The other day I walked past a Shake Shack in midtown Manhattan around noon — the dining room and adjacent outdoor seating area was completely full; a line snaked out the door. So it must have hit some investors in the gut when Shake Shack’s stock fell about four percent yesterday evening after the company announced that same-store sales — the amount restaurants brought in this past quarter compared to the same period in the previous two years — were down 1.8 percent.
The drop in same-store sales comes from just 37 of the chain’s 76 company-owned restaurants (the other stores opened less than two years ago). As Danny Meyer’s burger chain expands at a rapid pace (39 new Shacks will open before the end of 2017), these types of fluctuations in market demand are to be expected. By almost every other metric, the company appears to be doing well, according to a release. Sales rose 36.6 percent, to $88 million, and total revenue is up 37.4 percent, to $91.3 million, compared to last year.
But there is something else that could impact the burger chain’s long-term success. In short: The honeymoon period is over.
A few weeks ago I overheard a couple of colleagues talking about Shack burgers they had eaten earlier that week. It was the first time, I noted with curiosity, the conversation didn’t involve a rave review or excited commentary about a new menu item. In fact, though Eater editors across the country have been rabid Shack fans since the beginning — and we remain obsessed with every move the chain makes — the general sense I get is that we’re kind of, maybe, a little over it.
In a call with investors this week, Shake Shack CEO Randy Garutti emphasized that the drop in same-store sales was not something to be concerned about. Essentially, because same-store sales is a measurement only applied to a small percentage of the company’s total number of locations, it’s “not a metric to be looked at in isolation nor overstated at a broader context,” Garutti said.
Now in its 13th year, this drop may well just be growing pains. This is a company that, for a decade, thrived on being one-of-a-kind. Now that it’s gunning to be a billion-dollar chain with locations in every city in the U.S. (and hundreds more across the globe), the brand is losing both the cache that comes from being niche and unique, and the control it had over every meal served when it was one stall in a quaint park in the middle of Manhattan. As my colleagues pointed out in the office about a month ago, not every Shack burger comes out perfect, the way we remember it from, say, 2010.
Even though it’s less than a fraction of the size of giants like McDonald’s and Burger King (which have over 35,000 and 15,000 locations, respectively, compared to Shake Shack, which has just over 130), the Shack’s flaws will become more apparent. It’s unlikely that consumer demand for quality at a reasonable price will diminish, and nostalgia for diner or roadside stand-style burgers, like the ones Shake Shack slings, remains high. But Shake Shack can’t depend on those factors if it wants to grow into a legitimate competitor in the fast-food burger space.
The company raised prices at the beginning of 2017 to offer better pay and benefits to its workers. That will certainly keep employee turnover (and related costs) down, but it’s unclear if that move, and the related good-doer emotion it brings, will sell more burgers.
Meanwhile, Shack is full steam ahead when it comes to growth. New locations are planned for St. Louis and San Diego; expansion is on the horizon in regions across the country, including New York, D.C., Texas, California, and Michigan. Next year, new Shake Shacks will open in Milwaukee, Cleveland, Charlotte, and Denver.
If we consider these quarter two numbers a hiccup in the overall grand scheme of the life of a restaurant chain, it’s worth noting that Shake Shack admitted it would likely weather additional decreases in same-store sales for the remainder of the year. The company reduced its prospective 2017 total revenue estimates to between $351 and $355 million — a few million down from what investors were hoping for.
Still, there’s no telling how big and fast Shake Shack could grow into true competition for its burger brethren. Garutti said in a statement that the company is “incredibly excited about the recently announced agreement we executed to open Shake Shacks in Hong Kong and Macau, as we build on the strength of our Asian business with an eye towards China and further development through the region... as we look to the future, we’re focused on investing in... the tremendous growth ahead of us.”