And in 2024 so far, Athletic has outsold its non-alcoholic beer competitors, beating out Heineken and Budweiser. But as Athletic rapidly expands its production, can it keep the buzz going?
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This is "The Economics of Athletic Brewing." - One of the advantages that Athletic has over huge beer companies is that it is able to focus exclusively on this niche of non-alcoholic beer. - [Narrator] Since Athletic's founding, it has invested over $100 million into manufacturing and developing its own process of non-alcoholic beer production. - Non-alcoholic beer was born outta prohibition and it was a really penalty box concept, and then there was basically no innovation for 80 years.
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- [Narrator] Even as more companies have added alcohol-free beer to their repertoire, it's common for them to just make their original product, beer, and then remove that alcohol through additional processes. Athletic takes a different approach. Instead of adjusting just one part of the process, Athletic makes 10 to 12 changes across all brewing stages. It's a new process, and a single mistake could make alcoholic beer, ruining a batch. - Their process can be more complicated,
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but in some ways it can also be more efficient. - [Narrator] For example, for every 3 1/2 gallons of water Athletic uses, it creates one gallon of non-alcoholic beer, whereas the Brewer's Association estimates that the average craft brewery uses about seven gallons of water for every gallon of beer. - So we're almost two times better than that. What we're trying to figure out is how we can squeeze every last drop of product out of every single batch, and so we're investing in equipment
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that can help us do that. - [Narrator] And Athletic could tailor its process to the specific needs of non-alcoholic drinks, like pasteurization, one step traditional beer doesn't need due to its alcohol content. - It's very challenging for an alcoholic beer brewer to go into non-alcoholic beer because there's so many food safety requirements. You're answering to different regulatory agencies, you have to have food safety plans and it's just a lot more involved.
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- [Narrator] Now Athletic's Connecticut facility has the capacity to make 450,000 barrels a year, making it one of the largest dedicated non-alcoholic breweries in the world. And with one San Diego facility up and running and another underway, it will soon be able to make over 1 million barrels per year. - This is a massive amount of growth and it represents a huge bet from Athletic that people are not just going to keep drinking non-alcoholic beer, but they're actually going to increase
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their consumption. - [Narrator] Where Athletic scales up is also strategic. Data from its direct to consumer sales helped guide its initial decision to build that first San Diego facility. - We were really following our e-commerce data. We right from the jump are selling a lot of beer in California, in the Pacific Northwest, and so we bought a brewery and quadrupled the size of it in 2020 to 2021 to meet that demand. - [Narrator] And DTC sales is one arm of distribution
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Athletic has that its beer counterparts don't always get. - We had the option of distributing and marketing in ways that alcohol had never been marketed before. - [Narrator] In the US alcohol sales are heavily regulated. - With Athletic, because we're non-alcoholic, we immediately listed on our website everything for sale that we're making. - [Narrator] In 2018, over 50% of Athletic sales were direct to consumers, which let it gather actionable data on its customers.
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- So we had really fast feedback loops on what kind of beer they liked, where they live in the country, what the purchasing patterns are, and that really informed our distribution and marketing strategy, is like where are we resonating early, and can we build on that and what are we learning from those consumers? - [Narrator] Athletic found that 80% of its customers still drank alcohol, and more than 75% are under 45 years old. - Historically, people drank non-alcoholic beer
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instead of alcoholic beer. Now, they're drinking non-alcoholic beer in addition to alcoholic beer. And it suggests that as young people get older, the market is going to get even bigger. - Really, I was kind of the target consumer, someone who fashions themselves as slightly athletic, but like likes to work out and stay healthy. - [Narrator] So as Athletic explored other distribution avenues, Shufelt brought it to places he naturally went, from 5K races to Whole Foods.
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- The beer aisle is immensely competitive. It's really hard to get space on that shelf. - [Narrator] But at Whole Foods, about 50% of the cooler space is dedicated to craft beer. So its customers are used to trying new brands. And the fact that Athletic was a non-alcoholic craft beer gave it a much higher chance of getting a spot. In June of 2018, just one month after launching commercially, its beer was on Whole Foods shelves. - As Athletic scaled up its production,
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Whole Foods was able to distribute it across the country. - [Narrator] Now Athletic has been Whole Foods top selling beer across all beer for over a year. And wholesale distribution has transformed Athletic's sales. In Athletic's first year, it sold 875 barrels. In 2023, it sold more than 258,000 barrels with Athletic beating out Heineken and Budweiser in non-alcoholic beer sales in stores for the past two years. But today, the non-alcoholic beer industry is becoming increasingly competitive.
54:47
- The other question for Athletic is how much non-alcoholic beer can Americans actually tolerate? The answer to that question is higher than we used to think, but it's not really clear how much higher it can go. If non-alcoholic beer turns out to be a short-term trend, that's not a huge deal for alcoholic beer companies. But Athletic exclusively focuses on this one product, and that's usually an advantage for Athletic, but it's also a huge risk. - [Narrator] Athletic says it's focusing
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on getting customers to view its product as more than just a substitute for beer. Especially since beer is less popular than ever before. So while Athletic's 75,000 points of distribution are mostly places like grocery stores and bars, about 5% of these places aren't licensed to sell alcohol. - Could be anything from coffee shops to convenience stores to state park beaches, things like that. Every year we branch out more and more, so we have our beer trucks going to stores
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they've never considered going to before. - [Narrator] Athletic says that over 50% of its customers are buying Athletic in places they would normally have grabbed water or a soda. And if that number continues to grow, the chances of alcohol-free beer being just a trend could diminish. - They believe that there are more times in the day, more opportunities for people to drink non-alcoholic beer than alcoholic beer. You wouldn't have an alcoholic beer for lunch
56:02
when you're at work or you know at 5 p.m. when you're still stuck at work, but you might drink a non-alcoholic beer then. So they think that there are opportunities here that just don't exist in other parts of the beer market.
