A Cava (NYSE: CAVA) Food Illness Outbreak is Not a Black Swan, But a Pink Meatball: A Near…

A Cava (NYSE: CAVA) Food Illness Outbreak is Not a Black Swan, But a Pink Meatball: A Near Certainty

Cava is unique among fast casual chain peers in how it prepares and cooks ground meat. Undercooked ground lamb meatballs, expansion into catering services, and a high presence in college communities significantly increases Cava’s odds of causing an attributable public health crisis in 2024. I am short the equity of Cava.

This article is Part II on Cava. For Part I please visit the link here.

Cava (NYSE: CAVA) is a Greek-style fast casual restaurant chain of 290 storefronts per Cava’s latest 10-Q, quickly growing to 300+ storefronts at present time. Leading up to and after Cava’s June, 2023 IPO, Cava has been compared to Chipotle (NYSE: CMG) by consumers, stock promoters, and equity analysts.

Last week, I laid out why Cava has significantly under-appreciated risks to its equity valuation, including:

• The increasing presence of “C” graded health department sanitary scores in several of Cava’s high-value New York City storefronts
• The promotion of food illness as a lifestyle choice in Cava’s corporate-run Instagram account
• Issues with mislabeling the presence of sesame allergens in a product that made it to grocery store shelves
• Cava’s lack of guaranteeing to consumers food allergen safety within Cava’s supply chain
• Cava’s expansion of chain footprint into pro-union geographies

I have taken positions short the equity of Cava, as I believe Cava displays an extreme reward-per-risk payoff. I do not believe Cava can absorb a health crisis, and I strongly believe equity holders will be wiped out within a year of a Cava-attributed public health crisis. I believe a Cava-attributed public health crisis in 2024 is a near certainty given the health and food safety standard throughout this chain.

I. Cava’s Ground Lamb Meatballs Present a Significant Risk of E. Coli Contamination vs. Competitor Fast Casual Meat Products

While other fast casual chains also prepare meat fresh at storefront locations, Cava is unique in preparing ground meatball products. This is significant for several reasons.

Ground red meats such as beef or lamb have a much higher risk of harboring bacteria vs. meat cut into chops or steaks. Bacteria such as E. coli accumulate on the outside of cuts of meat, meaning by simply searing and cooking all sides of cuts of meat, most bacteria is killed immediately, significantly reducing risk. For example, Chipotle cooks their steak products sous vide, then employees season and marinate, then employees sear the steak products on grill, then employees chop the cuts into pieces.

However, with ground meat the entire end product must be fully cooked through in order to destroy bacteria, as the outsides of cuts of meat have been combined and mixed together, often from multiple individual animals, meaning bacteria such as E. coli can exist and spread throughout the ground meat.

Cava cooks their ground meat offering of Spicy Lamb Meatballs as meatballs. It’s not guaranteed that the insides of the products are cooked through.

Below is a video from Cava’s corporate TikTok account demonstrating how Cava employees prepare and cook the Spicy Lamb Meatballs.

This cooking demonstration video, posted on August 23, 2023, can be found here and below.

Consumers often complain of Cava’s Spicy Lamb Meatballs cooking standards across social media and on various restaurant review sites.

Undercooking ground meat products is well-documented as a leading cause of food illness outbreaks. Any halfway experienced or decent chef or cook can explain that cooking ground meat is not the same as cooking a cut of meat, and that raw ground meat is significantly riskier than a medium-rare steak.

II. Cava’s Move into Catering will Expose Cava to Greater Risk to Attribution of Food Illness Outbreaks

Cava has told Wall Street that its move into catering will bolster same-store sales and unlock new revenue generating opportunities from servicing bulk orders for corporate lunches and special events.

However, the move is highly risky, with Cava even noting this in risk disclosures in the S-1.

I believe Cava is already cutting too many food safety corners with their supply chain and restaurant-level operations, as clearly there are a number of “defective” and risky ground meat products entering the market and reaching consumers.

