Shake Shack winning in fast casual
Enlightened hospitality > throughput time
We started as a hot dog cart, now we’re here
Danny Meyer made his career creating Michelin star restaurants. In 2001, his restaurant empire Union Square Hospitality Group (USHG) launched a temporary hot dog cart to support an art installation in Madison Square Park. It was 3 years before the first Shake Shack opened in the same spot – expanded into 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”. (1)
Isn’t this just another burger chain?
No.
Wait, why not?
On opening day of the Newbury street location, CEO Randy Garutti addressed the staff with the simple message: “I want to challenge you to put us out of business… because you are so damn generous with what you give the people who walk in this door…This is not merely about the occasional gratis dessert: It’s part of a larger effort to empower employees to do whatever it takes to make customers feel loved.”(2)
Does this sound like another chain to you?
The root of what makes Shake Shack different is the idea of “Enlightened Hospitality” – it guides every decision and dictates both the business and operational model, creating a unique and sustainable competitive advantage.
Enlightened hospitality – cliff notes version
In his book, Meyer explains how he prioritizes his restaurant stakeholders, in a way almost no restaurant does: (3)
- Employees
- Customers
- Community
- Suppliers
- Investors
“The idea is to create a welcoming atmosphere first for employees, next for customers, and then for the outside community, suppliers, and, finally, investors. This is similar to what J&J outlined in their “groundbreaking” 1943 mission statement that preceded decades of earnings growth, but dissimilar from what any other fast casual chain has laid out. (2) (4)
Employees
Compensation – “Entry-level Shake Shack workers make $10 an hour in New York … the real financial incentives are designed for employees who stick around…[with] a profit-sharing program called Shack Bucks that can…add as much as $2 an hour to paychecks. And every full-time employee was given the chance to purchase stock in the IPO. 2 The company has a 401(k) match and health coverage for workers who work more than 30 hour
s a week. (5)
“The No. 1 reason we pay our team well above the minimum wage is because we believe that if we take care of the team, they will take care of our customers,” said Randy Garutti.(6)
Career advancement — “…our job is to promote that person and show them how they can make a lot more money if they choose to be a leader.” Many of Shake Shack’s executives have been groomed from within, and it’s not uncommon for hourly employees to get bumped up to manager, general manager, and beyond.”
Hiring (“51%’ers”— Target 51% EQ (people skills) vs. 49% IQ (technical skills). They look for “people who are warm, friendly, motivated, caring, self-aware and intellectually curious.” (7)
Empowerment – As Garutti alluded to in the opening of the Newbury location, employees are not just able, but expected to go above to drive a better customer experience.
The customer
Employees are instructed to “trust” customers and “try to be on their side—to always make the charitable assumption”. Experience is key, it’s more than just satisfying a functional meal need.
The community
Both Meyer and Garutti have publicly declared their goal of “creating a new kind of wealth called ‘community wealth’ that not only enriches individuals and corporations but also makes communities stronger.” (8)
Giving back – “We would raise the money philanthropically to build the kiosk, then we’d gift it to the park.” Even the (now world famous) logo was born out of pro bono work surrounding this venture. (9)
Restaurant design – Each restaurant is “of their place, not something that happened to their place” Each outlet is localized to some degree – on Newbury Street the walls are made out of materials from an old Boys & Girls Club in nearby Watertown.
The Suppliers
Quality — “No hormones and no antibiotics ever.” (10)
Mission — They show ranchers “photos of Shake Shack’s infamous crowds to drive home how excited customers are” for top quality meat. This also includes working with the famed meat purveyor Pat LaFrieda’s (meat + custom patty machine’s each producing 80K/day) (fast company).
The Investors
Are being rewarded. Revenue and EBITDA continue to grow steadily, as the footprint expands. The stock price has been volatile post one of the hottest IPO’s of the year, but there is little doubt that the chain will continue to grow “their way;” sustainably with 10 a year, eventually reaching 450 – enabling the chain to maintain its operating philosophy of enlightened hospitality. (11)
So what?
In an industry obsessed with how quickly they can get customers in and out, Shake Shack is winning by focusing their business and operations on a different prioritization of goals. If you’re not convinced yet, name another fast casual concept that celebrates their long lines with a live feed from the original.
