Biglari Holdings CEO Sardar Biglari won’t characterize Steak ‘n Shake’s latest chapter as a turnaround. That, he wrote in a letter to shareholders, happened from 2008–2009, after management assumed ownership and became “captain of the Titanic.” The company had $1.6 million of cash on hand, debt of $27 million, and losses of roughly $100,000 per day.

As Biglari has often touted since, by the end of 2009, it flipped to making $100,00 per day. Over a nine-year period, Steak ‘n Shake’s aggregate pre-tax earnings were about $185 million and those translated into “an even greater sum” of distributed cash. Or in Biglari’s words, “as that tsunami’s [the recession] wake demolished other restaurant companies, we were able to turn the business around.”

But the line began to sour in 2016. Same-store sales declined 0.4 percent and then 1.8 percent in 2017. They fell 5.1 percent in 2018. Biglari, in February 2019, noted, “The decade of control under current management ended much like it started—with heavy losses.” The number of customers dropped from 116 million to 111 million to 103 million, which marked Steak ‘n Shake’s lowest figure in eight years. For the first time since 2008, restaurants took a loss in operating earnings at $25.8 (in dollars in 000s). As a company, it was negative $10,657. The number was negative $30,754 in 2008 before trending positive year-over-year until 2018.

What went awry is a well-worn tale by now, spotlighted by a dragging service model, outmoded kitchen equipment, and a value proposition falling out of step with industry rivals. Yet, again, Biglari isn’t ready to call Steak ‘n Shake’s response a “turnaround.”

“A turnaround is when a failing company is able to succeed again by restoring what it had once done successfully. A transformation is when a company alters its business model in response to major shifts in its industry,” he wrote.

Steak ‘n Shake today is at its lowest unit count in a decade. The brand shed 30 locations in 2022 and has 120 fewer than it did at Biglari’s peak unit count of 626 at year-end 2018. The legacy burger brand, founded in 1934 in Normal, Illinois, on Route 66, previously grew by 128 restaurants in Biglari’s first 11 years of ownership. It retracted the opening two calendars—by 13 and two stores, respectively—but turned in net unit expansion each of the next nine. The decline began from 2018 to 2019, as Biglari articulated those “heavy losses.” Eventually, Steak ‘n Shake would post an aggregate pre-tax loss of $33.8 million at the end of 2020. “So we radically transformed the business model to avert ruinous losses,” Biglari said. “Starting in 2021, the company became profitable once again.”

Biglari Holdings.

This past year, Steak ‘n Shake produced pre-tax operating earnings of $11.5 million. However, it is not yet earning a return commensurate with the capital employed in the business, Biglari said. Its accounting net worth is roughly $194 million—a figure Biglari added should decline to $150 million as the company distributes cash and reduces its investment in fixed assets. The goal being to achieve a minimum pre-tax cash return on capital of 20 percent per annum.

Getting back to the foundational story, Biglari referred to Steak ‘n Shake’s prior business as an “old buggy-whip restaurant company.”

The company, he said earlier, “erroneously” stayed with equipment and kitchen design ill-suited for volume production. “We failed customers by not being fast and friendly,” Biglari said in 2019. “To be a market leader in the fast food-business, we should have paid greater heed to becoming, well, fast.”

Pre-COVID, labor costs ran at 38.5 percent of net sales for Steak ‘n Shake, a result that placed it at a 6–8 percentage point disadvantage compared with category peers. Meanwhile, across the decade, its drive-thru and takeout revenue leapt 51.5 percent. The first 10 years were defined by an aggressive pricing formula. Now, the brand was determined to implement advanced production techniques and tailor-make a system to speed up service, consistency, and reduce labor strain. Steak ‘n Shake stripped “superfluous elements,” from breakfast items to chicken sandwiches to silverware.

READ MORE: Sardar Biglari: ‘We Michelangelo’ed Steak ‘n Shake’

Yet the most visible—and pricey—transformation was Biglari’s decision to eliminate Steak ‘n Shake’s table service in 2020, rerouting 86 years.

It took about $50 million in capital outlay to do so, everything from interior remodels to a new point-of-sale to self-order kiosks. “The heavy commitment to capital improvements is behind us,” Biglari said. “If we had not invested in innovation, our competitors would have retained their advantage.”

For the past few years, dine-in customers have ordered at a kiosk rather than at a counter or with a server. Biglari said, “overwhelmingly,” guests have embraced the “seamlessness of the experience.”

“Our transformation,” he said, “is a textbook case of adjusting the business model rather than accepting fate.”

