Customers are responding well to Shake Shack’s newest chicken item, Chick’n Bites, which launched as a limited-time item this past quarter. However, menu prices are expected to rise, especially for chicken items, as the company tries to combat climbing operating costs.
During Q1 total revenue grew by 34 percent to $132.6 million. The burger chains’ operating costs jumped during the last quarter due to higher food prices and delivery commission fees. Compared to this time last year, food and paper costs at Shake Shack were up 140 basis points to 29.5 percent of total revenue. The easiest way to cushion the sharp uptick was to increase menu prices, said Shake Shack chief executive officer Randy Garutti on a May 2 conference call.
So far Shake Shack has been cautious of price increases. But now the brand plans to take a 1–2 percent increase on some menu items, including the Chick’n Bites, which are increasing from an initial promotional price of $4.39 to $4.99. Garutti noted the brand is looking at the long-term pricing strategy. Rather than shock customers with significant increases, Shake Shack wants a sustainable strategy that will play out over years, not months.
The initial price of $4.39 was a reduced promotional price that was used to gauge customer interest in the new product, Shake Shack’s chief financial officer Tara Comonte said.
“Even at the newer price, [the Chick’n Bites are] still below $5,” Garutti said. “I like us to be considering around the core menu how we can tinker at both ends of high and low pricing over time. We want to compete on quality and experience and not just on price.”
Comonte said beef costs have leveled out, but chicken is a high-cost item for Shake Shack. To deliver high-quality, antibiotic-free chicken, food costs will remain high, but the company expects them to even out down the road as improvements to the supply chain are made. By the end of the year, the material impact of Chick’n Bites will lessen.
Besides the increase in food costs, Shake Shack started 2019 on a positive note. The company had its strongest traffic of the past 11 quarters as it grew 1.6 percent. Same-store sales also lifted 3.6 percent. Garutti attributed the positive quarter to favorable weather, new location openings, and expansion of brand awareness through new digital channels.
As Shake Shack approaches its 15th birthday this summer, the brand is breaking out of its four walls to bring customers menu items in an unconventional setting. This creative, new strategy includes appearances at Coachella and pop-ups in markets where it plans to develop in the future.
Over the past year, Shake Shack opened 34 domestic locations. In the first quarter of 2019, the company debuted five domestic locations and seven licensed locations. These new locations are helping the brand fortify existing markets in the Northeast and West Coast. Shake Shack will also enter Salt Lake City, New Orleans, and Columbus, Ohio, by the end of 2019.
Shake Shack’s footprint in nontraditional spaces also took off during the first quarter. Restaurants opened in airports at Dallas-Fort Worth, Phoenix, and Cleveland. Last month, Shake Shack announced its first stadium location at Citizens Bank in Philadelphia. Garutti said, “Our stadium business continues to be a great brand builder, and we're always thrilled to have Shack be a memorable part of our guest game day experience.”
On the international side of the business, Shake Shack also expanded its footprint during the first quarter. Four international restaurants opened in Japan and South Korea. Shake Shack will push into the Philippines and Mexico by the end of 2019. To handle the growing overseas operations, the company will open an office in Hong Kong later this year.
The company remains on track to open 36–40 company owned locations with an additional 16–18 licensed locations in the pipeline. About 80 percent of the new locations will open in existing markets. Garutti said the decision to step away from concentrating solely on new markets allows the brand to go deeper with existing markets. By using this strategy, the company is able to build a stronger culture and community and grow leadership that can then help bring Shake Shack into new markets.
Average unit volume hovers around $4.3 million with first quarter average weekly sales of $79,000, Comonte said. However, as new locations come into the system those averages will decrease slightly.
“These metrics will continue to gradually reduce as we expand and broaden the sales volumes in the system, opening new Shacks across the country and going deeper in existing markets, all while delivering significant top and bottom line growth,” Comonte added.
The company expects company-owned locations to finish the year with AUVs between $4–$4.1 million.
Innovation in the Kitchen
Chick’n Bites aren’t the only creative LTO to come out of Shake Shack’s Innovation Kitchen in NYC. The company’s culinary team is busy dreaming up with new shake flavors and making improvements to classic menu items.
“We want to do the things that other people aren't willing or aren't able to do,” Garutti said. “And that starts right here in our Innovation Kitchen, and then it spreads to Shacks around the country.”
The newest shake flavors include cherry blossom, tiramisu, and sea salt and vanilla toffee.
Some menu items, like the Chick’n Bites, will be released systemwide, while others are tested at one or two locations in New York. One recent test features Shake Shack’s partnership with HBO. In honor of the final season of “Game of Thrones,” Shake Shack created a number of menu items inspired by the TV show but only available in a few locations across the country. Diners in those selected few markets have been able to try the Dracarys Burger and the Dragonglass Shake.
“Because such a strong fan base, people want to try this and the fun creation of the Dragonglass,” Garutti said. “It's a tasty and cool invention,and it's just a fun way to have people be thinking about Shake Shack.”
An analyst with J.P. Morgan Chase John Ivankoe pointed out that these exclusive items are on the higher end of the menu prices. Garutti, in turn, explained that these menu items are part of a test to see what the brand can do with shakes—and to see if guests are willing to pay a little extra for the one-time special.
Dealing with delivery
As operations cost rise, delivery costs could be the next area to see prices rise. “Unfortunately, delivery comes with a cost,” Comonte said.
Delivery is still in the testing phase at Shake Shack, and the brand doesn’t have plans to announce a formal partnership at the moment, Garutti noted. But so far, tests show customers love delivery and are willing to pay for it.
“There seems to be a great willingness to pay on digital channels,” Garutti said. “So I think we've got that upside as a potential.”
Instead of cost, Garutti said, the company is focused on growing off-premises traffic and getting customers to order through digital channels.