In May’s first-quarter report, Steak ‘n Steak revealed it “temporarily” closed 44 locations so it could wait for franchise partners to buy back stores. The restaurants shuttered “until such time that a franchise partner is identified,” the company said—part of Steak ‘n Shake’s previously announced target to refranchise all 400-plus of its corporate units to entrepreneurial-minded operators. The temporary closures are now up to 103, the company said in a second-quarter filing.
As of June 30, the classic burger brand, founded 1934 in Normal, Illinois, had 520 restaurants up and running (213 franchised and 307 company run). On December 31, 2018, there were 626 locations (213 franchises and 413 corporate). The retraction includes the temporary closures as well as three permanent cuts.
As the current unit split shows, Steak ‘n Shake’s refranchising plans haven’t speeded into play just yet. In July, the company reopened a St. Louis location under the new program—the first and only so far to be publicized.
What's going wrong at Steak 'n Shake?
Steak ‘n Shake unveiled the initiative in August 2018. It grabbed as many headlines for its sizable structure as it did for the capital equation. Looking to build a system of single-unit, operator-run stores, like Chick-fil-A, Steak ‘n Shake said it would offer restaurants for just $10,000 a pop. It also charges the owner up to 15 percent of sales to lease the unit and equipment and requires them to split the store’s profit.
Parent company Biglari Holdings, which also runs Western Sizzlin, reported Q2 six-month net sales of $152,062 and $317,693, respectively, representing a decrease of $39,735 and $59,675. The company said the drop “was primarily attributable to the temporary store closures.”
Steak ‘n Shake’s top-line results are sagging, too. The brand’s same-store sales decreased 5.9 percent in Q2. Traffic plummeted 9.2 percent. For the six-month picture, comps are down 6.5 percent and traffic 8.1 percent.
In Q1, same-store sales and traffic slid 7.9 and 7.7 percent, respectively.
The brand’s comps have now slipped for 11 straight quarters. It’s running red on a three-year stretch. Same-store sales declined 5.1 percent in fiscal 2018 following decreases of 1.8 percent and 0.4 percent in the previous two years.
Also, coming into the year, Steak ‘n Shake’s customer counts rode downward from 116 million to 111 million to 103 million—its lowest mark in eight years. “Since 2017, Steak ‘n Shake has experienced sales declines, which is the primary reason for Steak ‘n Shake’s lower profitability. To mitigate the sales declines and increase profitability, Steak ‘n Shake is emphasizing its franchise partnership program,” the company said in the filing.
One of the questions, naturally, is will all these stores reopen? The brand said in the filing that “no assurances can be given that Steak ‘n Shake will be able to secure suitable franchise partners or that its strategy will restore profitability.”
Steak ‘n Shake has incurred $21 million in operating losses so far this year. It had $3 million in Q2 versus a $2.7 million profit in the year-ago period.
Last year, for the first time since 2008, restaurants took a loss in operating earnings at $25.8 (in dollars in 000s). As a company, the figure was negative $10,657. It was negative $30,754 in 2008 before trending positive year-over-year until 2018.
Biglari Holdings said cost of food in Q2 was $47,316, or 31.1 percent of net sales. That compared to $57,117, or 29.8 percent last year. It credited the increase as a percentage of net sales to “a promotion that increased food costs.”
Restaurant operating costs in Q2 were $80,483 (52.9 percent of net sales) compared to $98,853 (51.5 percent) in 2018. This bump was principally due ot higher wages, the company said.
Lastly, Q2 G&A expenses were $12,021 (7.5 percent) and $29,122, or 8.7 percent, of total revenues. Last year, it was $16,877 (8.4 percent) and $31,964 (8.1 percent) of total revenues. The company credited the G&A expense decrease to a reduction in personnel.
Western Sizzlin closed three locations as well to bring the footprint to 56 units (52 franchises). There were 61 stores on June 30, 2018.
Additionally, Biglari Holdings said in the filing, it settled two class-action lawsuits brought by ex-managers for $8.35 million.
The notion behind the refranchising program, CEO Sardar Biglari noted earlier, was to add “entrepreneurs with a consummate commitment to the business,” into the fleet. Steak ‘n Shake would avoid “absentee owners,” as it tried to remedy some admitted customer service concerns.
“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,” Biglari said.
He added the path is intended to “reinvent Steak ‘n Shake as the best quick-serve restaurant company in the premium burger segment of the industry.”
Also, Steak ‘n Shake is working to overhaul and streamline production to improve speed of service. In the past decade, the company’s drive thru and take-revenue rose 51.5 percent.
But that came with an aggressive pricing formula that hasn’t evolved with a changing customer preference. Guests are placing convenience above price today. So Steak ‘n Shake is working on better production techniques to gain volume through speed, not price points. Biglari said the brand is doing so by “developing a tailor-made system designed to speed up service, deliver consistency, and reduce labor.”
“Our aim is to change not our products but the process by which we create our delicious Steakburgers and milkshakes," he said.
Steak ‘n Shake’s company’s units were all sit-down models for the first 78 years. The counter-service format arrived 2012. It grew through universities, casinos, airports, gas stations, shopping centers, and other nontraditional outlets. By the end of 2018, there were 87 quick-service locations—including international operations.
Steak ‘n Shake started pushing franchising in 2010. There were 71 franchised stores that year and 213 by 2019. The program began officially in 1939 but grew by an average of just one franchise per year from 1939 to 2010. Over the next eight years, current management added twice the number of franchise units (142) than had been built in the preceding 71 years.
The owners took over on August 5, 2008. Biglari has said before the company was losing $100,000 per day but was generating that much by the end of 2009.