Shake Shack, The Leading Franchise
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INTRO
Shake Shack started as a hot dog stand, opened and run by celebrity chef Danny Meyer back in 2001. It has since grown into a gourmet fast-casual type restaurant with over 275 locations both in the United States and abroad. The franchise went public back in 2015 and now has a market capitalization of $ 4.9B.
Shake Shack describes itself as a modern-day “roadside” burger stand
“And I think people come to us because they want a simple version of that classic thing without all the craziness.” Randy Garutti, CEO and Director at Shake Shack
Shake Shack’s main selling point is its fresh and simple, high-quality food, offered at a great value
Shake Shack is currently available in 12 other countries around the world
163 of its stores are company-run, while 112 of them are licensed
HIGH QUALITY, LOW PRICES
Shake Shack defines its menu as the classic American menu, made up of premium burgers, hot dogs, crinkle-cut fries and shakes. Shake Shack is known for avoiding chemicals and relying on high quality ingredients. Despite its premium brand image, the chain keeps prices low as the average single Shack Burger costs $5.29 while a hot dog is priced at around $3.
Through its “Stand for Something Good” program, Shake Shack is committed to carefully sourcing premium ingredients for its products from individuals who share its vision and its way of thinking
For instance, Shake Shack uses 100% Angus beef with no hormones or antibodies. Additionally, its bacon is 100% gluten-free, MSG-free and nitrite-free. This is achieved through an old-world charcuterie technique that pushes for raising livestock sustainably and humanely
“When we looked at it initially, we said how can we do this better? Let’s do it all natural. No hormones, no antibiotics in our protein. Now, let’s find the highest possible ingredients and let’s develop them in the way that we have for our fine dining restaurants in the past. We created this core menu that became Shake Shack. That has changed very little in our nine years of existence and it should really never change that drastically.” Randy Garutti, CEO and Director at Shake Shack
THE ANTI-CHAIN
Shake Shack has been referred to by the New York Times as the “anti-chain chain.” This points to the company’s commitment and dedication to excellent customer service and the quality of its products, both aspects which are not synonymous with traditional fast food.
"The whole experience [of fast food] is to cram people into a cookie-cutter space, to feed them as many unhealthy calories as possible then get them to leave," said Mr. Meyer, the president of the Union Square Hospitality Group and the Yoda of Shake Shack. "That stripping away of human experience? That is where fast food went astray."
“Contrast and compare, then, with the three Shake Shacks in New York City, where patrons are cheerfully welcomed at the counter of a neighborhood-centered, urban-fantasy version of a burger roadhouse. On the menu? Whole-muscle, no-trimmings, fresh-ground, antibiotic-and-hormone-free, source-verified-to-ranch-of-birth, choice-or-higher-grade Black Angus beef. Furthermore, "people have to wait in line just to place their orders," Mr. Meyer, 51, said on a recent afternoon. "After that? They have to wait for us to cook their orders. And then? We hope they'll stay awhile, as they eat. To enhance the communal experience." by Glenn Collins for the New York Times
With a little under $ 600m in sales in 2019, Shake Shack is smaller than most of its peers, yet, on a pre-pandemic basis, it was boasting a growth rate of around 30% a year. The company is also quickly expanding into Asia with stores opening in Hong Kong and Shanghai.
THE MARKET
The global fast food market is driven by rising urbanisation rates, a shift away from home cooking into online deliveries and rising wealth levels. These are driving the global market to a 4.6% CAGR over the 2020 - 2027 period while increasing health awareness is hampering growth.
