It’s early, but Shake Shack likes what it sees so far from its drive-thrus.
Over the past four months, the burger chain’s six drive-thru restaurants generated average weekly sales of more than $80,000, compared to an average of $76,000 systemwide.
Executives said customers are visiting its drive-thrus more often, and about half of visitors are using the drive-thru at locations that have one.
The results have the chain feeling optimistic about the future of the format. Shake Shack opened its first drive-thru in December 2021 and plans to open more.
“We obviously want to be careful not to share too much data at this early stage, but we continue to be encouraged about the AUV potential as well as the long-term profit and return metrics that we think we can get out of this model,” CEO Randy Garutti told analysts Thursday, according to a transcript on financial services site Sentieo.
The 395-unit chain expects to have at least 10 drive-thrus open by the end of this year and between 20 and 25 next year. Garutti added that the format opens up new real estate opportunities for the chain, which began as an urban concept but has been focusing much of its recent development on the suburbs.
Tempering the chain’s drive-thru enthusiasm are challenges associated with building restaurants these days. The cost of building a drive-thru, for one, “is significantly higher than a normal Shack at the moment,” Garutti said, adding that Shake Shack's building costs are up about 15% this year.
Construction is also taking longer. Stores slated to open within 12 to 15 months are being pushed back to 15 to 18 months, Garutti said, noting delays for things like walk-in coolers and air conditioners. Drive-thrus can take even longer because of additional perming. “That is what has been the frustrating part of it,” he said.
Drive-thrus were a bright spot in an all-around strong quarter for the New York-based chain. Same-store sales rose 10.1% year over year, driven by a 7.8% traffic increase. Sales at urban locations continued to rebound, up 19%, while suburban locations grew 3%.
Sales tailed off toward the end of the quarter and into July, though, which executives said was in line with normal summer patterns. And the chain is still struggling with lower foot traffic in big cities.
“We believe our recovery would have been much stronger if not for mobility, namely, return-to-office, urban transit and urban tourism leveling out, and in some instances, reversing,” said CFO Katie Fogertey.
Lunch and dinner traffic in its key Midtown Manhattan market, for instance, is still more than 40% below 2019 levels.
“Forty percent of our lunch guests just aren't here yet,” Garutti said. “And you look at whether it's subway, mobility, tourism and other things, they just haven't returned to where they were.”
Shake Shack also saw expansion on its bottom line: Restaurant-level operating margins were 18.8% for the quarter, up more than 3 points from Q1 and drawing close to its 19.2% margins from a year ago.
And yet the chain expects costs for food and packaging to continue rising through the end of the year. It will raise prices again—by as much as 5% to 7%—to keep up. That would bring its year-over-year pricing to 3% to 4% in the third and fourth quarters, Fogertey said.
“We wish we didn't have to, but it's the minimum really that we need to do as we look at so many of the input costs of our business coming in higher,” Garutti said. French fries specifically have seen record inflation, he said. “And while beef has kind of leveled, it's leveled at a very high level.”
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