Item 1. Business
Item 1. Business
First Watch Restaurant Group, Inc. (collectively with its wholly-owned subsidiaries) is a Delaware holding company which was acquired by funds affiliated with or managed by Advent International Corporation (“Advent”) pursuant to a merger transaction in August 2017, (the “Advent Acquisition”). Unless the context otherwise requires, “we,” “us,” “our,” “First Watch,” the “Company,” “Management” and other similar references refer to First Watch Restaurant Group, Inc. and, unless otherwise stated, all of its subsidiaries.
Overview
Since opening our doors in 1983, we have been a pioneer in the Daytime Dining restaurant segment, serving made-to-order breakfast, brunch and lunch using the freshest of ingredients. We have built our brand on our commitment to operational excellence, our culinary mission centered around a fresh, continuously evolving menu, and our “You First” culture. Our focus on one daytime shift enables us to optimize restaurant operations while generating average annual sales volumes of $1.8 million in 2021 per restaurant in only 7.5 hours per day. This daytime focus also allows us to attract and retain employees who are passionate about hospitality and drawn to our “No Night Shifts Ever” approach.
First Watch was named “America’s Favorite Restaurant Brand” by Market Force in 2020, based on customer recommendations and brand satisfaction. In both 2020 and 2021, First Watch was recognized by FSR Magazine as the fastest-growing full-service restaurant company in the United States based on unit growth.
As of December 26, 2021, we had 435 system-wide restaurants across 28 states, 341 of which were company-owned and 94 were franchise-owned.
Our Promise: Yeah, It’s Fresh!
At First Watch, we take a creative approach to Daytime Dining led by our commitment to freshness. Every morning, we arrive at the crack of dawn to slice and juice vegetables and fresh fruits, bake muffins, brew our fresh coffee and whip up our French Toast batter from scratch. Each item is made-to-order and prepared with care. We do not use microwave ovens, heat lamps or deep fryers in our kitchens. While our menu constantly evolves, our promise of freshness never wavers. Our award-winning, chef-driven menu includes crave-able items like our Avocado Toast, Smoked Salmon Eggs Benedict, Farm Stand Breakfast Tacos and Lemon Ricotta Pancakes in addition to revolving seasonal items like The Trailblazer Bowl, Carnitas Breakfast Tacos, Superseed Protein Pancakes and a rotating fresh, seasonal juice. This commitment to freshness and a culinary philosophy of “Following The Sun,” with our rotating seasonal menu, continues to differentiate the brand and attract an on-trend health-oriented customer while also serving the long-standing customer focused on the ritual and consistency of the breakfast occasion.
Our Mission: You First
For nearly four decades, we have cultivated an organizational culture built on our mission of “You First.” As a company, we put our employees first and empower them to do whatever it takes to put our customers first. We give back to the local communities where we operate and we support national and international causes we care about, such as our Project Sunrise partnership that supports women-owned coffee farms in Colombia, which in turn empowers them to reinvest in their communities.
Growth Strategies
New Restaurant Openings
We have significant unmet demand and trade-area development opportunities in both existing and new markets. In 2021, we opened 22 new company-owned restaurants generating annualized average unit volumes of $2.0 million, which is approximately 11.0% higher than our existing company-owned restaurant average unit volumes. Our experienced restaurant development team partnered with a third-party analytics firm to conduct an in-depth study determining our potential for more than 2,200 locations in the United States.
In selecting new locations, we evaluate specific market characteristics, demographics, traffic patterns, co-tenants and growth potential. Our development approach has proven that First Watch has tremendous portability across markets, with new
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restaurants boasting consistent and strong average unit volumes across geographies. We intend to open more than 130 company-owned restaurants from 2022 through 2024. While our existing franchisees are committed to developing restaurants in their territories, we expect company-owned restaurants will be the primary growth driver of our footprint over the long term.
Drive Restaurant Traffic and Build Sales
Our attractive returns on invested capital in each restaurant starts with our focus on traffic and customer frequency in the building of our sales through:
• Delivering an Excellent On-Premise Dining Experience. Excellence in restaurant-level execution, recognized by customers and reinforced by the hundreds of accolades we have received, increases the visit frequency of our customers, promotes trial by new consumers and ultimately encourages loyalty.