According to Research And Markets, the global fast food market is set to rise by 4.6% annually over the 2020 - 2027 period and grow from $ 647B to $ 931B
Driven by the shift away from home cooking to online ordering. This is helped by rising urbanisation rates and increasing wealth levels. However, a rise in health issues and increased health awareness hamper the growth of the fast food market
“The opportunity for the fast food market is serving low calorie & organic healthy food and increase in number of fast food outlets.” by Research And Markets
According to Market Data Forecast, the North American fast food market is set to grow by 4.7% each year over the 2020 - 2025 period and grow from $ 191B to $ 272B
The growing urban population, rising working population and online deliveries are driving the market while health issues and sanitation guidelines limit growth
TIER-1 MANAGEMENT
Shake Shack is led by Randy Garutti. He is the current Chief Executive Officer and Director at the company. Garutti also serves on the company’s board of directors. He has held both roles since April 2012. Garutti has also served as the Chief Operating Officer at Shake Shack before assuming the current position.
Chief Executive Officer and Director since April 2012
Previously served as Shake Shack’s Chief Operating Officer from January 2010 to his appointment as CEO and director. Has also served as the Director of Operations at the Union Square Hospital Group (USHG) for 15 years
Holds a Bachelor of Science degree in Hotel/Motel Administration/Management from Cornell University
President and Chief Financial Officer at Shake Shack, since October 2019 and June 2017, respectively
Previously served as the Chief Financial and Business Affairs Officer and Executive Vice President at Getty Images from October 2016 to the time of her appointment. Other roles she has played include Global CFO at McCann Worldgroup, Global CFO & COO at IPG Mediabrands and Global Financial Officer at Universal McCann
Holds a Bachelor of Arts degree in Accounting and Finance from Heriot-Watt University
Chief Operating Officer at Shake Shack. Has held this position since January 2017
Previously served as Senior Vice President, Operations at Shake Shack from 2015 to 2017. Has also served as Vice President, Operations since April 2012, and Director of Operations since 2010
Holds a Bachelor of Science degree in Hotel & Restaurant Administration from Cornell University
RED FLAGS
In March of 2016, Shake Shack opted to settle a class-action lawsuit filed by nine former and current managers. These managers cited that the company denied them thousands of dollars in overtime pay. In an official statement from Shake Shack, the company turned down the allegations stating:
“We believe the allegation to be untrue and we have taken steps over the years to ensure that our managers are classified appropriately.”
“Yet, we made a strategic decision to settle the allegation, despite our position on it, to keep our focus on building our business, growing our terrific team and offering the best experience possible to our guests.”
In a court case dated July 2020, Shake Shack was sued for employee violations under the Civil rights Act of 1964. The plaintiff accused the company of discrimination owing to her pregnancy at the time, coupled with her race. This ultimately resulted in her termination on January 5th, 2019. The court upheld the plaintiff’s claims.
FINANCIAL REVIEW
For the twelve months leading to the first quarter of 2021, Shake Shack posted total sales of $ 535. This was a 2.3% increase from the previous year
For the first quarter of 2021, sales reached $ 155m, a 8.5% year-on-year increase
Same-Shack sales increased by 5.7% versus 2020 but were down 14.8% versus 2019 levels
System-wide sales (TTM) stood at $ 7786m, a slight increase from the previous year ($ 779m)
Adjusted EBITDA reached $ 7.1m, or 4.6% of total sales
It’s total current assets stood at $ 435.0m, while its total current liabilities amounted to $ 118.0m
THE TAKE
What we like:
Shake Shack is a growing fast food chain active in the United States and expanding throughout Asia and Europe
It differentiates itself with a focus on high quality ingredients and affordable prices, making it a hit with younger consumers
The pandemic initially slowed down its expansion but enabled it to step into the packaged goods sector as it started selling burger packs online
The chain is ideally placed to benefit from the post-pandemic re-opening as consumers flock back to restaurants
At around 7 times sales, the company is fairly priced given its sustained sales growth
What we don’t like:
Gross margins have been pressured and reached 15%, coming from 30% in 2019
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Disclosures: The author has a position in Shake Shack, Inc. The author has no business relationship with any company mentioned in this article and the author is not receiving any form of compensation for this article.
Picture: Courtesy of Shake Shack, Inc.