HEADQUARTERS: New York City, NY
YEAR FOUNDED: 2004
2015 9-Month Revenue REVENUE: $139.5 M
New York restaurateur Danny Meyer may have had a rough summer--in June he announced a rent hike forced him to close his Union Square Cafe--but winter is looking up. His burger chain Shake Shack Inc. filed for an initial public offering on Monday, with plans to sell up to $100 million in Class A shares. Though the figure and number of shares aren't set, the Shack has big moves in its sights, namely expansion.
Shake Shack is 63 restaurants strong, with locations dotting the Middle East, Russia, and Europe. According to its regulatory filing, the company is banking on the idea that it has created a new dining category all its own known as "fine casual." Here, "premium, sustainable ingredients, such as all-natural, hormone and antibiotic-free beef" meet top chefs' artisanal creations and customers go home happy--and $15 poorer. So far, the concept is working: The Shack's revenue surged 45 percent to $82.5 million last year, while profit increased 31 percent to $5.4 million.
Meanwhile, elsewhere in the burger industry the Golden Arches continues to struggle with confusing price points, an overgrown menu, and a chronic inability to adapt to its customers. Better burger chains, like Meyer's and Florida-based BurgerFi, are among the fastest growing in the country. But that's not to say they will replace McDonald's and other fast food standbys.
"This will certainly up the game in terms of the burger market, but the impact upon McDonald's is going to be much less direct because the average ticket and customer mix is different," says John Gordon, restaurant analyst with Pacific Management Consulting Group. Put another way, customers hitting McDonald's won't be plunking down $15 for a Shack meal anytime soon.
As Shake Shack pursues its global expansion strategy post-IPO, it faces a number of challenges. As U.S. beef supply (and consumption) continues to nosedive due to decreased domestic production, prices will only go up. According to the U.S. Bureau of Labor Statistics, that already happened in September to the tune of 17 percent. No coincidence, then, that Shake Shack's food and paper costs rocketed 7.1 percent last year. Though Meyer did raise the price of his burgers to make up for the cost, if the trend continues that could spell trouble, especially if he feels his prices are too high already.
It's also concerning that Shake Shack's profit margins aren't as high as they are in its original stores in Manhattan. It could suggest the Shake might face some price resistance in the future, a problem that cupcake retailer Crumbs experienced when it went public and expanded quickly: higher-priced, gourmet food items may not be quite ready for massive expansion. After all, if people in Toledo, Ohio, can't justify spending that much money on food, it's questionable whether people in other parts of the country--and world--will.
On the plus side, Shake Shack's move to expand may look so-so on paper--profits fell from $4.4 million to $3.5 million last year--but Gordon believes that will level off as Meyer adds more units and does away with the one-time cost of "putting the bodies in place first." Plus, Shake Shake has the big advantage of an already-established presence outside of the U.S.
"[It] is very smart because [an international presence] is something that none of the other better burger operators, or even the other fast casual operators, including Noodles and Habit, which recently IPO'd, and Five Guys and Smashburger have," he explains. "If you can get a good restaurant concept, a great American brand with sufficient economics, and high-quality multi-unit operators internationally, that's really something."