How Tender Greens Turned Its Suppliers Into Investors The growing fast-casual chain Tender Greens used ingenuity, deal-making and vision to build a new kind of supply chain.

In 2003, before "fast casual" became restaurant industry buzzwords, Erik Oberholtzer, Matt Lyman and David Dressler had an idea: combine high-end ingredients with fast-food efficiency. They bet that this would differentiate their company, Tender Greens, and customers would be willing to pay a little extra for quality food.

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Sourcing those premium ingredients would be complicated, though. Most quick-­service restaurants use large distributors, which source from a network of farms and wholesalers -- a strategy designed to maximize scale efficiency. But those networks generally don't include the chef-to-farmer relationship -- and higher-quality ingredients -- Tender Greens wanted.

To solve it, Oberholtzer turned to a valuable contact. Before Tender Greens, he was the executive chef at a luxury hotel in Santa Monica. There, he had worked closely with Scarborough Farms, a midsize local grower whose lettuces he viewed as exceptional. Oberholtzer wanted them to supply Tender Greens, too, and he was looking for investors as dedicated to ingredient quality as he was. So he thought: Why not make the farm an investor?

Oberholtzer and his business partners drove out to Scarborough Farms and made their pitch. If the farm put up its initial deliveries of butter lettuce, spinach and the like, they would be converted into shares in Tender Greens. "Scarborough was rich in produce but not cash, and we were rich in ambition but not cash," Oberholtzer says.

Scarborough agreed, and for each of Tender Greens' six initial restaurants -- the first of which opened in Los Angeles in 2006 -- the farm built up equity, cementing a long-term partnership that has allowed both companies to expand. "Being equity partners guaranteed that Scarborough could grow with us knowing we weren't going to drop them," Oberholtzer says. "We, at the same time, were always able to have absolute confidence about our supply chain."

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Today, Scarborough Farms remains a shareholder in Tender Greens -- which now has 28 locations and counting -- and supplies almost 80 percent of the company's greens to its California locations, as well as other seasonal items like heirloom tomatoes. And Oberholtzer, now CEO, continues to create tailor-made financial arrangements to secure the right ingredients.

These days, though, the agreements look different. For example, Tender Greens once needed more sustainably raised pork but couldn't find a supplier. Rather than settle for lower quality from a large operation, Oberholtzer found a small farm in California that met his standards. He then supplied the farm with capital so it could scale up production and repay Tender Greens in pigs.

Later, when the brand began eyeing East Coast expansion in 2015, it realized it likely wouldn't be able to source local, sustainable greens year-round without hydroponic growing. So Oberholtzer formed a partnership with Local Roots, a startup creating a network of farms inside shipping containers. Through a handshake agreement, Tender Greens paid a premium for the initial harvests and provided the company with feedback to help it grow. Now, with Tender Greens' help, Local Roots has brought its quality up and prices down, and is developing a shipping container devoted to supplying Tender Greens' New York City locations.

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Deals like these have made Oberholtzer hesitant to take on other forms of investment. He's seen other fast-casual brands grow too fast, compromising quality to meet demands from investors. "With money comes opinions, and if opinions aren't aligned, it can become messy," he says. Still, three years ago, he sold a minority stake to Danny Meyer's Union Square Hospitality Group -- the powerhouse behind Shake Shack and 16 leading New York City restaurants -- along with Alliance Consumer Growth. Opinions, he says, have been aligned so far. Asked what the appeal was, Meyer put it plainly: "It's the ingredients."