Shake Shack – The Fine Casual Dining Experience

Will Shake Shack's model of 'Stand for something good' survive the economics of the post-IPO world………..

Overviewg892814

Shake Shack is a modern day “roadside” burger stand serving a classic American menu of premium burgers, hot dogs, crinkle-cut fries, shakes, frozen custard, beer and wine. Founded by Danny Meyer’s Union Square Hospitality Group, LLC (“USHG”), Shake Shack was created leveraging USHG’s expertise in community building, hospitality, fine dining, restaurant operations and sourcing premium ingredients. 

Vision   

Shake Shack’s vision is to Stand For Something Good in all aspects of its business, including the exceptional team it hires and trains, the premium ingredients making up the menu, the community engagement, and the design of the Shacks. Stand For Something Good is a call to action to all stakeholders—the team, guests, communities, suppliers and investors—and it actively invites them all to share in this philosophy. The Shacksperience, being taught at the company entails the principles of Enlightened Hospitality and how to live and breathe the Shack Pact – the agreement that encompasses the company’s value system and brand ethos.

 

total shacks

 

Business ModelWhat Makes Shake Shack Special

  1. Culture of Enlightened Hospitality: taking care of each other. The company believes that the culture of the team is the single most important factor for success. It aims to recruit and develop a team with the innate “personality to please” that cannot be taught. It has built a culture of active learning and fosters an environment of leadership development throughout the entire lifecycle of employment.
  2. Fine Casual: inspired food and drink. The Company’s fine-dining heritage is committed to sourcing premium, sustainable ingredients, such as all-natural, hormone and antibiotic-free beef, while offering excellent value to guests. The core menu remains focused and is supplemented with targeted innovation inspired by the best versions of the classic American roadside burger stands. It never stops looking for the best ingredients and the best culinary partners in order to exceed the guests’ expectations in every aspect of their experience.
  3. Beloved lifestyle brand. It aims to establish genuine connections with guests and the communities in which they live. The company aims to have each Shack localized with design and menu options that drives a sense of appreciation and enthusiasm for the Shake Shack brand.

Operating ModelShack-onomics

Opening New Domestic Company-Operated Shacks

Shake Shack has adopted a disciplined expansion strategy designed to leverage the strength of its business model and significant brand awareness to successfully develop new Shacks in an array of markets that are primed for growth, including new and existing and small and large markets. It uses a portion of the proceeds from this offering to open new Shacks and renovate existing Shacks. It continues to live by one principle to ensure the success of both our new and existing restaurants: “The Bigger We Get, The Smaller We Need To Act.” This mantra is central to its Stand For Something Good vision and encompasses its commitment to continue to make decisions that focus on the core of who it is, staying true to the principles of Enlightened Hospitality

Capitalizing on Outsized Brand Awareness

Shake Shack utilizes various social media outlets to actively engage with the growing online following. In June 2014, it ranked #10 on Restaurant Social Media Index’s top 250 restaurant brands, which is measured on influence, sentiment and engagement. Furthermore, it was named one of “The 25 Most Innovative Consumer and Retail Brands” in 2014 by Entrepreneur.com, ranked #11 in The Daily Meal‘s “101 Best Restaurants in America” for 2013, and was the winner of the 2013 “Most Loved Brand of the Year” from the RIZMY Awards, “Best Burger” at the 2014 South Beach Wine and Food.

Giving Back

Shake Shack upholds its community agenda by giving back to the communities in which it operates, and strengthens awareness for philanthropic causes such as Share Our Strength’s No Kid Hungry campaign. The marketing focuses on interacting with guests in an authentic, innovative manner which creates memorable, meaningful experiences. The experience provided for guests and local communities has generated a growing loyal following who promote the brand through word-of-mouth.

Growing Same Shack Sales

Shake Shack continually focuses on improving same Shack sales performance by providing an engaging and differentiated guest experience that includes new seasonal and Shack-specific offerings, unique and thoughtful integration with local communities, and high standards of excellence and hospitality. It continues to innovate around the core menu to keep offerings fresh, while remaining focused on signature items. For example, SmokeShack, which debuted in 2012, has been a great success and helped drive sales.

Opportunistically Increasing Licensed Shacks Abroad

Shake Shack has grown its licensed portfolio by expanding further in the eight countries abroad having internationally licensed operations. This strategy historically has been a low-cost, high-return method of growing brand awareness and providing an increasing source of cash flow. There are additional international markets that will embrace the Shake Shack concept. Given the position in New York and the success of the current licensed Shacks at home and abroad, Shake Shack continues to attract substantial interest from potential international licensees around the world.

Operations

Sourcing and Supply Chain

Shake Shack is committed to seeking out and working with best-in-class suppliers, artisanal purveyors, cattle ranchers and distribution networks. Its Stand For Something Good vision guides on how to source and develop ingredients, always looking for the best ways to provide top quality food that is a value and accessible to all. All of the proteins are raised without added hormones or antibiotics. The Supply Chain team has developed a reliable supply chain and continues to focus on identifying additional backups to avoid any possible interruptions of service and product.

Food Safety and Quality Assurance

The commitment to food safety is strengthened through the direct relationship between Supply Chain, Culinary and Quality Assurance teams. All supplier and ingredient decisions go through a review of the supplier’s internal and external quality audits, insurance coverage, track record and physical site inspection. Shake Shack has a Food Safety Site Inspection process in place and a dedicated Quality Assurance Manager to ensure food safety across all domestic company-operated Shacks.