• Menu Innovation. We continuously evolve our menu to keep it fresh and exciting yet operationally efficient. Our five highly anticipated seasonal menus and the introduction of new platforms drive customer frequency and incremental spending. When it comes to sourcing, we are guided by a core philosophy: “Follow The Sun.” This means that we welcome each season into our menu with exceptional ingredients harvested when they are most flavorful and fresh.
• Convenience and Increased Accessibility of Our Off-Premises Offering. We believe our integrated technology and improvements continue to optimize our customers’ convenience when ordering directly from us as well as our third-party delivery partners.
• Expand and Leverage Innovative Alcohol Offering. Our alcohol platform reflects our culinary philosophy by creating craft cocktails which combine fresh juices and ingredients with a variety of liquors. As of December 26, 2021, our craft cocktails were offered in 305 restaurants, including company-owned and franchise-owned restaurants, with clear plans to continue the expansion to all restaurants where feasible.
• Increasing Our Brand Awareness. For nearly 40 years, our awareness has grown primarily through word-of-mouth as our service, menu and environment created loyal fans. While we believe that organic growth of awareness contributes to our local feel, we also recognize the potential of strategically marketing in appropriate channels to accelerate our brand awareness.
• Additional Platforms and Initiatives. We continue to evolve the First Watch concept and offerings via the implementation of initiatives that include:
– Weekday Lunch : With the evolution of a new optimized core menu, which includes fresh, convenient and differentiated lunch offerings, the presence of our off-premises channels and the opportunity to apply targeted marketing, we believe the weekday lunch occasion holds future opportunity to build sales and traffic.
– Customer Technology & Customer Data: Recent technology initiatives, including integrated remote waitlists, remote orders, tokenized credit card transactions and WiFi into one system, provide opportunity for the development of new advanced customer relationship management systems aimed at growing customer frequency.
– Restaurant Technology Unlocking Throughput & Capacity: We are implementing technologies that will help us further unlock in-restaurant efficiencies, enabling greater peak hour throughput and capacity, including new tools to enable optimal seating configurations, to reduce table turn times and to orchestrate more efficient order preparation. For example, we are installing kitchen display systems in our restaurants to automate our order routing.
Operations
Quality and Food Safety
First Watch emphasizes high food quality and a commitment to food safety in each restaurant through the careful training and supervision of personnel and by following rigorous quality and cleanliness standards. Food preparation and cleaning procedures are defined, monitored and maintained by our quality assurance department. We contract with third-party inspectors to regularly monitor restaurant performance through unannounced non-biased food safety assessments with program standards that meet or
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exceed those of local health departments. These inspections are intended to achieve active managerial control in our restaurants in an effort to reduce risk factors and maintain a strong food safety culture.
Restaurant management incentive plans provide strong motivation to meet and exceed standards. In addition, as part of our overall food quality assurance, we have a process in place to review vendors’ food safety practices to ensure they meet or exceed industry standards.
Restaurant Staff
As of December 26, 2021, we had approximately 10,000 employees. None of our employees are part of a collective bargaining agreement, and based upon independent surveys and our internal evaluations we believe our “You First” organizational culture continues to foster overall favorable relations with our employees.
Each restaurant operates with a staff of approximately 20 to 30 team members led by general manager(s).
During a restaurant’s 7:00 a.m. to 2:30 p.m. shift, our staff focus on gracious service, food preparation, order accuracy and “instagrammable” plating. We employ a narrow span of control, which we believe contributes to the consistency of our restaurants’ performance across our system. The general managers interview each applicant and identify motivated employees who are friendly, service oriented, eager to prepare high-quality food and a fit for our “You First” culture.
Training
Our training programs share our legacy and culture of operating excellence. We have established a training facility at our corporate headquarters named the F.A.R.M. (“First Watch Academy of Restaurant Management”), to which we invite managers-in-training for a week-long brand experience where they learn everything from our history and cultural pillars to leadership and management tools. We have enhanced this training program to also focus on building a more diverse and inclusive team. In addition, managers-in-training also complete a comprehensive 11-week C.A.F.E. (“Culture and Food Experience”) training program in the restaurants, alongside experienced managers. New hourly employees participate in at least three days of initial onboarding training and shadowing. Our general managers and directors of operations conduct in-restaurant training for our staff who also train online through our Virtual Learning Academy.