Per-restaurant productivity is on the rise as well, Biglari claims. Under the old, table-service view, annual sales per employee, measured on a full-time equivalent basis, was roughly $64,000. It’s currently nearly $131,000. “The resultant cost savings have largely been passed on to customers through low prices, and to associates through higher waves,” Biglari added. “We are following Henry Ford’s dictum: ‘There is one rule for industrialists and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.’”

Steak ‘n Shake said it’s raised per-hour wages by more than 70 percent since 2019 and is “no longer the minimum-wage employer in our category.” Worth noting is how moving to a quick service, set approach removed tipped wages from the equation. The wage floor on hourly pay can’t legally be as low given there’s no tip credit to make up the difference.

“Phil [Cooley, vice chairman of Biglari Holdings] and I shun the outmoded notion that the restaurant industry’s success depends on a reservoir of inefficient but cheap labor,” Biglari said. “Even as inflation has besieged the industry, Steak ‘n Shake is committed to making efficient use of talented staff while pursuing the designation of maximum-wage employer in its respective communities. Although our self-service model has led to productivity gains, we have made a conscious decision to enhance meaningful interactions with our guests through the addition of hospitality hosts.”

“Paying the best, attracting the best, retaining the best, and giving the best to our customers is our formula,” he continued. “We take care of our people, they in turn take care of the customer, and the results take care of themselves. And the right people are Steak n Shake’s most important asset. Our aim is to be the most productive, hospitable restaurant company in the industry.”

And then there’s Steak ‘n Shake’s other transformative agenda: to create “a culture of ownership.”

Four years ago, the company begun to sell franchises to managers and other interested parties for $10,000. Steak ‘n Shake constructs the site, pays for equipment, and assesses a fee of up to 15 percent of sales as well as 50 percent of profits. Most of the revenue stems from the profit share. But Biglari also believes a single-unit, owner-operator system “achieve[s] operational uniformity by marshaling the efforts and strengths of entrepreneurs.” Previously, the average initial investment for a classic Steak ‘n Shake, which included planning and building a location, fell between $1.6–$2.6 million. Biglari, who started his company with $15,000, said the new program would feed the entrepreneurial spirit at Steak ‘n Shake.

He also suggested, even splitting profits along with the 15 percent of sales, franchise partners under this structure could earn “considerable sums.”

“For operators to think and act like owners, we believe they must be owners,” Biglari said. “We are becoming a company of owners, changing the culture of the organization in our quest for service excellence. We now have more units operated by franchise owners than we do units operated by the company. Eventually, we expect to place all units in the hands of owner-operators.”

What does the organization consider “considerable sums?” Over the last three years, the average franchise partner made about $137,000 per fiscal year, the company shared, “which was more than the average accountant, architect, or engineer in America earned,” Biglari said. “Doubtless, a good number of our partners will become millionaires. But make no mistake: We are not minting millionaires but are merely providing the means—they are earning every penny.”

As company-operated units transition to franchise ownership, Steak n Shake will appear a much smaller company from a revenue perspective, but not from a profit perspective. Accounting convention dictates in company-operated units, sales to the end customer are recorded as revenue; but for franchise partner units, only the company’s share of the restaurants’ profits, along with certain fees, are recorded as revenue.

Put differently, it will resemble a federation of legally and administratively separate enterprises.

Case in motion: net sales during 2022 were $149,184 as compared to $187,913 during 2021. The decrease in revenue of company-owned restaurants due to the shift of company units to franchise partner units.

Biglari Holdings.

Accounting aside, though, Biglari said single-unit franchise partners will improve Steak ‘n Shake simply by committing to running one successful location, not unlike how Chick-fil-A has fostered its empire.

The owners manage day-to-day operations, set wages, and focus on building growth one customer at a time, Biglari said.

At 2022’s exit, the company converted 175 company-operated units into single-unit franchise partnerships, a net increase of 16 partners from the prior year. The program arrived in late 2018. By the end of that year, there were only two. The rate of conversion slowed in 2022, Biglari said, which was intentional “to ensure our high standards were not compromised.”

“This franchise opportunity cannot be purchased, only earned,” he said. “Our program is designed for those long on ability but short on capital.”

A look at how it’s tracked:

December 31, 2022:

  • Company-operated: 177
  • Franchise partner: 175
  • Traditional franchise: 154


Note: Thirty-nine of the 177 Steak n Shake company-operated stores were closed as odf this date. The company said it intends to refranchise the majority of those closed stores.

September 30, 2022

  • Company-operated: 181
  • Franchise partner: 171
  • Traditional franchise: 159


December 31, 2021:

  • Company-operated: 199
  • Franchise partner: 159
  • Traditional franchise: 178


September 30, 2021:

  • Company-operated: 221
  • Franchise partner: 140
  • Traditional franchise: 179


December 31, 2020:

  • Company-operated: 276
  • Franchise partner: 86
  • Traditional franchise: 194


If you go back to early 2019, there were 413 company-operated locations.