Management Information Systems

Domestic company-operated Shacks use computerized point-of-sale and back-office to support growth plans. These point-of-sale systems are designed specifically for the restaurant industry and use many customized features to increase operational effectiveness, internal communication and data analysis. The point-of-sale system is used to collect daily transaction data, which generates information about daily sales, product mix and average transaction size.

Versatile real estate model built for growth 

During fiscal 2013, Shake Shack grew the number of domestic company-operated Shacks by 62%. It seeks locations where communities gather, often with characteristics such as high foot traffic, substantial commercial density, reputable co-tenants and other traffic drivers such as proximity to parks, museums, schools, hospitals and tourist attractions. For every potential domestic company-operated Shack it considers applying rigorous financial metrics to ensure maintaining targeted profitability. The flexible model allows to design Shacks so that a variety of property types can be pursued.

Economics of the Shack Model

Shack model is designed to generate attractive Shack-level operating profit margins, strong cash flow and high returns on invested capital. Historically, domestic company-operated Shacks have delivered an attractive average cash-on-cash return of 65% and payback period of 1.5 years. Targets are set at Shack-level operating profit margins in the 18 to 22% range and cash-on-cash returns in the 30 to 33% range.


Leaders training future leaders

The team is led by passionate and experienced senior leaders, balanced with professionals formerly from fine dining operations and industry veterans from larger restaurant companies. Randy Garutti, the Chief Executive Officer, combines strategic multi-unit leadership experience with fine dining expertise.

Future Prospects

Shake Shack went public with a huge splash in late January 2015. It priced 5.75 million shares at US$21 a share, raising $121 million. The stock promptly doubled on its first day of trading, giving the 63-unit chain a valuation of nearly $1.7 billion. While the stock has since slipped, it still boasts an impressive valuation.

Shake Shack executives are concerned about not opening hundreds of stores a year, but generating the ‘wow’ reaction from the neighborhood in which they open. What also makes Shake Shack special is the salary structure for its employees, averaging above the industry standard. If Shake Shack is going to expand the underlying business, it will need to maintain its excellence. With the current business model, the strategy will likely rise and fall on the ability of its team members to deliver. And it’s much easier to attract new workers and retain existing ones if your business is designed to pay workers above the going rate. Although the current system is working well, it is hard to speculate the future – particularly when activist investors get involved. If at any given point the company comes under shareholder pressure, there is a possibility of a complete meltdown of the core values for which the company stands – a questionable ask for the way our economy operates as a whole.

 


 

References:

Shake Shack Filed For An IPO—What Investors Need To Know — Part 5: Shake Shack’s Single-Digit Same-Store Sales Growth History

https://www.sec.gov/Archives/edgar/data/1620533/000104746914010114/a2222577zs-1.htm#bi19801_trademarks

https://www.qsrmagazine.com/reports/5-tips-shake-shack?page=3

http://www.strategy-business.com/blog/Shake-Shacks-Secret-Sauce?gko=23501

http://www.forbes.com/sites/panosmourdoukoutas/2015/03/12/before-beating-mcdonalds-shake-shack-must-get-its-business-model-right/

http://www.businessinsider.com/shake-shacks-customer-service-policy-2015-6

http://www.huffingtonpost.com/2015/01/30/shake-shack-pay_n_6579762.html

Is Shake Shack on the Rise? — Part 8: Shake Shack: Why Do Most Analysts Recommend a ‘Hold’ for the Stock?

http://finance.yahoo.com/news/shake-shack-shak-great-growth-133401562.html

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3 thoughts on “Shake Shack – The Fine Casual Dining Experience

  1. Hi Azeem, thanks very much for your note. I finished the post impressed by both Shake Shack’s momentum and its ability to connect on a meaningful level with a wide variety of consumers across the world. One piece of the Shack’s operational model I would love to learn more about is its beef supply chain. I bet it is an enormous challenge to source a reliable, hormone- and antibiotic- free supply of beef for a growing number of stores without either high prices or high supplier concentration. I read online that beef comprises about 30% of Shake Shack’s COGS. Do you have concerns about Shake Shack’s ability to maintain its margins given its exposure to changes in the beef market?

  2. Great article Azeem! I think Shake Shack’s rapid expansion in the fast casual space is truly impressive. I read recently that Shake Shack is expanding most heavily in the Middle East including new locations in Lebanon, Quatar and Dubai. I wonder what aspects of this market particularly are beneficial to their specific business model and how they choose their international location targets. Additionally, we have discussed the difficulties of maintaining and preserving operational efficiencies but most importantly brand value when expanding too quickly. I would be interested to know what Shake Shack is doing to ensure that they are able to scale their idea effectively internationally without losing brand equity.

    I recently read another article on the company that stated that because Shake Shack focuses so heavily on reliable and high quality products that they tried to move from frozen crinkle fries to fresh fries. However, there was a lot of variability in the fresh potatoes that were delivered to the store and the customers actually preferred the taste of the frozen fries so they switched back to frozen fries. This was an example where the financial benefits actually were aligned with the qualitative data, however I am sure that as expansion continues, there will be difficulties in making operating decisions that completely tie with the business model and mission. I look forward to seeing how Shack Shake handles these issues and further improves their operational strategy.

  3. Hey Azeem. Thanks for your post! As you could tell from my post, I am fascinated by the incredible growth that we have seen in the fast casual space. Given that Chipotle and Shake Shack really define this category, I wanted to compare their business/operation models to one another. As I expected, both companies share a lot of the same tenets such as sourcing and supply chain, Food and Quality Assurance and leaders training future leaders. I still struggle to identify if these characteristics are really the special sauce that separates Chipotle/Shake Shack from the entire fast food industry or if they just have a better product.

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