SHAKE SHACK: IS ‘ENLIGHTENED HOSPITALITY’ BECOMING DIGITALIZED?

Digitalization is exposing that fast-casual chains are becoming too slow. Will Shake Shack’s embrace of digitalization enable it to buck this trend, or are its plans for growth fried?

DIGITALIZATION SCORCHES FAST CASUAL

The growth of the fast-casual dining industry has plateaued.  A slew of start-ups have expanded rapidly across the United States with hopes of becoming the “Chipotle of X,” and quick service restaurants (QSRs) have seasoned their menus and décor with fashionable flavors to turn up the competitive heat.[1]  Increasing digitalization has affected customers’ preferences, with the fast-casual target customer – the tech-savvy millennial – increasingly demanding good meal value without compromising on food quality, consistent speedy service, the option to interface via an app, and on-demand delivery options at a faster clip than the industry anticipated.[2]  Investment firm Cowen expects the U.S. meal delivery market to grow 12% annually over the next five years.[3]

Concurrently, minimum wage increases are taking effect in many U.S. states, and surging labor costs are biting into fast casual restaurants’ margins, leaving the industry’s fate in flux.

Shake Shack, a global fast casual chain recognized for its made-to-order ShackBurgers and enlightened hospitality – emphasizing the happiness of its customers and employees – aims to capitalize on digitalization to achieve its goal of unprecedented unit growth in 2018 despite industry headwinds.  Shake Shack has embraced digitalization as its key operational ingredient to accelerate year-over-year store growth by nearly 40% in 2018 while delivering quality service and food.[4]

SHAKING UP THE SUPPLY CHAIN

Preparing for additional growth, this year Shake Shack moved away from managing disjointed relationships with multiple suppliers to partnering with ArrowStream, a supply chain management firm, to migrate all of Shack Shack’s food spending, inventory, supplier and distributor tracking, and quality assurance to a single dashboard.  Shake Shack’s management now accesses “at your fingertips” insights in order to make real-time supplier decisions for the chain, which is particularly complex given seasonal menu changes, new items, and a laser-focus on food quality.[5]

Bon APPétit

Shake Shack is also investing in technology to enable new ordering methods that satisfy customers.  Shake Shack has a devout followership, but its target millennial customer overall does not like to wait.[6]  In October 2016, Shake Shack launched its mobile app in select locations and now promotes it nationally, allowing customers to order ahead and specify pick-up times.  Shake Shack integrated the app into its in-house point-of-sale ordering system so that its kitchens can seamlessly accommodate app-originated made-to-order purchases without modifying their operations.[7]  In the short-term, Shake Shack is also testing partnerships with various food-delivery companies including DoorDash, Caviar, and Amazon via the delivery service Olo.[8]

 

[9]

Enlightened Hospitality or Endangered Hospitality?

Last month, Shake Shack replaced counter staff with kiosks at its Astor Place location with the stated objective to serve more customers during peak times.  Customers place orders on touchscreens, pay via card, and receive text notifications when orders are ready.  The kiosk mimics Shake Shack’s in-house ordering system, and the tech-savvy split kitchen has been redesigned to enable greater output.  For now, Shake Shack has maintained its staff, known as “Hospitality Champs” who are available to answer questions regarding kiosk ordering.  While early signs show that kiosks have decreased customer order wait times, kitchen order fulfillment bottlenecks exist.[10]

[11]

In the medium-term, Shake Shack will continue to roll out its mobile app and more kiosk-enabled stores depending on how its Astor Place location performs.  Management has indicated that labor expenses are Shake Shack’s most significant near-term headwind but has not signaled that it plans to reduce in-store labor.[12]  CEO Randy Garutti indicated that the new location is “our way of seeing how we are going to do that.”[13]  Shake Shack also plans to eventually test other innovations around packaging methods and delivery speeds.

MOVING FORWARD

In the short-term, Shake Shack should continue to promote its mobile app, analyze kiosk testing results, and focus on increasing app personalization options such as tracking customer order preferences, past orders, and locations in order to increase customers’ app engagement.  Shake Shack should also integrate more closely with an exclusive delivery partner or consider bringing delivery in-house in order to gain control over the end-to-end customer experience.

In the medium-term, regardless of whether Shake Shack pursues the kiosk model, Shake Shack should redesign split-kitchens in delivery-heavy areas to accommodate the growing home-delivery market demand.  Shake Shack should expand its kiosk model if overall order throughput times decrease and customer satisfaction and quality levels remain high.

While digitalization aids Shake Shack’s growth from an operational standpoint, time will tell whether Shake Shack’s embrace of digitalization will enable it to deliver on its enlightened hospitality values and its priority to continue to make a darn good burger.

