“There are a lot of really poorly run restaurant chains,” Gillies says. “They might be wonderful eating experiences, the people running them might be wonderful people … but the fact of that matter is that there’s a lot of restaurant chains where the investors haven’t made a dime in five, 10 years, while the people running the companies have gotten rich.
“Someone like Biglari comes along, and he kicks over the hornet’s nest.”
Going Beyond Buffett
Though the comparisons between Biglari and Buffett are easy to spot, there are plenty of moves Biglari has made that stray from the Buffett script.
Buffett has “either bought companies outright, which allows him to make the changes that he sees necessary, or he focuses on companies that are run really well and buys a large investment stake, and then doesn’t say a word,” says Chad Brand, founder and president of Peridot Capital Management and also a shareholder with Biglari Holdings.
“If Buffett had bought Steak ‘n Shake, you can bet he would have hired an operations guy to run Steak ‘n Shake, and Buffett would have stayed in his office and looked for ways to invest the profits from Steak ‘n Shake,” Brand says. “Biglari hasn’t done that.”
Biglari has instead jumped into the everyday operations of Steak ‘n Shake, a company that was founded in 1934 by Gus Belt as a place for customers to get a premium hamburger and hand-dipped milkshake.
Some of his changes at Steak ‘n Shake have been so unlike Buffett, however, that they’ve riled up some in the investor crowd.
First, there was the 20-for-1 reverse stock split in December 2009 that sent the price of shares from about $13 to about $260, and the attempted 15-for-1 split that could have shot the price to nearly $7,000 (shareholders vetoed the latter).
Biglari claims that the reverse stock split is a way to weed out short-term-thinking shareholders.
“We will continue to strive to avidly excite the attention of blue-chip shareholders who are unfazed by near-term fluctuations in our stock or by the vagaries of the stock market,” he said in his 2010 letter. “Rather, such investors are placing their confidence in us and, like us, judge performance on the basis of long-term value creation.”
Brand, who wrote a letter to Biglari crying foul over the second reverse stock split, says the first one was a sensible move for a company trying to establish long-term success. “He’s trying to build this company up for the next 30 years, not necessarily for the next 30 days,” Brand says.
The next move that baffled some investors was a name change; in April 2010, Biglari changed the name of Steak ‘n Shake corporate to Biglari Holdings and consolidated his other brands within the company.
The final move that was quite unlike Buffett was the compensation package he proposed for himself. Although his salary was already $900,000, he proposed a deal that would pay him 25 percent of the increase in Biglari Holdings’ adjusted book value, exceeding a 6 percent hurdle rate; in other words, potentially millions of dollars a year. Shareholders approved the compensation in late 2010.
“What we too often learn in corporate America is pay-for-failure because of asymmetrical payouts through which executives win regardless of whether their shareholders win or lose,” Biglari said in his shareholder letter. “True pay-for-performance is a concept that most investors accept intellectually.”
But for all of his anomalies—which include having a picture of him welcoming guests installed at each unit—Biglari has succeeded at turning Steak ‘n Shake around. As he promised in his 2008 letter to shareholders, when he said the company’s “fundamental idea is to become the most efficient restaurant company in the industry,” Biglari has streamlined operations and slashed company costs across the board.
When he took over the company, Biglari halted new store construction and cut many unnecessary company costs. He’s since added promotions like the company’s popular 4 Meals Under $4 offering, all you can eat pancakes, kids-eat-free options, and a half-price happy hour for milkshakes. There have also been several new menu offerings, like the California Burger, that have reportedly been approved by Biglari himself.
Steak ‘n Shake is also rolling out a new store prototype that costs $1.5 million instead of the previous $2.2 million, and trims the square footage from 4,200 to 3,200. The new prototype, which features retro photos of the company and other design tweaks, is “a display of our uncompromising dedication to the pursuit of excellence,” Biglari said in his 2010 letter. A counter-service-only prototype, the Signature, is also set to debut this month.
Not everyone is on board with the changes Biglari has made to the brand. In early 2011, some franchisees complained that all of the promotions had hurt store margins, and a group of franchisees filed a lawsuit against Biglari over his moves to standardize menus and pricing. And there are rumblings from franchisees that the prototype change skimps too much on equipment.
Although franchisees represent a small portion of the Steak ‘n Shake system—at the end of 2010, it had only 75 franchised units of 487—Biglari may want to consider the plight of those operators. After all, he said in his 2010 letter that Steak ‘n Shake will be “investing in human resources, training, supply chain, and, more significantly, franchising” as a means to grow.
Franchising, he said, is a “fiery growth engine, the kind of business we like to own: one that does not require enormous sums of cash to generate annuity-like cash flow.” Biglari also said he’d like to grow the company by 1,000 franchised units, though he did not mention in what time frame.
Is it too soon to judge Biglari’s moves at Steak ‘n Shake? Probably. But Gillies says investors, operators, and critics alike would be wrong to write him off so soon.
“I think people underestimate Biglari,” he says. “I think he’s very confident in what he does, he’s very measured in what he does. He doesn’t really care about outside criticism.”
Photo: © San Antonio Express-News/ZUMApress.com / © Edward A. Ornelas / 2007