Facing mounting losses and steeply falling traffic, Steak ‘n Shake has closed nearly a third of its company-owned restaurants and plans to convert most of them into a counter-service model in the hopes that they can become profitable.
The company has temporarily closed 107 of its 368 company-operated restaurants and now says it plans to reopen most of them without waitstaff, which the burger chain had been using since its founding in 1934. Franchisees operate the remaining 242 locations.
It is uncertain how many of the restaurants will be reopened and when.
The closures follow a three-year period in which Steak ‘n Shake’s operations have deteriorated, sending the chain to significant losses. Same-store sales, which had increased every quarter for more than seven years, declined 6.9% in 2019, the third straight annual decline.
Traffic, meanwhile, plunged 11.2%.
That sent the brand’s operating earnings tumbling: Steak ‘n Shake’s operating loss widened last year to $18.6 million, from $10.7 million the year before.
Sardar Biglari, CEO of Steak ‘n Shake owner Biglari Holdings, said the temporary closures were necessary because of the losses.
“We temporarily closed 107 units to fix issues that led to the operating shortfall,” he said in his annual letter to shareholders. “We refused to keep any unit open that could not deliver excellent customer service.”
By changing the operating model of the restaurants, Biglari wrote, Steak ‘n Shake will be able to save on labor. “The combination of labor-intensive, slow production with high-cost table service has led our overall labor costs to be 6 to 8 percentage points above those incurred by our competitors,” Biglari wrote.
Biglari Holdings’ annual report notes in one of the company’s risk factors that “there are no assurances that Steak ‘n Shake will be able to restore profitability after reopening closed stores.”
Steak ‘n Shake has been temporarily closing locations for more than a year as its operating losses have mounted and sales weakened.
The chain needs to stem the brand’s losses in relatively short order: Steak ‘n Shake has $181.5 million outstanding on a loan that comes due in just more than a year. Biglari Holdings does not guarantee that debt.
The company is working to sell all of its company-owned restaurants to franchisees under a new franchise-partner model that Biglari believes provides significant hope for the brand. He called it a “monumental change” in his letter.
The company now has 29 franchise partners who pay $10,000 for the right to operate the brand, then pay a fee of up to 15% of revenues to Steak ‘n Shake, with which it splits 50% of the profits.
Steak ‘n Shake has received 17,000 applications for the program. Biglari argues that the 29 current operating partners represent a 0.17% “acceptance rate” that is comparable to the 4.5% acceptance rate at Harvard.
Still, he notes that same-store sales at restaurants operated by these franchisees rose 2.2% last year, and adds that the company’s share of profits from these stores “exceeded the sum they generated in the prior year, when we claimed 100% of profits.”
Biglari added that some of the operators “are on their way to earning north of $200,000 in their first year” and that “a good number of our franchise partners will become millionaires.”