Shake Shack recently crossed its 500^th restaurant globally. It would be a laughable understatement to say much has changed since a Michelin-starred restaurateur introduced a hot dog cart 19 years ago with the goal to benefit New York City’s Madison Square Park.

But it’s the last few years that have really shaped the coming act.

U.S. sales plunged as much as 90 percent in the opening weeks of COVID-19. The company’s average downturn of 70 percent was closer to full-service peers than quick ones. In March 2020, digital sales mixed 23 percent of the business. There was no drive-thru, direct delivery, and the makeup of Shake Shack’s omnichannel served as background chatter to its social, in-store experience.

Effectively, the brand went from no digital sales pre-virus to roughly 30 percent of the operation today.

Shake Shack opened 10 corporate and 15 licensed locations in Q3 and is on track to debut about 80 total stores systemwide, or roughly 18 percent unit growth. About the same number and split is expected for 2024. Twenty corporate Shake Shacks are currently under construction. Presently, about 40 percent of the fast casual’s sales stem from licensed operations, of which there are 215.

During Shake Shack’s Q3 call this past week, CEO Randy Garutti outlined the framework of where the burger brand heads next. That 500 figure, which stretches through 33 states and 18 countries, has doubled in four years.

Shake Shack’s revenue grew 21 percent in Q3 to $276 million, with 2.3 percent same-store sales growth, inclusive of negative traffic of 4.2 percent and price/mix growth of 6.5 percent (the brand had high-single digit menu price in the quarter and took 1 percent at the end of October as well).

In-store sales rose 9 percent, year-over-year—a figure that benefitted from positive mix as Shake Shack’s kiosk retrofit progresses. Kiosks account for more than half of in-store business and sales through the channel hiked 140 percent versus Q3 2022. Average weekly sales hit $74,000, annualizing to $3.9 million average-unit volumes.

Additionally, October same-store sales accelerated to over 3.5 percent, with flat year-over-year traffic. The brand credited Q3’s relative softness to seasonality more closely in line with pre-COVID times than recent years, including back-to-school trends in August and September. In past years, traffic patterns between August and September were muted by remote work and learning. Beyond, the brand said, weather headwinds on the East Coast, a hurricane in SoCal, and other macroeconomic pressures stressed the top line. Those two factors mentioned represented a loss of roughly $500,000 in sales.

October traffic, though, improved in every region compared to September. “We continue to drive more guests back to in-Shack dining, and we’re also leaning into various strategies in marketing and operations to navigate these uncertain macro waters, with opportunities to pulse on value-added offers in our own and third-party digital channels,” CFO Katie Fogertey said. “We’re still focusing on our premium ingredients and delivering hospitality as well as further optimizing our four-wall performance. We’ve seen strong returns from our free Friday promotion and our afternoon Happy Hour BOGO shakes, plus we’ve had opportunities to dive deeper in select markets with performance marketing strategies, all of which are driving traffic and sales into our own channels.”

Kiosks change the game, drive-thrus remain work in progress

Expanding on the topic of kiosks, Fogertey said Shake Shack has begun testing new capabilities to drive enhanced upsell in the channel, which has become the chain’s largest order mode across company-operated stores. Kiosks, she added, changed the pace of investment needed to support the business. It’s early days and the brand keeps refining everything from wayfinding to placement to training. “There’s still a lot of exciting opportunity on that front and it’s great that we have kind of most of the entire fleet now rolled out. It is definitely our highest-margin channel,” Fogertey said. “We see a nice checklist on the back of it. And we still think we’re early days here and really kind of leveraging the full potential of upsell through this digital order mode. And how that we can start to leverage guest data over the long term through that channel.”

BTIG analyst Peter Saleh estimated kiosks mixing 50 percent of in-store sales is up from 30–35 percent a few quarters ago. “Kiosks are the company’s highest-margin channel, owing to the higher average check and labor efficiencies, contributing to the strong margin noted above,” Saleh said. “That said, while kiosk sales mix is increasing, sales from delivery, web and app have been declining with the return to in-restaurant sales, now at about 30 percent of sales from 36 percent last year and 42 percent in Q3 2021. In our view, this dynamic is blunting the average check impact of kiosks, but aiding margins.”

What’s also elemental to Shake Shack’s future is profitability. Margins rose to 20.4 percent (store-level operating profit of $54 million), with expansion of 400 basis points, year-over-year. It marked the second consecutive quarter above 20 percent. “We’re winning share in our own more profitable channels and our kiosk rollout has made our best channel even better from a profitability and guest experience perspective,” Garutti said. “There are many pressures that lay ahead including an unknown consumer backdrop and beef inflation. However, we are focused on driving continued improvements that help us outperform historical patterns in light of these cross currents.” Q3 adjusted EBITDA grew nearly $16 million to $36 million, up north of 80 percent versus the prior-year period. And adjusted EBITDA margins lifted 430 basis points, from 8.7 to 13 percent.