Purchasing and Distribution
Our Supply Chain department manages and negotiates directly with qualified, national suppliers and distributors with the dual goals of securing the supply of high quality, fresh products and controlling cost. Our selected vendors undergo inspection to ensure that products purchased conform to our standards. Our Quality Assurance department requires third-party supplier audits or Global Food Safety Initiative certification for all food distributors and manufacturing facilities to ensure good manufacturing practices, food safety, pest control, sanitation, training, regulatory compliance and food defense systems are in place. To ensure freshness, most of our restaurants accept produce and broadline distribution deliveries at least three times per week.
Management Information Systems
All our restaurants use digital management information systems, which we believe are scalable to support our future growth plans. These systems are designed to enable functionality, improve operating efficiencies, provide us with timely access to financial and marketing data and reduce restaurant and corporate administrative time and expense. In addition, our in-restaurant systems are used to process customer orders, credit card payments, employee time-keeping and scheduling.
Marketing and Advertising
We use a variety of marketing channels, including email communications, affiliate partnerships, social media interactions, digital marketing, direct mailers, public relations initiatives and local community sponsorships, promotions and partnerships. We focus on increasing our engagement with social media platforms in order to generate brand awareness and also to gather information we can then apply to future marketing efforts.
Franchise Program
As of December 26, 2021, we had 15 franchisees that operated 94 restaurants and our existing franchisees had 49 total new restaurant development obligations. Typically, our franchise agreements provide an initial term of 10 years with additional renewal terms that total 10 years subject to various conditions that include upgrades to the restaurant facility and brand image.
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All franchise agreements grant licenses to use our trademarks, trade secrets and proprietary methods, recipes and procedures. The initial franchise fee for each restaurant is $35,000 to $40,000. Franchisees are required to pay 4.0%-4.5% of franchised restaurant sales in royalties and contribute 1.0%-3.0% of franchised restaurant sales to a system fund, which is used for advertising, marketing and public relations programs and materials on a system-wide basis. Presently, we are not extending franchise agreements to new franchisees.
Human Capital
“You First” Culture Elevates Employee and Customer Satisfaction
First Watch has a simple mission statement - “You First.” We have been people-focused from our inception as we have always believed our employees are our greatest asset. We believe that putting our employees first, in turn, leads them to put customers first. The Company’s culture and “You First” mission play a role in higher retention of all employees. During 2021, turnover of our general managers fell nearly 30% below the average of our respective segment of the restaurant industry as reported by Black Box Intelligence, a restaurant sales reporting firm (“Black Box”), and the average tenure of our general managers is approximately five years.
Diversity and Inclusion
In September 2020, First Watch launched a new campaign, branded #beabetterhuman, which has taken our people-focused approach to a new level. The Company turned participation in the #beabetterhuman campaign into an opportunity for employees to give back to the community. The #beabetterhuman initiative includes a six-part live, interactive web series tackling sensitive topics such as unconscious bias, privilege and mental health. The #beabetterhuman campaign is designed to educate our entire workforce, raise awareness and influence change. In order to provide employees with a chance to make a difference, for each employee that participated in all six #beabetterhuman web sessions, First Watch made a donation to Bryan Stevenson’s Equal Justice Initiative (featured in the book and film “Just Mercy”). We continue to build upon the success of the program with an ongoing #beabetterhuman series on Facebook, Instagram and Glassdoor highlighting diverse employees within the restaurants and their unique and inspiring stories.
The R.I.S.E. (Race Inclusion and Support Exchange) Council was created to engage high performing diverse leaders in monthly dialogue on how to best advance the Company’s diversity efforts. As a result of ideas that the R.I.S.E. Council surfaced, The Rising 20, a new mentor program was established in 2021 as an important step in the #beabetterhuman campaign to help accelerate the development and advancement of minorities within First Watch. In this mentoring program, employees are partnered with an executive for a six-month guided mentorship journey targeting personal development and professional growth. In addition, the program includes a self-assessment and career goal setting workshops.
