Digitalization – Shake Shack’s Secret Sauce for Growth

Shake Shack is implementing digital technology throughout the supply chain to aid its rapid expansion. What will happen to the long lines in store and the quality of burgers?

From Madison Square Park to conquer the world

Sprouted from Madison Square Park, the fast-casual burger restaurant Shake Shack has made it to the must-do list of New York City, winning the hearts of New Yorkers and tourists alike. As of June 2017, Shake Shack operated 135 restaurants, including 76 company-owned stores in the U.S. and 59 via joint-venture partners globally [1]. In its IPO filing in 2015, Shake Shack announced a growth plan of opening 450 stores domestically.

Figure 1: The first Shack at Madison Square Park, New York

The expansion poses tremendous challenges on Shake Shack’s current supply chain system. Unlike fast-food chain McDonald’s, whose supply chain is built around heavily processed frozen food product, Shake Shake promises to provide fresh ingredients sourced from local farmers. Building around this promise, Shake Shack utilizes only five suppliers for its beef, with about 88% of the company’s ground beef patties supplied by just one of those firms [2]. The current supplier system seems to be insufficient to accommodate Shake Shack’s aggressive expansion going forward. As store numbers skyrocket, supplier sourcing, food spend management, and quality control become major questions.

Digitalization – the Secret Sauce for Growth

Meanwhile, Shake Shack is experiencing two consecutive quarters of tumbling same-store sales. In Q1 2017, same store sales is down 2.5% from same period last year [3]. The long lines during peak dining times generated buzz but also created long wait times and inefficiencies, discounting the fast-casual dining experience as well as revenue performance.

Besides driving growth in number of stores, what can Shake Shack to to improve its operational efficiency to serve more customers per store? What will help aid their growth while maintaining the core values of quality and trustworthy supply chain? Digitalization is Shake Shack’s answer to both questions.

Figure 2: Ordering from the Shake Shack App

Digitalizing Customer Demand

In March 2017, Shake Shack introduced their new mobile-ordering app, which enables its customers to order from phone and pick up at a chosen time and store. The smart app calculates back-end preparation times and order size to prevent an overload on kitchen staff. Phil Crawford, Vice President of Information Technology, said this app has increased both physical customers and average order sizes, driven by saving time. In addition, an average mobile spend via the app is 15 % higher than in store [4]. It also allows Shake Shack to collect data to understand its customer behavior and menu performance to make more accurate demand forecast.

Managing Suppliers

Shake Shack’s supply chain strategy has evolved from personal relationships with its few suppliers to digital solutions that allow more transparent analytics. In 2015, Jeffrey Amoscato, vice president of supply chain at Shake Shack, described Shake Shack’s relationship with its suppliers “one-to-one in person relationship”[5], whereas supplier sourcing was based on face-to-face communication and screening. This personal approach is difficult to scale and manage as Shake Shack grows. Just two years later, Shake Shack is now integrating digital software, such as ArrowStream, a supply chain analytics company specialized in Food industry to help consolidate and manage food spending, inventory data and contract management with its suppliers [6]. Using data and analytics can help Shake Shack identify potential savings and reinforce its relationships with trustworthy local suppliers, an important part of Shake Shack’s ecosystem and the center of its customer promise.

Figure 3: The in-store customer experience

Going Forward

On the customer demand side, while the advantage of mobile ordering is clear, customer adoption of the APP still requires heavy marketing effort as currently mobile orders only account for 3% of Shake Shack’s sales. Whereas Papa John’s, another fast-food chain, announced over 55% of its total sales come digitally and 60% of those are from mobile [7].

The combination of mobile ordering and supplier analytics enable potential vertical integration going forward. Shake Shack can even consider opportunities like implementing prescriptive analytics to provide decision support and to optimize with different resources. As Shake Shack continues to expand, prescriptive analytics will be able to simulate different scenarios and create learnings across the chain.

In addition, Digitalization increases transparency in supply system and can potentially change industry norm. Steve News, Associate Professor in Operations Management at Saïd Business School, predicts an increasingly transparent supply chain as demanded by customers and regulators [8]. Especially for food products, provenance is an essential feature of what the customer buys, but a lot of the times it is difficult to verify. Shake Shack can potentially provide ingredient tracking information on its mobile ordering end, to further enrich its relationship with customers by clearly communicating its values of community and responsibility.

How does digitalization affect customer experience?

While digitalization can be helpful, it also poses new questions. By moving towards mobile ordering, how can Shake Shack sustain its buzz and hype when there is no line in store? As in-store interaction with customers decreases, should Shake Shack reposition its value of customer service?

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[1] “Shake Shack Lands in China 2017”, Global Retail News, 18, 188, p. 9, Business Source Complete, EBSCOhost, accessed November 2017.

[2]“Why Shake Shack Will Never Be McDonald’s.” http://fortune.com/2015/05/14/ shake-shack-mcdonalds/

[3] Shake Shack, 2017 Quarterly Earning Report

[4] “Shake Shack Lands in China 2017”, Global Retail News, 18, 188, p. 9, Business Source Complete, EBSCOhost, accessed November 2017.