Is Shake Shack over-indexing on apps and kiosks?  Does its move toward digitalization inhibit its ability to provide comprehensive quality service to customers?

Does Shake Shack have an obligation to retain its customer-facing labor? What implications will increased automation have on labor as minimum wage increases come into effect?

[794 words]

[1] Kostyo, Mike. “What’s next for fast casuals?” SmartBrief Publications, September 13, 2017. https://www.smartbrief.com/original/2017/09/what%E2%80%99s-next-fast-casuals, accessed November 2017.

[2] Red Robin. 2017 Q3 Earnings Report. http://www.businesswire.com/news/home/20171106006297/en/, accessed November 2017; Perowne, Roger. “10 marketing lessons from how millennials are changing the way we eat.” Campaign, November 13, 2017. https://www.campaignlive.co.uk/article/10-marketing-lessons-millennials-changing-eat/1449985, accessed November 2017.

[3] Frank, Thomas. “Home food delivery is surging thanks to ease of online ordering, new study shows.” CNBC.com, July 12, 2017. https://www.cnbc.com/2017/07/12/home-food-delivery-is-surging-thanks-to-ease-of-online-ordering-new-study-shows.html, accessed November 2017.

[4] Shake Shack. 2017 Q3 Earnings Report. http://www.businesswire.com/news/home/20171101006661/en/, accessed November 2017.

[5] “Nation’s Fastest-Growing Chain, Shake Shack, Implements ArrowStream to Help Power Its Supply Chain.” ArrowStream press release. September 20, 2016, on Dow Jones Newswire, file:///Users/colbyfarber/Downloads/Factiva-20171114-1338.pdf. Thorn, Bret. “Taking Small Bites Out of Big Data.” Go-Wine via Factiva, May 19, 2017. https://www.go-wine.com/restaurant-article-326-taking-small-bites-of-big-data.html; accessed November 2017.

[6] Taylor, Kate. “Millennials are killing chains like Buffalo Wild Wings and Applebees.” June 3, 2017. http://www.businessinsider.com/millennials-endanger-casual-dining-restaurants-2017-5, accessed November 2017.

[7]“A New Way to Shack: Shake Shack Introduces a New Guest Experience with a Test Launch of its First iOS Mobile Ordering Shack App.” Shake Shack press release. October 17, 2016, https://global-factiva-com.prd1.ezproxy-prod.hbs.edu/ha/default.aspx#./!?&_suid=151078355351405618411558318017; PYMNTS. “Shake Shack Shakes Up Ordering, One Step At A Time.” August 25, 2017. https://www.pymnts.com/mobile-order-ahead/2017/shake-shack-mobile-rollout/, accessed November 2017.

[8] Zetlin, Minda. “Amazon May Soon Bring You a Shake Shack Burger in Under an Hour.” Inc. September 22, 2017. https://www.inc.com/minda-zetlin/amazon-may-soon-bring-you-a-shake-shack-burger-in-under-an-hour.html, accessed November 2017; Judkis, Maura. “The next time you order food, this cute robot might roll up to deliver it.” March 9, 2017. https://www.washingtonpost.com/news/food/wp/2017/03/09/the-next-time-you-order-food-this-cute-robot-might-roll-up-to-deliver-it/?utm_term=.ae85b5af7d2c, accessed November 2017.

[9] Houck, Brenna. “Shake Shack Detroit’s Opening Line Snakes Around the Corner.” February 23, 2017, https://detroit.eater.com/2017/2/23/14715980/shake-shack-detroit-opening-line-wait-times, accessed November 2017.

[10] Sietsema, Robert. “Shake Shack’s New Cashier-Free Location Really Does Reduce Wait, So Far.” October 10, 2017. https://ny.eater.com/2017/10/10/16454838/shake-shacks-no-cashier-nyc-astor-place, accessed November 2017.

[11] Ibid.

[12] Shake Shack. 2017 Q3 Earnings Report.  http://www.businesswire.com/news/home/20171101006661/en/, accessed November 2017.

[13] “Danny Meyer on How Automation Won’t Hurt Shake Shack Hospitality.” National Real Estate Investor via Bloomberg. October 10, 2017. file:///Users/colbyfarber/Downloads/Factiva-20171114-1346.pdf, accessed November 2017.

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13 thoughts on “SHAKE SHACK: IS ‘ENLIGHTENED HOSPITALITY’ BECOMING DIGITALIZED?

