Shake Shack: Serving Up More Than Just Burgers
Caring Customer Service Comes From the Top Down
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.
Student comments on Shake Shack: Serving Up More Than Just Burgers
I’m a Danny Meyer fan and think it’s impressive that he’s built a line of successful restaurants at different price points by focusing on hospitality. As you point out, compensating workers at a rate above minimum wage has worked in his favor so far, but I’m curious about how Shake Shack will fare in the face of rising labor costs. New York’s minimum wage is increasing to $15 next year, and I’m wondering whether Shake Shack will be able to raise its wages accordingly without seriously hurting its profits. Shake Shack prices have already increased twice in the past year – will it raise prices again in reaction to the change in labor costs? If so, will that increase be enough to mitigate damage to profits? Additionally, will consumers stick with Shack Shack, or will an increase in prices drive people away from the restaurant’s “fast casual” and towards traditional fast food?
I would be interested in finding out more about the challenges that they faced when moving from fast food to fast casual dining. Was their emphasis on company culture and higher wages specifically developed to support this transition? If so I wonder how sustainable this advantage will prove without further investment in training and other aspects of employee satisfaction.
William – I enjoyed the post and am a pretty big fan of Shake Shack! To be honest, as much as I do not indulge on traditional fast-food restaurants I feel the entire Shake Shack experience is much different and am proud to have frequented Shake Shack during my time in New York. We actually had one of their locations in the lobby of our office building so it was a frequent lunch and after-work stop for many of us. As you pointed out, there was always something different about the experience – from the way the employees seemed to enjoy their job and were committed to the customer experience – to the way that the food tasted and a willingness to wait in line to be served. Shake Shack for many became more of a commodity than a staple in the fast-food market. Many of our out-of-town clients would actually request Shake Shack for lunch instead of the more exquisite and higher-quality catered meals. I think Shake Shack has been able to grab a lot of fanfare in larger cities and some of their current locations, but I wonder if they can create the same “buzz” in smaller cities and towns across the U.S. Also, as they continue to buy premium ingredients and pay for their employees’ higher wages will they be able to remain competitive in markets outside of cities where consumers’ willingness to pay is likely far less? Despite the market reaction to Shake Shack over the past couple months – will there be equal volatility for consumers once the “wow” factor wears off – or they start to price out potential customers in more rural markets?