Back in the middle of 2019, now-CFO Katie Fogertey, who was then serving as Goldman Sachs’ lead analyst covering restaurants, wrote a “bull report” about Shake Shack. While that might not sound like headline-grabbing news today, it was at the time, when few pundits looking outside-in agreed. The brand was just shy of 297 systemwide units and a bit of a unicorn among its peers for the way it operated, looked, the nature of its real estate selection, and even the structure of proposed growth, which was just beginning to mature outside city centers.

In plain terms, Shake Shack was a restaurant enterprise Fogertey didn’t believe was understood by investors.

The report earned Fogertey a bit of notoriety and led to some “big conversations” about how she came to her conviction. She stepped into the CFO role amid Shake Shack’s COVID recovery in June 2021 and has since watched many of those projections come to light. The brand finished 2023 with 518 restaurants, including 334 in the U.S. It opened a record 85 units last year and another 80 or so outlets are planned for 2024.

UPDATE: Shake Shack hires Rob Lynch from Papa Johns as next CEO

However, this current inflection in Shake Shack’s history might just be the most interesting yet. And, to some extent, it’s a reversal of the earlier point. The brand is currently searching for a new CEO as Randy Garutti approaches retirement. What awaits whoever takes the role is a blueprint that’s been written, tested, and proven in this industry, time and time again, BTIG analyst Peter Saleh said Thursday in a note. But for Shake Shack, these are tried-and-true quick-service themes that haven’t fully been explored. At least not yet.

Saleh broke them out—drive-thru presence; advertising spend; and, eventually, a loyalty program. “We would expect the next Shake Shack CEO to come prepared to capitalize on these growth pillars,” he said. After all, they’ve worked for Chipotle, Panera, and Domino’s, to glance at a much-wider picture.

At the end of Q4, Shake Shack had 30 drive-thru restaurants. Unlike some fast casuals (such as Chipotle), these are upscaled versions of more traditional formats; they feature speaker boxes versus straight pickup lanes. Shake Shack’s first drive-thru arrived on December 6, 2021, in Maple Grove, Minnesota. It showcased a digital menuboard, two-lane ordering system, and separate pickup window. Additionally, there was a split-kitchen design with a separate space dedicated to drive-thru, with employees taking orders and payment at multiple points along the journey.

Why Shake Shack avoided drive-thrus in its early days wasn’t convoluted. Firstly, its New York City designs couldn’t fit them, but going deeper, drive-thru as a category didn’t align with the brand. Beyond the optics of fast food as fuel, there was also the fact Shake Shack’s fulfillment took longer than most and the notion of expediting through a drive-thru lane was a logistical puzzle without a key. The rise of omnichannel systems redefined possibility. Yet it’s been a learning process at every step.

After seeing initial success (average weekly sales at drive-thru stores, where mix was 50 percent, had trended above $80,000, or $4.15 million AUV, beating systemwide numbers of $76,000), Shake Shack started to work on the ROI. It aimed to reduce buildout costs by 10 percent via new and tighter prototypes that shed some seating.

More recently, Shake Shack told investors it was conducting time-motion studies and targeting throughput improvement for the first time. The goal was to reduce guest order times by roughly 30 seconds systemwide, and even more at drive-thrus. To get there, Shake Shack will roll new kitchen flows throughout 2024 as well as increase real-time reporting and invest in new training.

Presently, ticket times at Shake Shack are about six to eight minutes. Although guests understand the extra wait and expect that of the brand, there’s room to improve, management said in Q4, and do so in a way that doesn’t tarnish Shake Shack’s fast-casual-forward ethos.

Several of these new kitchen flows were piloted over the past year and a half to help food move through the back-of-house more efficiently. So it’s more about how F&B is handed off than renovating inside. Garutti said most new stores would open with a linear kitchen model that adjusts flow. Some existing ones will convert. Combo meals are also being tested with feedback at the drive-thru resonating since it’s easier and quicker to point to a curated option than build out a meal.

Eighteen drive-thrus opened in 2023, with a smaller percentage expected this year.

And that brings Shake Shack to a more long-term crystal ball. Saleh said he would not be surprised to see a much greater shift toward drive-thru units versus traditional ones as leadership changes. “Substantially all the new unit development in quick service is drive-thru formats,” he said, “as more than 70 percent of sales are typically generated through that window.”