  1. After reading this essay, I am definitely craving for a burger! Although being a fancy gimmick, I do not see the automated kiosks as a useful initiative to reduce wait times. As you pointed out in your essay (and from my own experience), the order process is hardly the bottleneck in the operations of Shake Shack as the order fulfillment usually causes the majority of the waiting time.

    Additionally, I believe there is a debate whether these kiosks, in fact, reduce labor costs through layoffs. For example, McDonalds stated earlier this year that the introduction of the automated-ordering kiosks would not reduce in significant layoffs, as workers would be moved to other parts of the restaurants to improve service quality (http://www.businessinsider.com/what-self-serve-kiosks-at-mcdonalds-mean-for-cashiers-2017-6).

    Moreover, I am critical when it comes down to the extension of the delivery business going forward. While there are some foods that are predestined for delivery (such as sushi or pizza), Burgers are definitely not one of them. Every time I ordered a burger, the fries were soft and soggy while the burger was cold and unsatisfying. Hence, I believe that Shake Shack would compromise on its otherwise superior quality when it focuses more on their delivery operations going forward

    Personally, I also value human interaction as a key part of the restaurant experience. Consequently, I am not convinced that the introduction of kiosks will contribute to the brand perception/value for customers.

  2. The question of whether Shake Shack’s investment in apps and kiosks will achieve the desired goal of reducing wait times and improving the overall customer experience, is an interesting one. Although there are inherent risks in alienating customers by replacing tellers with automated kiosks, streamlining information flow from customer to the back end, the kitchen, will ultimately improve the customer experience but only to a limited extent.

    The above examples of automation merely deliver incremental improvements in the overall customer experience by improving the accuracy of customer orders and perhaps minimally reducing wait times. Shake Shack and its customers would be better served if the company were to invest in developing clever innovations around its delivery model. Dominos’ innovative pizza delivery box revolutionized how we experience and consume pizza in our homes- it arrives hot and fresh 99% of the time. Shake Shack has an opportunity to be first to market in developing a cutting edge, innovative delivery solution so that customers can enjoy its core product offering – burgers and french fries- which traditionally do not travel well, at home or at work.

  3. To your question, is Shake Shack over-indexing on apps and kiosks? Does its move toward digitalization inhibit its ability to provide comprehensive quality service to customers?

    My answer is no – I see opportunities to serve customers in creative ways through automation.

    I can see a world in which there exists a segment of people who will be happily served by an automated front-end. I believe that this will hold truer for fast food outlets as the experience of table service is already being done away with. However, the front-end automation should go hand-in-hand with the back-end process redesign / automation to ensure a smooth process flow. (you mentioned bottlenecks in the kitchen as a result of reduced wait times)

    Automating the front-end will allow Shake Shack to deploy innovative ways of reaching the consumer. For example, consumers might not even need to come into a physical location for a burger. Instead, robots could become a delivery mechanism or even a ‘mobile kiosk’ that transports fresh burgers from nearby Shake Shacks into the surrounding areas. This reality is not too far away. Several months ago, in London, Just Eat (a food delivery platform similar to Grubhub), delivered the 1000th meal to the customer via its fleet of 10 robots.(http://www.telegraph.co.uk/business/2017/08/27/just-eat-deliver-1000th-meal-london/)

    If this becomes a reality, I will miss the many Tasty Burger late night visits that has become a social gethering of some sorts.

  4. I am fascinated by Shake Shack’s experiment with automated ordering kiosks, and I like your questions around 1) whether or not this technology will inhibit Shack Shack’s ability to provide comprehensive quality service to customers, and 2) if Shake Shack has an obligation to retain its customer-facing labor.

    In some ways, Shack Shack’s move towards digitalization is a surprising one, especially given Danny Meyer’s strongly held beliefs on the role his restaurants play in his customers’ and employees’ lives. In his book Setting the Table (I highly recommend!), Meyer shares heroic tales about his team providing great hospitality to customers (in one story, one of his restaurant managers tracks down a customer’s lost wallet, which she had left in a taxi, over the course of the meal and gives it back to her at the end of her meal). He also talks about the importance of taking care of his employees and making sure he creates an amazing work environment for them.

    On the one hand, putting automated ordering kiosks in Shake Shack seems to run counter to these beliefs. Restaurants, in particular, are places where people go to seek refuge from technology, connect with others over food and conversation, and be cared for by humans. In addition, by having kiosks do the work that employees usually do, Meyer could be taking jobs away from people who really need them.