“Ingenuity is the hallmark of business,” Biglari said. “Our franchise partnership system is the story of enterprising men and women who meet the challenge of delivering the gold standard in service with determination and optimism. We will grow franchise partnerships on the basis of cooperation: recruiting self-starters and letting them operate with a minimum of bureaucratic rules. Although we set the standards, the authority to make operating decisions must remain in the field, rather than emanate from Steak n Shake’s headquarters.”

Biglari added, alongside the program, Steak n Shake’s traditional franchise business is its “means of growing unit count.” The idea mirroring the sector’s age-old aim—expansion without major capital outlay—funding to expand borne by third parties. “The noncapital-intensive strategy of traditional franchising generates high-return, annuity-like cash flows. As such, it is a business that not only produces cash instead of consuming it but concomitantly reduces operating risk,” Biglari said.

Biglari Holdings.

While this paves potential runway, it hasn’t of late. This past year’s 154 traditional franchise units were 40 fewer than year-end 2020 and 24 fewer year-over-year. “Despite the reduction of traditional franchise units in recent years, this segment of our business remains a prodigious cash generator. Between 2010 and 2015, we invested substantial sums to advance our traditional franchise business,” Biglari said.

It has been a work in progress. Beginning in 2010, the company invested money to advance the traditional franchise model. It had 71 franchise units in 2010 and 213 in 2019. The company started franchising in 1939. It grew by an average of one franchise unit per year from 1939 to 2010. In an eight-year run leading up to the transformation, management added twice the number of franchise units (142) than had been built in the preceding 71 years.

“We expect Steak n Shake to achieve its target return on capital by transitioning to a combination of conventional franchise operations and nonconventional franchise partnerships,” he added.

Some comments on Western Sizzlin, and a stake in Jack in the Box

Biglari Holdings other restaurant chain—Western Sizzlin—is a traditional royalty-based franchisee with 39 units, all but three of which are franchisee run.

The brand had nearly 140 locations in March 2006 when Biglari took control. They’ve presided over a 70 percent reduction in unit count since. Biglari, in the shareholder letter, brought up a comparison. Also in 2006, Buffets Inc. acquired Ryan’s Restaurant Group to become America’s largest buffet restaurant chain. At 675 venues, it was nearly five times larger than Western Sizzlin. “Over the past 16 years, Buffets has filed Chapter 11 bankruptcy four times—AKA Chapter 44—and as a consequence Western Sizzlin is now about 10 times bigger than Buffets in unit count,” Biglari said. “But the most notable difference between the two companies is that ours has generated considerable wealth for its owners over the same period. Between 2006 and 2010, Western Sizzlin shareholders earned a satisfactory return, as have Biglari Holdings shareholders since the acquisition.”

On March 30, 2010, Biglari Holdings purchased Western Sizzlin for a net price of $21.7 million, which included $2 million of marketable securities and undeveloped real estate. Today, Biglari said, it would command a multiple of its $3.8 million purchase price. “Since then, Western Sizzlin has sent $28 million in cash to its parent company, Biglari Holdings. Furthermore, Western Sizzlin continues to produce dependable cash for the holding company,” he said.

It speaks to a broader Biglari strategy: that the company doesn’t necessarily reinvest money where it was earned. Biglari took Western Sizzlin’s earnings and deployed them in “unrelated but more productive investments.” The company also directs Maxim Inc., First Guard Insurance Company, Southern Oil Company, Southern Pioneer Property & Casualty Insurance Company, and, most recently, Abraxas Petroleum Corporation.

“Our experience with Western Sizzlin underscores the proviso that a declining business can remain a good investment if rationality guides capital allocation,” he said. “Of course, the success of any sound idea is only as good as its execution. The individual responsible for Western Sizzlin’s cash generation is Robyn Mabe, the company’s CEO. She started in the accounting department back in 1993 and has done a sensational job in every position she has held.”

The company also revealed in the letter it acquired 5.5 percent of the shares in Jack in the Box, or 1,041,461, for a market value (in 000’s) of $71,059. Biglari owns a 9.3 percent interest in Cracker Barrell (2,055,141 shares) as well.

The company originally purchased 4,737,794 shares of Cracker Barrel for $241.1 million from May 2011 through December 2012, with a dollar-weighted purchase date of December 2011. Between 2018 and 2019, The Lion Fund reduced its holding in Cracker Barrel to 2,000,000 shares. In March 2020, Biglari purchased an additional 55,141 shares for its insurance subsidiaries. The company’s income from Cracker Barrel dividends was $10.7 million last year.

Fast Food, Finance, Growth, Operations, Story, Steak 'n Shake