Shake Shack’s success can seem a bit paradoxical when faced with the big trends of American dining: Its burger fare is relatively pricey, unhealthy and, for most Americans, hard to find.
Yet all of those points have also helped to explain why Shake Shack has shareholders so excited — and why McDonald’s still finds a lot to fear from the upstart burger stand.
Since Manhattan restaurateur Danny Meyer first launched the eatery in 2001 from a hot-dog cart in Madison Square Park, 63 shacks have opened their doors in nine countries, including at eateries in Russia, Turkey and Dubai.
The company has mostly operated on low sizzle: After that first cart, it took three years for the first permanent location to open and another five years after that for the second to debut. But the burger joint is now looking to expand, saying it plans to open 10 stores a year for the foreseeable future, starting in 2015.
With $72 billion in sales, burgers are America’s biggest business for dining out. That has helped explain why investors have pushed expectations so high: Last week, Shake Shack was planning to sell its 5 million shares for as low as $14, compared to the $48 it was trading for before noon.
Shake Shack, however, is far from the only entrant in the “better burger” world: Five Guys and Smashburger flipped first, to name a few. And sales at a typical Shake Shack grew only 1.2 percent in the most recent quarter, down from 8 percent in 2013.
Shake Shack fare is pricey, with the average check costing about $11 — higher than Chipotle, at $10.17, and about twice as pricey as McDonald’s.
While McDonald’s has been excoriated for its unhealthy offerings, Shake Shack is perhaps just as bad. A double ShackBurger, fries and a Black and White shake would pack in 2,000 calories — more than two carnitas Chipotle burritos, combined.
And though they have inspired lines in New York, the burgers have also been panned for their inconsistency. New York Times food critic Pete Wells said in 2012 that the meat was often “cooked to the color of wet newsprint, inside and out, and salted so meekly that eating it was as satisfying as hearing a friend talk about a burger his cousin ate.”
Yet for all its challenges, Shake Shack is still a stock-market darling for the way it has self-promoted and grown. Unlike McDonald’s the Shack has never suffered a “pink slime” moment, instead attracting diners with promises of fresh, premium ingredients, like hormone-free beef and home-spun shakes.
Also unlike McDonald’s, it has not suffered from menu bloat, maintaining a core menu that, with the exception of beer and wine, has evolved little from the old-style burger stand or malt shop.
The company has made deliberate slowness into a corporate virtue, knowing that becoming mainstream too quickly could hurt its underdog charm; signs in executives’ offices say, “The bigger we get, the smaller we need to act.”
Its unusual moves toward worldwide expansion have, cleverly, helped each American outlet still feel unique, as Clint Rainey wrote on New York Magazine’s Grub Street blog in 2013: Growth is happening, “but customers don’t actually ‘see’ it, thus keeping each new Shake Shack something of a novelty.”
Whether the Shack is able to maintain that kind of slow-growing zen in the face of profit-minded shareholders will be a key tension for its next few years on Wall Street. Shake Shake made $19.5 million in 2012 and quadrupled that revenue in 2013, to $82 million, company filings show, but it is still a little fry compared with the $90 billion empire of Mickey D’s. The Shack earned $79 million in revenue in the first nine months of last year, which is what McDonald’s earns in about a day.
Success at the Shack’s level is not unprecedented. Nine years ago, Chipotle’s stock debuted at $22 a share; it now trades at $710. But some stock watchers are already worrying the Shack’s chances are overheated: For his money, CNBC talking head Jim Cramer said he’d rather just buy one of the burgers.
But America’s burger business is incredibly sunny: About 9 billion were ordered at American restaurants last year, up 3 percent over 2013, according to market researchers at the NPD Group. Some analysts say Shake Shack’s “better burgers” don’t have to be all that much better for the company to strike gold.
“Going out for burgers and fries is something consumers have been doing for decades,” said Elizabeth Friend, a senior analyst at market researcher Euromonitor International, “and ‘better burger’ chains have given them a new — arguably better — way to experience a perennial favorite.”