    On the other hand, however, putting automated ordering kiosks in Shack Shack could actually help Meyer better achieve his goals around the customer and employee experience. For those customers who are looking to get in and out as quickly as possible, ordering at a kiosk immediately is preferable to waiting to interact with an employee. In addition, with kiosks carrying out the more basic tasks of taking orders, employees can have more time to do the things only they can do – getting to know their customers and providing that hospitality. And in terms of taking care of its employees, having automated ordering kiosks could ostensibly allow Shake Shack to pay their existing employees more, as there would be less of a need to invest in training new employees.

    All in all, I am optimistic about the efficacy of these automated ordering kiosks. Meyer has led the way in changing and innovating restaurant industry practices, and I think this experiment will yield helpful insights.

  5. Very interesting take on the challenges facing the food service industry over the next several years. Consumer tastes (pun intended) are constantly evolving, and they expect more out of fast casual restaurants seemingly every day. I think the move to a centralized supply chain application is a smart one, as we’ve seen many players in the market do this over the past year or two.

    One thing to keep an eye on will be how fast Shake Shack can move on the technology front. Chick-Fil-A and Starbucks have both found massive success with their ‘order ahead’ mobile apps, and I think this will greatly benefit Shake Shack. Partnerships with food delivery services such as DoorDash, UberEats, and Postmates will also be vital to medium and long term growth.

    Lastly, the question you raise about automation’s effect on labor is an interesting one. I think the ‘behind-the-counter service’ component is an important one for many quick service restaurants, although I’m not sure if it’s vital for Shake Shack. Will they be able to improve margins (while at the same time increasing their investment in new technology) with automated service? Only time will tell…

  6. Another argument in support of the kiosk ordering system is the relative simplicity of Shake Shack’s menu options- the labor content of taking an order is extremely low (little customer confusion), which explains why much of the industry is moving in the automated direction. Also, the production process of a burger doesn’t lend itself to a production line system as opposed to chipotle, which creates your meal as you order it.

    It may also be helpful to think about the digitization initiatives in terms of competitive advantage. Shake Shack largely competes against local chains like Tasty Burger or mom-and-pop burger shops- not as much against the McDonalds and Burger King’s of the world. These local chains don’t have nearly the scale to support digital ordering or customer apps- they compete based on local relationships / knowledge and food quality (arguable in the local Boston area vs Shake Shack). App-based ordering and delivery services therefore represent sustainable competitive advantages. Customers see a more comprehensive value proposition, Shake Shack realizes only the upfront fixed costs of installing these systems, and local competitors that don’t have the volume to cover fixed costs and are not as well capitalized can’t replicate any of this infrastructure.

  7. Great article. You mention two key digitization efforts that Shake Shack is implementing – and both are equally important.

    I think the front-end digitization is inevitable. This is something Panera has been doing for years, and personally, I love being able to go in during the lunch rush and essentially skip the line. As you mention, this simply moves the bottleneck of the operation from ordering to preparing. As much as I see automation reducing labor needed at the register, I can’t imagine the economics of further automation in prep would make sense any time soon. In a time where customers want everything made exactly to their preference, I don’t see the prep staff shrinking. The labor issue is one that Shake Shack will have to reconcile as they continue to automate their front-of-house. However, increased throughput from faster ordering could necessitate a larger prep/support staff needed. Assuming this leads to higher revenue, it might make sense for them to maintain their current staffing model, with a focus on roles other than checkout (I’m imaging a metric such as # burgers/staff member – if this can be improved by higher volume, staffing may no longer be an issue).

    The other digitization factor you mentioned is their partnership with ArrowStream. This is very exciting for a business that uses shelf-life sensitive inputs. For something like vegetables that may only have a shelf life of one week, the ability to closely monitor inventory, forecasting, and supplier scheduling could unlock significant savings, efficiency, and decrease waste. This could even give Shake Shack the ability to reduce the space needed for inventory storage (and transition to more JIT delivery), reconfigure kitchens, and use the additional space to create a more delivery-friendly work space, as you discussed.

  8. The article raises really interesting questions about how digitalization will effect the future of fast casual dining. One area that might be interesting to think about is how digitalization is going to fundamentally change the physical footprint of restaurants. That is, how do your space needs change when your customers order via kiosks and your bottleneck shifts to the kitchen? Do you need larger kitchens? Increased waiting areas? How do you manage the flow of people and what design changes will be necessary to existing layouts?

    For delivery orders, I think it’s worth asking whether you need the retail store at all. Should you produce those orders in the retail store, or does it make more sense to produce those meals off-location in cheaper real estate? The retail location originally served as the place where the business could meet its customer, but now that digital technology can enable that meeting, it makes sense that the real estate needs — and the dramatic costs associated with them — will change. I’d venture to guess that many digitally-enabled, fast casual restaurants will open up commissary type locations that only produce food for delivery; why should they continue to pay high retail rents when they can produce the same food on the second floor of a drab building?