So close the computer, and go get a burger (and maybe a shake!). Hopefully the line is slightly shorter than this:
Sources:
Sounds delicious. Do you think their enlightened hospitality priorities could come under pressure now that they’re public – is there a risk that investors start to creep up the pecking order? Thinking especially over the longer term when organic expansions opportunities may become more limited, when the current guys at the top turnover or if they get vocal investors buying in and exerting pressure.
I think it is a very valid concern, but I firmly believe that they will hold firm with the current model. You already see dedication to this through one transition (from Danny Meyer essentially running, through spinning out as a separate company as it is now). Also, as mentioned they have set and maintained expectations on growth at ~10 a year, even though there is a much larger market opportunity. Some of this is probably why you are seeing such volatility around the stock price, but I do not believe there is any reason to worry of a divergence. This would be, the biggest mistake they could make at this point.
I think this is a great example, and you’ve outlined their operating advantages very well. I’ve seen people wait over an hour in line for Shake Shack, and I’m not sure that there are many (or any) other fast food chains that people would do this for. I think that prime locations have been at least part of the success and I’m worried that they have been jeopardizing this factor recently. For example, Shake Shack opened a location in New York on 3rd and 40th, which is not a prime location. There isn’t much around that location and I’ve never seen a long line there. I’ve also seen them open many locations in airports and I’m curious as to the economics of those stores. Is it purely a marketing play or are the margins behind those locations attractive?
I think this is a very valid concern, however I think what mitigates this is the locations as a destination rather than convenience play. Chipotle is about getting customers in and out quickly, and being the most convenient option. They are at 1,700 units en route to several thousands. Shake shack is en route to a few hundred. If anything these non-prime locations do even more to strengthen the link between operating and business model.
On the airport point, I would suspect these are actually some of the most profitable, because they actually are quite willing to pull the price lever. The most expensive Shake Shack in the company is in the Dubai airport. There is not enough public information to definitively say, but this is my strong hypothesis.
There is a lot more nuance to this business than I ever gave it credit for. As I am sure you are well aware the better burger category has been exploding as of late. So far there have been two approaches to expanding the category: one is a more regional approach that radiates from the chain’s core market and leverages its local reputation / word-of-mouth to build a cult like following. I would argue this is the approach that In-N-Out Burger and Shake Shack have largely pursued. The other approach has been the land grab approach which is to expand as quickly as possible in order to gain a national footprint, brand awareness, and ultimately market (and mind) share, an approach that has been adopted by chains such as Five Guys and Smashburger.
I haven’t dug into the financials, but I am curious as to how much more productive the Shake Shack locations are in the Northeast, which I would consider its core market, vs. its locations on either the west coast or overseas. Moreover, it will be interesting to see over the next 5-10 years as Shake Shack continues to expand nationally whether they will be able to take market share away from Five Guys and Smashburger, who already have national market presence, and whether they will be able to maintain the same unit economics. It will also be interesting to see if they will have to increase their marketing budget / campaigns to build brand awareness in markets outside of their core region.
Think this is a very valid question on the profitability. Although they do not release this level of details, we do know that they are very deliberately growing slowly. This is largely to do just what you referenced, and maintain the same unit economics and appeals (as opposed to the land grab model). So far, the brand awareness seems to be from a mostly natural strong organic “pull” from customers. This Forbes article adds some more detail:
http://www.forbes.com/sites/steveschaefer/2015/05/12/shake-shacks-growth-the-tortoise-and-the-hare/
Thought this was great! You know I’m a big fan of enlightened hospitality, and think Danny Meyer has been really successful at bringing the concept to fast casual
I was wondering if you thought about the international expansion piece at all? My understanding is that. like many QSR concepts, international Shake Shacks are licensed. But I wonder if that poses a particular risk in this case given the Company’s unique hospitality focus. I think they do require their licensees to meet particular standards, but was curious if you had considered their ability to continue to deliver on their customer promise internationally without full control.
They do indeed licence their brand (mostly international). I believe this would be an area of concern if they were growing at a rapid pace, but believe the rest of the operating model allows for this. For example, they still maintain a very small and select group of suppliers. The underlying fear in your question is that Shake Shack will in some ways go down market a la the McDonalds of the world, but I agree with the article below that “while Shake Shack does license its brand, it’s shown little interest in aggressively pursuing the franchise strategy that made McDonald’s so massive” which when combined with the rest of their business and operating model will preserve the overall brand quality.
http://fortune.com/2015/05/14/shake-shack-mcdonalds/