Shake Shack is an example of great alignment between a business and operating model. The company describes itself as a “modern-day ‘roadside’ burger stand”[i] serving a selection of premium hamburgers, hot dogs, milk shakes, and other traditional American foods typical of fast food restaurants. Shake Shack has come a long way since its humble beginnings as a hot dog stand in Madison Square Park, but it continues to rely on a business model that cares about its employees, its customers, and its product. Shake Shack captures value by serving a quick and delicious meal with care, and creates value by turning a fast food meal into a casual dining experience that transforms Shake Shack from a burger chain to a “lifestyle brand”.[ii]
Shake Shack’s operating model stands out from the crowd of fast food chains in the way it cultivates a company culture for its well-paid employees, how it fairly prices premium and innovative ingredients, drives customer loyalty, and wisely operates stores by measuring cash-on-cash returns and selectively chooses locations to open new stores.
Shake Shack trains its employees to “understand and practice the values of Enlightened Hospitality: caring for each other, caring for our guests, caring for our community, caring for our suppliers and caring for our investors,”[iii] and it is evident in the service customers receive in the store. The company proves it cares about its employers by paying them premium wages in many market places. For example, employees in the Washington, D.C., area are paid $12/hr, when the minimum wage is $10.50/hr;[iv] and also offers health benefits for full-time workers, paid time off, and 401(k) matching contributions. Employees even receive a sliver of sales through an innovative Shack Bucks program.[v] Below is an illustration of where Shake Shack has chosen to invest in its employees, and stay ahead of the times, rather than wait for government regulation and public pressure force them to control their largest cost component.
Shake Shack has a vision for tremendous growth in the future, and has already laid the groundwork for its international expansion plan, but it is not being hasty. By keeping the number of new stores at a moderate level, it can maintain supply and demand levels that continue to drive high volumes of business at its locations. Other food and beverage chains, such as Chipotle, Starbucks, Wendy’s, and McDonald’s are opening stores much more quickly,[vi] but trade at much lower multiples, signaling that the market appreciates Shake Shack’s growth strategy. Shake Shack currently operates 78 stores across the globe, and has plans to open 450 in the U.S. alone,[vii] but it is growing at a measured pace and keeping most of the stores, rather than franchising them and risk losing hold of the brand.
A flexible layout and store design have also enabled stores to be opened up in a variety of locations from urban high density areas, to ballparks and train stations. Additionally, each store is designed thoughtfully and with the local community in mind to help it become a meeting place for locals,[viii] which drives the lifestyle experience it is hoping to achieve.
Shake Shack is off to a good start, but has seen its stock price take a wild ride since its IPO in early 2015. Currently, it has the respect and loyalty of customers excited about the possibility of stores opening in their hometowns and neighborhoods and a high willingness to pay. However, if Shake Shack’s reputation is damaged, it could significantly hurt the company. For Shake Shack, its biggest strength is also its greatest weakness.
[i] Shake Shack Prospectus, Jan. 29, 2015. http://www.sec.gov/Archives/edgar/data/1620533/000104746915000523/a2222881z424b3.htm
[iv] Investor Presentation, November 2015. http://s2.q4cdn.com/686132520/files/doc_presentations/SHAK-General-Investor-Presentation_Fall-2015_7.pdf
[v] “Shake Shack’s Secret Sauce? It Cares.” Daniel Gross, Strategy + Business, Feb. 11, 2015. http://www.strategy-business.com/blog/Shake-Shacks-Secret-Sauce?gko=23501
[vi] “Shake Shack: High Demand + Low Supply = Pricing Power”. Emre Sozen, Seeking Alpha, Nov. 13, 2015. http://seekingalpha.com/article/3684786-shake-shack-high-demand-low-supply-pricing-power
[viii] Shake Shack Prospectus, Jan. 29, 2015.