Shake Shack's Digital Strategy Evolves En Route to 450 Restaurants

Shake Shack has always been a digital innovator in the quick-service space. But it’s finding the cashless conversation to be a challenging one. And perhaps a premature one at that.

Last fall, the brand brought a kiosk only, cashless store to Astor Place in New York City. Shake Shack called it a “playground” where digital integration and digital innovation would be the focus, and said these technological advances would help the chain get to know its customers better and assist them more efficiently.

On the latter note, Shake Shack learned plenty. And what it discovered was that the company needs a more wide-ranging approach as it prepares for one of the most important growth spurts in Shake Shack’s history.

“We think people really like it,” CEO Randy Garutti said of the kiosks in a conference call. “But what we have learned, and why we're doing the next rollout—we'll probably do about four or five Shacks in this next coming quarter. … [What] we've clearly seen is that our guests do often want to pay with cash.”

In the next test, Shake Shack will pilot stores that feature a combination of cashiers as well as kiosks, although Garutti said the Astor Place store would remain as is. The company plans to retrofit a number of restaurants throughout this coming quarter “with the goals of enhancing our guest experience, improving speed of service, and providing an opportunity to offset some degree of the increasing labor costs we have,” he added.

“We'll keep listening and learning. But I think the whole point of the digital evolution of the company is that we want to put the power in your hands. If you want to be a person who orders on the app, we got you. If you want to have it delivered, we got you. If you want to talk to a human being, we can't wait to greet you with a smile. But it's your call. And we want to make sure that we're doing that in so many different ways,” Garutti said.

Landing on a sweet spot will be key for Shake Shack as it barrels its way to 450 units long-term—220 domestic stores by 2020. Five opened in the first quarter, including the brand’s first in downtown Denver, as well existing markets in Houston, LA, South Florida, and New Jersey. Four international units opened—two in Japan, and one each in Saudi Arabia and South Korea, bringing the global total to 171.

"To deliver on these guiding principles, we are committed to continuously elevating our performance and accountability, deeply understanding our guests, executing the basics with brilliance, building our business infrastructure and driving smart and profitable growth.” — Randy Garutti, CEO Shake Shack

Shake Shack’s growth, however, is heavily weighted toward the back half of fiscal 2018, with more than 70 percent of its planned openings expected, and the majority of those scheduled for the fourth quarter. This would add 32–35 Shake Shacks this year domestically, representing a robust growth rate between 36–39 percent (20–25 percent in new markets). Additionally, 16–18 licensed Shacks are on the books with international growth focused on Japan, South Korea, and the brand’s recent launch in Hong Kong, where Garutti said lines 100 deep waited all 12 hours the restaurant was open on it debut. Domestically, Seattle, Cleveland, and Nashville are among the new markets in sight.

The company is expecting average-unit volumes of company stores to range between $4.1 million and $4.2 million this year.

With this kind of growth in store, Garutti said it’s more important than ever for Shake Shack to get its customer service model correct. “We're going to continue to test and innovate—test new and innovative offerings that drive excitement, frequency, and overall guest satisfaction, all while staying true to our core and operationally effective in the Shacks,” he said.

Shake Shack enjoyed a Wall Street-busting quarter to kick off the transformational year, which pleased investors following an up-and-down 2017 that saw Shake Shack post fourth quarter net income at a loss of $14.4 million. But those numbers were clouded a bit by 41 percent unit-count growth and the fact Shake Shack only counted 43 restaurants in its comparable base since it keeps the measurement to stores open at least 24 full fiscal months.

To start fiscal 2018, Shake Shack posted revenue of $99.1 million, a 29.2 percent increase compared to the $76.7 million it brought in during the year-ago quarter. This smashed FactSet’s prediction of $96.7 million. The chain recorded net income of $3.5 million, or 13 cents per share, which also beat the Wall Street consensus of $2.3 million, or 9 cents per share. Same-store sales climbed 1.7 percent, year-over-year, easily passing FactSet’s 0.4 percent guidance. Comps declined 2.5 percent in Q1 2017.

The news sent Shake Shack’s stock up 7.6 percent after the bell and more than 9 percent in pre-marketing trading Friday. This was driven by a combined increase in price and sales mix of 5.9 percent offset by a 4.2 percent decrease in guest traffic.

Excluding all transactions associated with the free burger promotion in the prior year, same-store sales would have been 2.1 percent in the first quarter with traffic declining by only 2.2 percent, the company said.

“Shake Shack is a growing, loyal, connected community, relentlessly focused on excellence, experience, and hospitality,” Garutti said. “To deliver on these guiding principles, we are committed to continuously elevating our performance and accountability, deeply understanding our guests, executing the basics with brilliance, building our business infrastructure and driving smart and profitable growth.”

As Shake Shack expands, Garutti said the brand would need to be accessible wherever and whenever its rapidly widening base wants it to be.

The chain is working on browser-based ordering for mobile and desktop, expected to launch later this year, to enable guests who don’t want to download the app to order online. Shake Shack continues to test and learn through integrated pilots with key delivery service partners, Garutti said.

“Throughout the first four months of 2018, we conducted integrated test with Postmates, DoorDash, Caviar, and Grubhub. We're seeing continued demand from our guests for Shake Shack to be delivered, gaining valuable feedback across multiple areas, including the new packaging we've been testing,” Garutti said. “We're encouraged by the results, and do we believe we saw a positive uplift in sales during the first quarter. For now, our strategy as it relates to delivery, remains unchanged. We will continue to thoughtfully test and learn, and if or when the time comes for us to enter into a formal partnership, we'll do so on the basis that it will deliver a strong and economically healthy business for us for the long term.”

The digital checks are driving up Shake Shack’s average ticket. The orders are roughly 15 percent higher, depending on the channel, Garutti said.

There is a lot going on menu wise for Shake Shack right now. During Q1, it created a Griddled Chick’n Club as an LTO to offer an alternative to the crispy sandwich that has been core to the brand’s menu since 2016. And based on “years of feedback from our guests,” Garutti said, locations in New York, California, and Texas started serving a Veggie Shack made from brown rice, black beans, and beets. This week, Shake Shack also introduced a barbecue lineup featuring a new smoky Cheddar cheese.

“Beyond these gratifying results, what remains our greatest point of pride is that the hospitality culture of our team is stronger than ever. That is what will always guide and drive our continuing growth. This is a special company with a special opportunity ahead,” Garutti said.