Just comparing, about 10 percent of Shake Shack’s domestic stores today are drive-thrus. For Chipotle, it’s nearly 25 percent. Starbucks is over 70 percent. At many larger quick-serves, it’s 90 percent-plus.

Chipotle, which, again, should be noted leads with a “Chipotlane” that doesn’t have a speakerbox and is strictly for order-ahead, revealed in Q4 there are now 811 of them. That initiative began only five or so years ago. The brand opened 121 restaurants in the last quarter—a company record—and 271 for 2023, also a water mark. And of those 271, 238 included a Chipotlane and the brand said 80 percent of its 285–315 new openings on deck for 2024 would feature one. If the rate sustains, roughly 50 percent of Chipotle’s footprint could boast a Chipotlane by 2023.

To deepen the point, there were zero before CEO Brian Niccol arrived in 2018 from Taco Bell.

Saleh, however, does not feel Shake Shack has yet perfected the drive-thru prototype that works best for its brand. The vision ahead, he expects, will center on smaller footprint units with less interior seating, which would reduce development cost and bolster returns. “In our view, the next CEO should have experience developing drive-thru restaurants, with a deep understanding of the factors that make it successful,” he said.

Starbucks’ trade area transformation, not unlike Shake Shack, flashed in 2021. It began closing some in-line urban venues and announced it would transition toward suburban drive-thrus. Today, as noted, 70 percent of Starbucks locations have the channel, which is a significant climb from 50 percent pre-COVID. The eventual aim goes even higher—80 percent. “… greater capital allocation toward this higher volume, higher-margin format makes more sense as more and more consumption is done off-premises,” Saleh said.

Is Shake Shack soon to follow?

The message, and the potential of loyalty

Garutti echoed Saleh’s spotlight on advertising in Q4. Shake Shack has always been unique in this regard because it’s a brand whose equity far outstrips its unit count. A trip to the Theater District location, with lines snaked around, can prove that easily enough. Over the years, it’s helped the brand crash into new markets by showing up with a certain Big Apple mystique. “We have to find out what all the buzz is about.”

A good way to illustrate this is, in 2020, before COVID arrived, the brand shared some development updates with investors. At that moment, 60 percent of the burger chain’s domestic units were less than 3 years old. Twenty-four percent had been on the market for 12 months or fewer. The average age of restaurants across Shake Shack’s 163 U.S. corporate system (there were another 111 licensed units) was 2.9 years. Strikingly, twenty-three of the fast casual’s 31 markets touted five or fewer locations.

When you consider Shake Shack has nearly doubled its footprint since 2019, these statistics haven’t lost their gravity.

Garutti said Shake Shack wants to open drive-thrus in high-awareness markets. There are some in California, New York, and New Jersey—openings that will provide insights into how customers truly want to access Shake Shack through the channel.

And in DMAs where the brand is less well known, the company said it plans to ramp up advertising spend, which is at roughly 1 percent. Shake Shack tested the approach in high-potential markets on the West Coast and Texas. Sometimes, it went along with new unit openings, but usually, Garutti said, the chain sought one-to-one digital opportunities. So don’t expect to see a “whole lot of TV commercials and the things you might traditionally think” from Shake Shack in the future, he said.

Some recent examples: a partnership with the “Trolls Band Together” movie, a promotion where restaurants would give away free chicken sandwiches if an NFL player did the chicken dance after scoring a touchdown, and a “free Fridays” deal on third-party delivery websites.

Store-level operating profit in Q4 expanded 25 percent to $55 million and margin hiked to 19.8 percent. And the brand did so (a 240-basis-point increase) despite transitions still reporting about 20 percent below pre-pandemic marks thanks to the chain’s heavy sales concentration in New York City.

Shake Shack credited key sales-driving initiatives, optimization of labor, and expense management. Kiosks can’t be understated in that improvement, either, as they’ve launched to nearly every company store, carrying a high-single-digit check lift compared to the traditional cashier experience.

The reason this all fits together, Saleh said, is Shake Shack has a chance now to take some of these recent margin gains and reinvest them into traffic-driving plans, like advertising. He feels “the next leg of growth” for the brand could stem from just that. Shake Shack ran a “For What It’s Worth” campaign in October on streaming services on the West Coast and Texas, with strength in that month (and Q4) “largely driven by this investment.”