In 2021, CEO and President, Chris Tomasso, and Chief People Officer, Laura Sorensen hosted seventeen separate 90 minute calls with hourly employees across the country for their inaugural W.H.Y. Tour – their “We Hear You” listening tour. The purpose of the in-depth sessions was to learn more about the issues that matter most to our hourly workforce. As a result of this tour, the Company was able to take swift action on the most meaningful issues. New employee benefits, practices and operational tools were introduced, along with a monthly recognition budget for each restaurant to devote to ongoing employee recognition.
Experienced, Passionate Leadership Team and Deep Bench of Talent
Our team is led by passionate executives who have an extensive mix of experience in our brand and with other leading national restaurant concepts and consumer facing businesses. We have a deep bench of talent throughout the organization. Our executives and key employees average more than 15 years of industry experience and our directors of operations have an average tenure at First Watch of approximately ten years. In addition, our restaurant staff includes dozens of fully-trained, tested, high-performing managers throughout our system who are positioned to step into the general manager role as we open new restaurants.
Government Regulation
We are subject to extensive federal, state and local government laws and regulations, including those relating to, among others, public health and safety, zoning and fire codes, alcoholic beverage control and franchising.
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In addition, we are also subject to the Fair Labor Standards Act, the Immigration Reform and Control Act of 1986, the Americans with Disabilities Act and various federal and state laws governing such matters as minimum wages, exempt versus non-exempt, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements and other working conditions. New laws, regulations or interpretations could impact our business or our cost of compliance.
For a discussion of the various risks we face from regulation and compliance matters, see Item 1A.“ Risk Factors. ”
Intellectual Property
We have registered “First Watch the Daytime Cafe,” “You First,” “Yeah, It’s Fresh!” and certain other names used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office (“USPTO”). In addition, the First Watch logo, website name and address and Facebook and Twitter accounts are our intellectual property. Our policy is to pursue and maintain registration of service marks and trademarks and to oppose vigorously any infringement or dilution of the service marks or trademarks. We maintain certain recipes for our menu items, as well as certain standards, specifications and operating procedures, as trade secrets or confidential information.
Competition
The restaurant industry is highly competitive and fragmented, with restaurants competing directly and indirectly with regard to dining experience, food quality, service, price and location. We also compete with grocery store chains and meal subscription services. In addition, there is active competition for management personnel, real estate sites, supplies and restaurant employees. Competition is also influenced strongly by marketing and brand reputation.
As consumers increasingly seek higher quality breakfast, brunch and lunch experiences, we believe we are well-positioned to compete with a wide range of national, regional and local establishments that operate during our hours of operation. More directly, we do not believe there is a comparable offering within our segment that operates at scale as First Watch does and we view our primary competition as a network of independent restaurants that also serve breakfast and lunch in neighborhoods across the United States.
Seasonality
Our quarterly results of operations are subject to seasonal fluctuations. Additionally, the timing of holidays, weather conditions and the number of new restaurant openings may affect sales volumes seasonally. Furthermore, the COVID-19 pandemic may have an impact on consumer behaviors and customer traffic that may result in temporary changes in the seasonal fluctuations of our business.
See Item 1A.“ Risk Factors ” for discussion of risks related to seasonal and periodic fluctuations.
Corporate Information
First Watch Restaurant Group, Inc. was incorporated in Delaware on August 10, 2017, under the name AI Fresh Super Holdco, Inc. We changed our name on December 20, 2019 to First Watch Restaurant Group, Inc. Our principal executive offices are located at 8725 Pendery Place, Suite 201, Bradenton, FL 34201 and our telephone number is (941) 907-9800. Our corporate website address is www.firstwatch.com. We completed our initial public offering (“IPO”) in October 2021 and our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “FWRG.”
Additional Information
Our consumer website is located at www.firstwatch.com, and our investor relations website is located at https://investors.firstwatch.com. We make available, free of charge, through our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (“SEC”). Our reports and other materials filed with the SEC are also available at www.sec.gov. The reference to these website addresses does not constitute incorporation by reference of the information contained on the websites and should not be considered part of this Annual Report on Form 10-K.
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We announce material information to the public about us, our products and services, and other matters through a variety of means, including filings with the SEC, press releases, public conference calls, webcasts and the investor relations website (https://investors.firstwatch.com) in order to achieve broad, non-exclusionary distribution of information to the public and for complying with our disclosure obligations under Regulation FD.
The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media, and others to follow the channels listed above and to review the information disclosed through such channels. Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.
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