As Biglari alluded to before, Steak ‘n Shake’s issues extend beyond convenience. The brand’s customer service lagged as well. “No amount of technology or equipment will create a winning restaurant chain; it takes the right leadership in every restaurant unit,” he wrote.
Steak ‘n Shake hopes to take a page out of Chick-fil-A’s book to remedy the issue. Earlier in the year, the brand announced it was franchising all 413 of its company-operated units. Specifically, the initiative centered on a single-unit strategy—akin to the chicken leader—in hopes of fostering a system where every operator is fully invested. The owner-operator model sells franchises to managers and other interested parties for just $10,000. But the new operator must split the store’s profit with the franchisor. Again, like Chick-fil-A. Steak ‘n Shake also charges the restaurant up to 15 percent of sales to lease the unit and its equipment. This was an ambitious change from past practices. The average initial investment for a classic Steak 'n Shake, which includes planning and building a location, runs between $1.6–$2.6 million. Biglari, who started his company with $15,000, said the program would feed the entrepreneurial spirit at Steak ‘n Shake.
“But there is a caveat: We are not interested in absentee owners; rather, we seek entrepreneurs with a consummate commitment to the business. In doing so, we aim to harness the power of enterprising operators,” Biglari wrote.
Even splitting the profits along with the possible 15 percent of sales, Biglari said, franchise partners can earn “considerable sums” under this structure.
“Our thinking behind such a lucrative arrangement is simple: The best way to create wealth for ourselves is to first create wealth for our franchise partners,” he wrote.
The franchisees are being screened based on entrepreneurial attitude and ability, but become franchise partners based on achievement, he said. They need to demonstrate skills “embodying a customer-focused approach” and be hands-on operators.
“We limit a franchisee to a single location, based on the belief that focus, along with passion, determination, and persistence, will translate into excellent employee and customer satisfaction,” he said.
This new Steak ‘n Shake system could take about three years to transition. “We expect the combination to reinvent Steak n Shake as the best quick-serve restaurant company in the premium burger segment of the industry,” he wrote.
To accelerate the process, Steak ‘n Shake is now offering two franchise arrangements: the franchise partner model (the single-operator structure outlined above), and traditional franchisees, which is how the company plans to grow its unit count, Biglari wrote.
“To achieve unit growth without a major capital outlay, we employ a traditional franchise based model, a noncapital-intensive strategy that generates high-return, annuity-like cash flows,” he wrote. “Here, the major funding necessary to expand the brand is borne by third parties. Traditional franchising is a business that not only produces cash instead of consuming it but concomitantly reduces operating risk.”
Steak ‘n Shake’s franchise system has shifted before. Beginning in 2010, the company invested money to advance the traditional model. It had 71 franchise units in 2010 and 213 in 2019. The company, founded 1934 in Normal, Illinois, started franchising in 1939. It grew by an average of one franchise unit per year from 1939 to 2010. In the past eight years, current management added twice the number of franchise units (142) than had been built in the preceding 71 years.
In regards to the service model, all Steak ‘n Shakes were sit-down chains for the first 78 years. In 2012, the company introduced a quick-service format, “designing and developing our concepts in a modular way that embraced flexibility and made it adaptable to various venues,” Biglari wrote.
This has allowed it to scale in universities, casinos, airports, gas stations, shopping centers, and other non-traditional outlets. Currently, 87 of the franchised units are counter-service only—a figure that includes international operations, which began in 2013. There are 22 locations in France.
Transitioning to a franchise model makes sense dollars wise, Biglari said.
“For the period 2011 through 2015, the franchise business operated at a loss but intrinsic value advanced,” Biglari wrote. “We allocated capital to develop the franchising business with the expectation of creating greater dollar value for each dollar spent. Our traditional franchise business—domestic and international combined—is now a prodigious cash generator. In 2018, franchise operations posted a record profit of $8.0 million. Furthermore, because international operations reached scale toward the end of 2018, thereby turning the flow of red ink to black, we expect our franchise business to generate even higher profits in 2019.”