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(gentle music)
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- [Narrator] The McAloo Tikki Burger, McPops, onion rings. If you don't recognize these items from your regular McDonald's menu, that's because you can't get them at a regular McDonald's in the US. They're exclusive to McDonald's in their respective countries. ♪ The all-new McAloo Tikki ♪ - [Narrator] Designed to both attract tourists. - [Customer] America does not have these fries or wings. - [Narrator] And more importantly, drive international sales. - When you look at the sales figures,
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about 41% of their sales are in the US and all the rest are international. - [Narrator] Here's how and why the company designs those local menus. This is "The Economics of McDonald's International."
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McDonald's founder Ray Kroc opened his first restaurant in Illinois in 1955 with just three food items on the menu. Its staple was a 15 cent hamburger. It first moved outside the continental US in 1967. Now the company has over 40,000 restaurants in over 100 countries. - We think of McDonald's as an American company, and in the US they have about 13,500 restaurants, but the bulk of their restaurants are actually international. So all the rest of those restaurants, about 27,000,
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are all around the world. - [Narrator] And you may have noticed that the restaurants look different. - This is so chic. There's no Grimace, no Hamburgler. - [Participant] In Canada they offer poutine. (announcer speaking French) - [Narrator] While global core items like burgers and fries make up most of McDonald's food sales still, these local menu items make up about 30%. International sales are a key part of McDonald's revenue. Australia, China, Japan, France and Germany
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are a few of the company's top markets. Adopting a menu like this is a strategy companies use called localization, and it's a tactic that has been essential to McDonald's global growth. When the company expanded into India in 1996, it did so without any beef on its menus, observing the common belief in the country that cows are sacred. McDonald's served more than 6 million customers there its first year with items like the Maharaja Mac made with mutton patties.
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One of India's current popular items is this, the McAloo Tikki Burger. - It's a potato and pea patty blended with some Indian spices. - [Narrator] This is Roger Di Domenico. He works with local teams to build international menus. - They remind me of a certain Indian Street food that I had growing up. So I think it's just a wonderful way to recognize and get closer to the customers while still remaining McDonald's. - [Narrator] Most McDonald's locations globally
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are managed and owned by franchisees or licensees rather than the company. Deciding what's on those menus starts with customer research. Local experts use that research to craft new items. Local flavors are incorporated in several ways. The first is adapting McDonald's staples to fit specific tastes. - I think if you look at the spicy chicken McNuggets that have been in multiple markets, each one of those markets has a different interpretation of what spice means to their consumers.
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There'll be one that might be highlighting curry. There might be one that highlights more of a Tabasco like flavor, and then a third one that will use something like a Thai chili or a jalapeno. - [Narrator] But some markets will create or offer something completely new. Mexico has McMolletes's as part of breakfast. The Philippines serves fried chicken with McSpaghetti. - If it's something that tastes like home and can be both true to McDonald's and true to the consumer, it's a big win for us.
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- [Narrator] And some additions to the international menus compete with other restaurants. - In some of these countries, McDonald's definitely competes with a brand like KFC on chicken. So in some countries in the Middle East, they actually offer fried chicken. It's not something you'd see on US menus, but to compete with these local flavors, they do that. - [Narrator] Some of the more popular international items, have even spread to McDonald's menus globally. - McFlurry started off in Canada
1:00:26
and now it's loved everywhere. McSpicy is a product that started off as a local taste variation in China that has now been adopted all over the world. We want people to come in for the global core icons. We want people to come in to try something new. And so any of the menu items that we feel like will do that is what we wanna elevate in the system. - [Narrator] McDonald's seized on the popularity of South Korean boy band BTS, launching a limited edition BTS Meal
1:00:53
in a number of countries in 2021. It included Sweet Chili and Cajun sauces inspired by the South Korean market. The company said the promotion helped drive a 40% increase from the year before in global sales, and significantly lifted McNugget sales during that period. But some transplants aren't so successful. - For a number of years, McDonald's has had a McVegan sandwich in Germany and some other European countries. They recently tried offering what they call a McPlant,
1:01:23
which was using a Beyond Meat burger in the US. And they tested that in some markets, and it just doesn't seem the consumers here want that. So you know, there is a push pull, you know. It's fun to have new flavors. It's exciting, but it doesn't always work in a permanent way. - [Narrator] While having a wide selection of items globally is profitable, McDonald's is looking to streamline some of its offerings - This year, the CEO, Chris K has said that there's just too many redundancies
1:01:51
all across the world. He gave an example where, you know, there's 70 different types of chicken sandwiches all across the world, and so I think they are in the process of examining that, but I don't think they're gonna eliminate all local items on menus. - [Narrator] So next time you're in Spain, you might be able to try McPops. - They're filled with your choice of white chocolate or hazelnut. They're super soft and they've got this amazing filling on the inside.
1:02:16
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