Here’s why Cava’s expansion into catering services is important:

When food safety issues occur at a typical storefront, customers may not know one another or talk to one another. If Cava serves bad meatballs to 50 customers at one location on one day, and 25 of these people experience illness ranging from mild digestive issues to a full E. coli poisoning requiring hospitalization, it’s less likely that these issues will necessarily be immediately traced back to Cava.

Take, for example, a busy Manhattan, New York location often frequented for lunch by area office workers. If 25 random customers become sick that evening or in the following day, some likely live in New Jersey, some live on Long Island, some live in the city, some live in Westchester County north of New York City. Many of these people likely do not work at the same offices nor do they know or communicate with one another. If a few of these people go to hospitals, some will go to hospitals in New Jersey, some on Long Island, etc. Everything they ate in the last few days would be logged.

It’s harder to pinpoint the exact source of a food illness outbreak given multiple people over multiple hospitals in multiple states or geographies.

However, with catering it’s much easier to pinpoint a food illness source. If everyone at a specific office or every attendee of a party becomes sick within a day of eating contaminated food, all of these people communicate with one another and all are likely within the same social and professional circles.

If multiple people at Bob’s retirement party or multiple people at Emma’s tenth birthday party get food poisoning from a catered Cava meal, it’s very easy to pinpoint the source.

III. Cava’s Presence Around College Campuses Exposes Cava to Risk of Attribution of Food Illness Outbreaks

For similar reasons, Cava’s presence on or near college campus areas exposes Cava to significant risk from increased attribution of food safety issues. This occurs for several reasons:

1. Many college campuses have student health systems, and students first go to these health centers for any medical issues. If there is even a mild uptick in health center visits over a day or two, it’s easy to attribute food illness sources.
2. Most college campuses are insular communities, where everyone is in a tight social network. It’s easy to share information.

In 2015, a norovirus outbreak that sickened 140+ people, most of whom were affiliated with Boston College, was quickly identified with a single Chipotle location as the source. This was the final straw that dropped Chipotle’s stock in late 2015.

Cava is already experiencing some of the same patterns with risk exposure to college campuses, as evidenced on social media.

For example, here is a post on Reddit about Cava food poisoning at the University of Maryland.

As another example, here is a post on Reddit about Cava food poisoning at the University of Florida.

Summary

Cava’s Spicy Lamb Meatballs are just one of the many food safety issues present within this fast-growing chain, but they are a major one.

A public food illness outbreak is the single biggest risk to any fast casual chain, and Cava is going into battle unarmed with no understanding of the territory, with untrained troops who can’t even cook meatballs properly.

Cava is continuously trading for growth and expansion at the cost of restaurant-level operations and supply chain integrity, a combination that does not end well for fast casual chains.

I do not believe Cava equity investors fully appreciate the food safety issues at Cava. Most institutional investors, and even many retail investors, simply do not have experience working in a restaurant for a wage, so this risk of a food illness outbreak is under-appreciated.

However, as any experienced, decent chef or cook could tell you, grilling meatballs at an assembly-line restaurant with busy lunch and dinner rush periods is a recipe for disaster. There is no way the majority of these meatballs at most Cava locations are getting out to customers properly cooked through at a proper internal temperature. In fact, since these meatballs are bite-sized and many are served in pitas, many customers are unaware at the time of consumption that they are potentially eating raw ground lamb.

Anyone investing in hardware would pay close attention to defect rates and return rates and customer complaints about hardware product lines over time. If a hardware company suddenly experiences a large increase in defective chips or computers that make it out to the customer, this very obviously affects sales numbers and likely company valuation.

Why is Cava any different? If they’re putting out defective products in the market that can injure or kill people, this needs to be considered as well.

Cava is well-positioned for a public health crisis, and the signs are all there. A Cava public health crisis is not a Black Swan, but a Pink Lamb Meatball.

Please enjoy this video from Cava’s corporate TikTok account, in which Cava makes jokes about making customers “violently ill” and spending time in the bathroom after eating Cava.

This article is Part II on Cava. For Part I please visit the link here.

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This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. Lauren Balik does not represent the interests of any fund or of any investor other than herself. Past performance is not indicative of future results. This content speaks only as of the date published. Any projections, estimates, forecasts, targets, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.