  9. Great article, Anusha!

    I am a bit wary of potential bottlenecks and rampant inefficiency at pickup caused by mobile order ahead bunching at periods of peak demand, after experiencing first hand the difficulty Starbucks has had implementing this (Justin, I am not sure I would call there implementation a rampant success – seems to me they have faced quite the difficult road with many would-be customers being turned off and exiting after seeing a crowd bunched up just inside the doors.)

    It seems the kiosks could possibly solve these issues as they are dedicated areas for pick up of mobile orders, similar to curbside pickup at fast casual restaurants. Whether its kiosks or ArrowStream that allow Shake Shack to continue to outcompete in this exciting space, ii agree with you that whatever allows the company to compile and utilize the best data on diner preferences and patterns is what will make the difference in the end.

  10. Given the various challenges faced by the QSR segment now, it’s very interesting to see how Shake Shack is adapting with more ditigalization. In fact, I am surprised that Shake Shack only started having its own app recently, given that millennials represent a large portion of their customers.

    I am especially a big fan of the app which allows consumers to order ahead of time. (In)famous for its long waiting time, Shake Shack will benefit greatly from this feature. This feature not only allows Shake Shack to plan their production better – with more order information known ahead of time – but also greatly reduces consumers’ wait time and uncertainty once they place their order. To take this function even further, Shake Shack may also have the opportunity to smooth out their demand, by encouraging consumers to place or pick up their orders during off-peak hours.

    However, I believe they should definitely keep their “Hospitality Champs” to answer any consumers’ questions and stay personable. After all, the value of any hospitality chain is not just the food that they are churning out, and there is also value in customer interaction when appropriate.

  11. I definitely think that there is risk associated with phasing out the human aspect of any service oriented business, and that that risk is exacerbated for Shake Shack because their primary point of differentiation is the happiness/personal touch of their employees. From that point of view, it seems essential to keep the “hospitality champs” (as Kaye mentioned above), but that begs the question…why spend the money at all there will still be human tellers?

    I see a lot of benefit to increasing the option to order ahead — it seems that organizations like Sweetgreen and Starbucks have had a lot of success with this sort of system and that it doesn’t take away from the feelings of human contact.

  12. Great article! To address your question on the impact of digitalization in this scenario, using automation and new technology does not compromise Shake Shack’s customer service. Shake Shack’s customer promise is to deliver a simple, high quality menu to customers at an affordable price in a moderately nice ambiance and with reasonable speed. The staff contributes to this value proposition, but I would argue that they are not a core component to the dining experience. Rather, to counter the first response comment, I would argue that the queue created by the in-person ordering process creates a bottleneck that actually hinders the customer experience in high-traffic locations, and may result in lost sales each year.

    Adding in kiosks frees up Shake Shack to innovate their design space as well. Much like Ron Harrison of Marriott explained, once you understand how customers are using the space, you can redesign it to better maximize its value and productivity. With digital kiosks, Shake Shack has the opportunity to remove its standard POS in the form of the counter at which customers order, which can free up room for split-kitchens, additional tables, or new pop-up concepts that Shake Shack can use for innovations. In addition, Shake Shack is taking the right move by not only updating its customer interaction approach, but also by incorporating new technology into its internal systems. Specifically, having the mobile orders incorporated in updating the POS will enable Shake Shack to avoid challenges that the several of our TOM cases have shown when unexpected or rush orders are added into the system.

  13. Really interesting article! The adoption of kiosks prompts a number of follow-up questions and brings to mind a number of opportunities going forward.

    In addition to the questions of how this will change the physical layout of the restaurant going forward (with a need to shift to more kitchen space to address the increased order volume from the kiosks), I wonder what the impact of the digital kiosk is on customer order behavior. Does ordering from a kiosk encourage ordering more/fewer items? Are customers more or less likely to customize items, potentially increasing/decreasing additional complexity in the kitchen? And will this kind of ordering system lead to a level of self-selection within the customer base, with customers who prefer a more traditional method of ordering moving to other restaurants while those who value the speed and convenience of kiosks/apps sticking with Shake Shack?

    It seems like there is probably opportunity to drive additional innovation in the ordering process as the company adopts kiosks. Shake Shack could potentially update the order screen in real time to nudge customers based on current conditions (maybe nudging them towards ordering leftover items they are trying to get rid of at the end of the day). There also seems to be an opportunity to use A-B testing to see what kind of display/layout works most effectively in terms of maximizing order size and/or speed/ease of use.

    It will be interesting to see how this issue develops going forward!

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