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Steak 'n Shake sticks to its low-price strategy

Despite two years of weak traffic and tension with operators, the burger chain believes low prices are vital to build sales.

In 2008, after the investor Sardar Biglari took over Steak ‘n Shake and became its CEO, the company implemented a discounting pricing strategy, notably a deal offering four meals for less than $4.

The promotion was a raging success. Same-store sales skyrocketed in the years afterward. The company has since then maintained a low-price strategy that led to a remarkable streak of 29 straight quarters of positive same-store sales.

Steak ‘n Shake isn’t about to change that, despite traffic declines the past two years, periodic tension with franchisees and growing competition from other burger players.

“Most of our system is in the Midwest and the Southeast and coming up the East Coast,” Tom Murray, CFO of Steak ‘n Shake Franchise System, said in an interview. “We want to maintain a consistent pricing strategy. We feel that gives the brand a competitive advantage.”

Steak ‘n Shake’s pricing strategy means the franchisor dictates how much operators can charge, despite the location of the operators’ restaurants. The strategy is the centerpiece in a lawsuit filed by a franchisee in Virginia last week.

The lawsuit comes after two notably difficult years for the 600-unit chain. Same-store sales fell 0.4% in 2016 and another 1.8% in 2017. Traffic last year fell 4.4%.

The decline in traffic wiped out the chain’s profits. Operating earnings per location declined from $83,300 in 2016 to just $1,000 in 2017.

For franchisees that operate 173 of the 585 U.S. locations and have to pay for royalties on top of other costs, the traffic declines risk sending many locations into financial losses. In addition, rising minimum wages in many markets, along with competition for labor, could put further pressure on that profitability.

Steaks of Virginia, the franchisee that filed the lawsuit last week, claimed it was losing money at all nine of its locations.

In an interview, Murray said that Steak ‘n Shake has raised prices on certain menu items over the years.

“Our pricing model, our system is based on a good price-value relationship to the consumer,” Murray said. “That’s how the brand has been so successful over the past eight years under this ownership. We went on a string of many, many quarters of same-store sales growth. It was primarily due to that price-value relationship we provide to the customer.”

But those prices haven’t been enough to lure customers the past two years. Competitors, notably McDonald’s, Wendy’s and Burger King, have been aggressively pushing their own low-priced offers.

Others, such as Jack in the Box, Hardee’s, Carl’s Jr., and Sonic, have joined in on the discounting fray themselves.

“All the more reason that raising prices is a bad idea,” Murray said. “You look at the competition out there. People are modeling themselves after our original 4-for-$4 menu. You see that now in our competitors. And they’re going deeper.”

“Value is what’s driving traffic,” he added. “That’s why we feel like, with our pricing model, the last thing we should do now is deviate.”

In a letter to investors in February, Biglari explained his company’s strategy by likening it to Henry Ford’s decision to lower the price of his cars to get more people to buy them.

“We are subscribing to Henry Ford’s motto: ‘To make money, make quantity,’” he wrote. He said the company’s strategy is to sell “the highest quality burgers and shakes at the lowest possible profit per customer from an ever-increasing number of customers.”

In other words, the company is relying on higher traffic to generate more profits.

Murray said that the company has worked to promote higher-end items, such as a Prime Burger. “That was very successful,” he said, noting that the company has since added line extensions to that burger.

Still, costs are higher in some markets than in others, due to real estate, labor and other costs. The cost of living is higher in the Washington D.C. area than it is in rural Indiana, for instance. When asked whether operators in costlier markets could raise prices, Murray said, “We don’t like to,” but said, “obviously, we’ll have to look at certain situations.”

Biglari, for his part, said that improving quality will be vital for the chain to regain the lost traffic.

“We do not just sell burgers and shakes, we also sell an experience,” he wrote. “The entire organization is therefore working assiduously to become exceptional in operations. We are injecting verve into the company by allotting significant resources to improve the customer experience. It is a truism that if a business does not evolve, it will eventually devolve.”

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