“While we don’t believe the brand is large or geographically broad enough for national TV ads, we do believe there is an opportunity to ratchet up the advertising spend from 1.1 percent in 2023 to a higher figure, as initial returns on advertising warrant the investment,” Saleh said.

Many quick-serves spend at least a mid-single digit percent of sales on advertising. Chipotle is at 3 percent and Starbucks 1.7 percent.

“Typically, when a change in leadership is imminent managements tend to shy away from additional investments and changes in strategy. We believe the returns on this advertising investment must be extremely compelling for management to commit additional resources ahead of the new CEO announcement,” Saleh said.

Given unit density, if this does indeed happen, it seems likely it will unfurl across the Northeast and West Coast. A 100 basis-point increase in advertising spend, Saleh estimated, would cost Shake Shack about $12.5 million and would require a 3.5 percent traffic lift to breakeven on the investment (at a 35 percent incremental margin).

Once more using Chipotle as a parallel, the brand in the past decade moved from the mid-to-high 1 percent of sales on marketing and promotion to the 3 percent you see today. While the progress wasn’t linear, Saleh pointed out, due to the chain’s food safety issues and sales struggles from 2015–2017, one of Niccol’s priorities when he joined was to increase Chipotle’s scope.

Famously, Niccol in 2018 even called the brand “invisible” on an earnings call, noting its need to emerge from the depths and into a position where it could lead culture, not react to it.

This was hardly surprising to see from Niccol, who served as Taco Bell CEO from January 2015 until his Chipotle switch. He was the Yum! Brands’ chain’s marketing and innovation chief when it rocketed out of a 2011 PR disaster stemming from a customer lawsuit that alleged the chain’s taco mixture was more filler than beef. Niccol was also Taco Bell’s president from 2013–2014. He was the force behind its decision to morph into a hip concept that connects with younger guests beyond a late-night strength. That included hiring interns to run social media accounts, devising a taco lens on Snapchat, and pushing Taco Bell’s food through Instagram via user-generated content. Niccol was also credited with inspiring the crunchwrap sliders, an idea he garnered from watching employees use tortillas to make miniature wraps.

Here’s what he said of Chipotle’s potential in April 2018: “I think the marketing spend is one of those areas that we believe there’s a lot of opportunity to take those dollars that we’re currently allocating and make the brand much more visible with what we have. And then we’re going to put in place more of a test-and-learn approach on the initiatives that will roll out, so, we’ll have clarity on what we believe the return is for the investment that we’re making before we make those decisions to go beyond our current plans.”

You can see below how Chipotle’s advertising spend lifted it out of a crisis before settling into a more comfortable cadence, yet one that’s still propelled years of stronger sales.

Along the same lines, Shake Shack is one of the few fast-casual brands, especially at this scale, without a rewards program. Direct competitors Chipotle, Panera, and Starbucks boast some of the largest pools in the business. Chipotle launched in 2019 and claims to have some 38 million members. That number is 48 million for Panera, where more than half of transactions come from the group, which report to visit more frequently and spend more. Starbucks’ loyalty platform in the U.S. set records in Q1 2024 with 90-day active users growing 13 percent, year-over-year, to 34.3 million. Tender reached an all-time high of 59 percent and traditionally, checks range anywhere between 20–70 percent higher.

Starbucks’ management added the frequency of its most loyal customers increased sequentially in Q1 and spend per member clipped another record. One more figure: $3.6 billion was preloaded onto cards domestically.

“Again, Chipotle strikes us as the best precedent here, having a similar customer base and launching a rewards program in the recent past, despite being a significantly larger concept,” Saleh said. “This general verdict on loyalty programs has been echoed by quick-service concepts like Papa Johns, McDonald’s, and Domino’s Pizza, who have all cited some degree of higher frequency from rewards customers. Reward programs drive digital adoption and provides access to consumer data that enable brands to better tailor their menus and restaurant development.”

In this case, Saleh feels Shake Shack has the right combination of geography (urban), customer demographics (younger, higher-income, and digitally savvy), as well as guest frequency to make the investment of a rewards program worthwhile. “We would expect the next CEO to carefully consider a rewards program in the years ahead,” he said.

Shake Shack’s same-store sales increased 2.8 percent in Q4 year-over-year, led by 1.4 percent traffic growth across in-store and digital channels. Average weekly sales were flat at $76,000 per store per week, or about $4 million in annualized AUV.