[5] Mariana Souza, “Shake Shack’s supply chain guru on sourcing better burgers.” Greenbiz.com, https://www.greenbiz.com/article/shake-shacks-supply-chain-guru-sourcing-better-burgers, accessed November 2017.

[6] ArrowStream, “Nation’s Fastest-Growing Chain, Shake Shack, Implements ArrowStream to Help Power Its Supply Chain”, https://globenewswire.com/news-release/2016/09/20/899736/0/en/Nation-s-Fastest-Growing-Chain-Shake-Shack-Implements-ArrowStream-to-Help-Power-Its-Supply-Chain.html?parent=899737, accessed November 2017.

[7] “Good Food Is Not Enough: 3 Dining Trends For The Digital Age”, Forbes.com, https://www.forbes.com/sites/michaeljones/2016/05/18/good-food-is-not-enough-mobile-diners/#11460eb626b4, accessed November 2017

[8] Steve News, “The Transparent Supply Chain”, Hbr.org, https://hbr.org/2010/10/the-transparent-supply-chain, accessed November 2017

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6 thoughts on “Digitalization – Shake Shack’s Secret Sauce for Growth

  1. Thanks for great post!

    I think that it is also important to take the context into account. In this case the pressure from the competition is strong as there are already other players launching similar solutions – for example, McDonalds and their mobile app that enables to order and pay for the meal. Moreover, McDonalds already has some innovative ideas such as tracking customer’s location, so that the food is only prepared when the customer is near the store. [1] Given the overall move on the market towards digital ordering, I think that Shake Shack should reposition its value of customers service to this new innovative channel.

    [1] https://techcrunch.com/2017/03/15/mcdonalds-begins-testing-mobile-order-pay-ahead-of-nationwide-launch/

  2. Great post! I agree that digitizing aspects of the customer experience serves to ultimately strengthen the relationship between consumers and Shake Shack. However, to answer your questions, I do not think that the lack of lines will be a hindrance to the “hype and buzz” of the store. One example that I can think of is the Apple Store, which has seen a decrease in lines in recent years due to similar factors like consumers purchasing online. Has the lack of lines outside the store hurt Apple sales? Experts say no. Even though the lines have diminished, the stores are doing well and Apple is currently the number 1 retailer in terms of sales per square foot [1]. This leads me to believe that the freed up space in a Shake Shack could actually be a good thing, as it would (1) be able to grow its revenues by not having to turn customers away due to long lines and (2) be able to utilize the free space to enhance the customer experience as you mentioned in your question. An example of increased customer experience could be providing more tables for customers who dine-in, or increasing the size of the kitchen so the staff can deliver on orders faster and decrease customer wait time.

    [1] https://www.cnbc.com/2017/09/22/lines-at-the-apple-store-getting-shorter-pictures.html

  3. While I agree that getting customer data through a mobile application may be worthwhile for general transparency, I am not convinced that a mobile application adds a lot of value for supply chain optimization. The app is just replacing the current order process (of getting food in the moment) without giving a reliable idea of future demand. Extrapolating future trends from current consumption may not be accurate. Furthermore, this level of data could be achieved through other means (and is probably already available), e.g. a customer loyalty card or accounting statistics on cashier throughput.

  4. This post was a really interesting read! I agree with your final thought – what are the long term operational implications of this strategy, assuming there is increasing and continuous adoption of the app to reach the 55% achieved by Papa Johns? I would anticipate that it is increasingly important for Shake Shack to train its labour force to deal with the pressures that come with both digital and in-store ordering, since they now manage two types of customers. Secondly, how would the traditional store layout need to change as more customers purchase online? Would there need to be a larger dedicated pick up area with its own staff, at the expense of sit down tables? Finally, I wonder what the international implications of this strategy as Shake Shack continues to expand into new markets – namely, are international markets eager to adopt the fast online system, or is Shake Shack more of an ‘experience’ in these markets?

  5. Really interesting. It was very surprising to read that Shake Shack has only 5 beef suppliers. Eventhough I understand it is part of their customer promise I find it difficult to believe there is only 5 good beef suppliers in the markets where Shake Shack is expanding. One of the first things I would do is to actively look for more – quality proven – suppliers. If management decides there is actually no supply available, I would partner with my supplier to increase capabilities and prevent a complete shortage of supply.

    In therms of the app, while I believe that the app is a nice feature for Shake Shack to have I think the problem will remain if they only do that. Most of the app orders will still come in rush hours, and if you don’t improve your process inside the store, people could start receive cold burgers or still wait in line, even if they pre-ordered.

  6. Great post and very interesting topics! Shake Shack is definitely a pioneer of digitalizing restaurant services. I think there are a few opportunities in the restaurant business. First, there lacks of a standard digital solution across all restaurants, which means every restaurant chain has to develop its own ordering app. This situation challenges independent small restaurant business because it requires a relatively significant one-time cost. Also customers need to download different apps or go to different platforms in different restaurant chains. Second, the challenge is that the digital system is not integrated. The ordering process and supply management are conducted on two different platforms so that the information flow is not integrated. So I believe there is an opportunity to create a “ERP/SAP” system in the restaurant business.

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