The path, Garutti said, will be to move deeper into existing markets with “proven and new formats” alongside fresh market entry. The first Shake Shack drive-thru landed in December 2021. Four opened in Q3, and one in October, across Washington, Utah, and Texas, to lift the total to 21. Garutti said they’re resonating on the satisfaction front. “That said, we know in drive-thru and in-Shacks generally, some of our biggest areas of improvement remain consistency, speed, and throughput,” he said. “And this is going to be a big focus for our designs and operational improvements through 2024.”

While Shake Shack opens drive-thrus and varied formats on the corporate side, four “roadside” locations were brought to market by licensees in Q3 to widen the brand’s nontraditional arm (airports have traditionally been the anchor, as well as food courts). These stores off highways, Fogertey previously told QSR, give Shake Shack a chance to provide “an elevated experience [guests] wouldn’t be able to get otherwise.” And they’re a visible branding tool as Shake Shack’s unit count grows and its awareness trails along.

Garutti on the call simply called them a “growth opportunity.”

Cutting costs, dialing up models

Broadly, Shake Shack plans to deploy capital toward returns in four main areas: building units, updating current ones (kiosks), investing in digital infrastructure, and structuring its home office capability to support restaurants.

Shake Shack again committed to reducing build costs next year by 10 percent as well as preopening costs (these were $5 million total in Q3) by at least 10 percent per location.

How Shake Shack will do this unfolds in a few ways. It starts with format, choice, and design, Garutti said—a point that circles back to the drive-thru. There are new prototypes in the works. These took early results and found ways to cost engineer without losing what matters most to guests. And it takes time, Garutti said. Units opening in 2024 were designed in 2022 and identified in 2021, in many cases. “And you’ve got to catch up to that backlog,” Garutti said. “You can’t just tomorrow change and put together a new prototype.”

Those are the things Shake Shack can control. What’s unknown are inflationary setbacks. Garutti said there’s been a “little bit” of lightening on the contractor side, but there are still restaurants today struggling to get final HVAC equipment packages or electrical panels, among other things. “I expect those pressures to lessen quite a bit in these coming years and hopefully that’ll help us toward these goals. So yes, you hear our commitment loud and clear,” Garutti said.

Closing the loop on drive-thrus, Garutti said top performers are seeing high traffic zones aligned with high brand awareness areas. The entire operation is scaling down slightly—not just for cost as they’re the priciest boxes to build, but also because Shake Shack is learning how many seats it needs, inside and outside, and what the vibe should be, Garutti said.

“We think we can continue to build a drive-thru that’s really distinct and exciting in the industry,” he said. “But take down the size and cost of it in the kind of 2025 models.”

In 2024, the brand will carry the next drive-thru batch to what’s traditionally been some of Shake Shack’s stronger, more coastal markets. Some will open in New Jersey, Long Island, and California.

All things considered, Garutti noted, Shake Shack remains a relatively small company, and one that’s seen a lot of iterations of growth over the years. There’s been different eras of kitchen design and myriad models. Where it’s headed now is a two-front approach: Shake Shack has to look at the continued build of the “Shack of the future,” he said, bringing down costs, and also “really aligning on the best longer-term kitchen design.”

Most of the opportunity, Garutti continued, will run through how Shake Shack moves food through kitchens. “And the flow of expediting how we make things is not going to change, right?” he said. “We have standards of our premium ingredients and the way that we cook that we expect to continue. But we can do it faster. We can do it better. We can do it with a greater sense of urgency, more often.”

To put it differently, throughput and speed—not atop Shake Shack’s early sheet of priorities—have climbed in a hurry.

“It’s going to be about every second of the day watching this, making sure we’re consistent,” Garutti said. “And knowing that a Shake Shack guest can count on what they’re going to get when they come.”

Labor to fit the future

Similar to Q2, Garutti said Shake Shack reached some of “the best” turnover and retention numbers its seen. It’s generating more than twice the employee applicant flow compared to last year. Managers in particular are sticking around, with the general group making over six figures, Garutti said. Some, “a lot more than that.” Shake Shack gave stock to every GM in 2023.

Management said Shake Shack removed more than 50 labor per store week—aiding in the 400 basis-point margin expansion.

Still, with kiosks reshaping dining rooms, Shake Shack continues to leverage new strategies, including improved forecasting and scheduling. Fogertey said, even with a marked improvement in staffing levels, the fresh scheduling capabilities and management are essential to Shake Shack becoming more efficient on the line. It’s especially true as in-store traffic rises and locations need to add workers back in to support demand.

Garutti said anyone who’s worked in restaurants can attest the easiest thing to do is run a busy location. The flipside is trying to navigate a store that’s sometimes busy and sometimes not. “And we’ve got some new systems that we’re putting in place from a lot of learning and work through this year,” he said. “Making sure we’ve got aces in places, as we call it, and the teams doing the right thing at the right time.”

“Importantly, we’re not resting here,” Fogertey added. “We expect to continue to show benefits from these improvements in labor strategies that set our team members, our managers, and our Shacks up for success in the coming years with improvements on deployment, refinements to the order journey, and more scalable and consistent processes.”

Fogertey said this inflection in Shake Shack’s growth chart, from streamlined food courts to large-scale drive-thrus, is the ideal time to refine its model as well as larger staffing and deployment standards. It’s work that’s been rooted in time and motion studies and various variables. “This will give our operators much improved tools,” she said.