Shake Shack served Wall Street its IPO filing in late December 2014, boasting an estimated valuation of $1 billion. The burger chain is part of a larger cultural movement towards “fast-casual” dining that has overseen the subtle decline of fast-food giants like McDonald’s.
The New York based restaurant chain is a darling of Wall Street. From its humble beginnings as a hot dog cart in Madison Square Park it has grown to 53 shacks as of Q3 2014. 31 Stores are U.S. based and 22 are internationally licensed, with most of them located in Middle-eastern countries. They’ve expanded to 63 locations in total – 36 domestic and 27 international.
Shake Shack is part of an emerging class of “fast-casual” food restaurants, but they refer to themselves as “fine casual”. With just 63 locations Shake Shack is in its infancy, but if the burger chain can maintain its popularity, expect to see locations grow by 10-20 times over the next 3-5 years. Competitors such as In-N-Out Burger (300 stores), Five Guys (1000 stores) and Chipotle (1600 stores) give insight to the growth of the Fast-Casual segment. Techtomic’s 2014 Top 500 chain restaurant report indicates that sales for fast-casual chains grew by 11%. In 2013 Chipotle made over $3 billion in revenues, and revenue has been growing every year since 2009.
Chipotle Mexican Grill, Inc (NYSE: CMG)
Millions of USD; annual data; Source: Google Finance
A Crumbling Empire
In August 2014, McDonalds posted its worst decline in sales for 10 years. Sales have been fairly flat over the past year and lower than year ago levels, and the fast food giant is struggling to address their customer’s needs. In a bid to service every customer type McDonald’s menu has ballooned to over 100 items! The recession changed the way people buy fast food and the coveted 18-34 demographic are voting with their dollars for healthier options. Americans still eat fast food; it’s just called Chipotle now.
The growth of brands like Chipotle and Five Guys exemplifies a cultural shift toward better food. Consumers are rejecting former fast-food front-runners and looking to “fast-casual” restaurants to provide them with high-quality food made with fresher ingredients and sustainable practices. Which is why Shake Shack proudly promotes its vegetarian fed, humanely raised and source verified 100% all-natural Angus beef.
Make no mistake, Mcdonald’s still does big business. With 35,000 stores in over 100 countries they are still a behemoth. It’s just that rising disposable incomes and increased choices mean consumers are flocking to fast-casual restaurants like Chipotle and Five Guys instead.
Shake Shack IPO By the Numbers
The key number to look at is total revenue, which grew from $20 million in 2010 to $82 million by year end 2013. In that same time frame the company grew from 7 Shacks in two states to 40 Shacks in six states. The company’s IPO filing reveals that the Manhattan Shacks perform better than their Foreign counterparts. Shacks based in the Big Apple average $7.4 million in sales versus 3.8 million elsewhere.
System-wide sales include revenue from all Shacks; total revenue is limited to domestic Shacks and revenue from franchised Shacks; Source: Shake Shack S1 filing
The operating margins, how much a company makes (before interest and taxes) for every dollar in sales, are healthy as well – standing at around 30% for Manhattan Shacks and 20% for the others. This compares favourably with Chipotle which has operating margins of around 20% – i.e. it makes 20 cents for every dollar in sales.
Outgrowing Their Roots
As Shake Shack grows bigger there will be accompanying challenges. It’s not easy to keep a large company profitable but in Danny Meyer, CEO of Union Square Hospitality Group, they have someone who’s going to give them a fighting chance. Meyer’s first venture, Union Square Tavern, was ranked New York’s top restaurant for seven years. He’s an impressive guy.
Awards, honours, and money are nice but Danny’s business philosophy has been shaped by the experiences of his father. The elder Meyer was a hotel owner who, unable to balance ambition and finances, ended up over-extending himself and going bankrupt at the age of 42. He would pass away only 17 years later.
The younger Meyer is desperate to avoid the mistakes of his father, and his twin pillars: business discipline and team-building have served him well. In 26 years Meyer has gone from owning the Union Square Tavern to being the CEO of a company that employs 2200 people and he’s not stopping there.