Steak ‘n Shake wants to speed things up

Same-store sales plunged last year, so the chain is refranchising and improving its speed.
Photograph courtesy of Steak 'n Shake

Same-store sales fell 5.1% at Steak ‘n Shake in 2018, parent company Biglari Holdings said Monday, as the burger chain lost customers amid a highly competitive market.

Traffic fell 7% for the chain, which has seen its same-store sales fall for three straight years.

The declines followed seven straight years of increases for Steak ‘n Shake beginning in 2009.

“For seven straight years, we registered industry-leading gains in customer traffic,” Sardar Biglari, CEO of Biglari Holdings, wrote in a letter to shareholders. “But for the past three years, we have been in decline, with same-store sales below the average for the industry. The work we left undone has led us in recent years to be a market laggard.”

To reverse that trend, the company is trying more speed and more franchising.

Biglari wrote that the company is overhauling and streamlining production, “developing a sophisticated operating and delivery system” to improve speed and volume.

Coming out of the recession, Biglari wrote, “We erroneously stayed with equipment and kitchen design that was ill-suited for volume production. The effect has been a high-cost, labor-intensive slow service. We failed customers by not being fast and friendly.”

The company has shifted from a predominantly table-service concept to one that is now largely a quick-service format. Over the past decade, Biglari wrote, drive-thru and takeout revenue increased by 51.5% and now represents about half of the company’s total revenue.

By streamlining processes, Biglari wrote, the company can improve consistency and reduce labor costs “while safeguarding our customers’ love affair with the craftsmanship behind our handmade, homemade creations.”

At the same time, Steak ‘n Shake plans to put more control of those processes into the hands of franchisees.

Last year, the company decided to refranchise all 400 of its company-owned restaurants—franchisees operate another 200 locations.

That’s a massive shift that Biglari said should be done over the next three years.

The company plans to use an owner-operator model, selling franchises to managers and other investors for $10,000. Those operators then split the stores’ profits with the franchisor in a model similar to the one employed by Atlanta-based chicken chain Chick-fil-A.

Steak ‘n Shake would also charge the restaurant up to 15% of sales to lease the restaurant and its equipment.

“We are not interested in absentee owners,” he wrote. “Rather, we seek entrepreneurs with a consummate commitment to the business.”

“Our thinking behind such a lucrative arrangement is simple: The best way to create wealth for ourselves is to first create wealth for our franchise partners,” he added.

Operators would be “carefully screened based on entrepreneurial attitude and ability” and would be limited to a single location.

Still, the challenge behind any refranchising is the lack of profitability on the part of the chain’s restaurants.

As the chain’s same-store sales have declined, its operating earnings have, too. In 2015, Biglari wrote, operating earnings per store were $95,300. That has fallen to a loss of $25,800.

“The decade of control under current management ended much like it started—with heavy losses,” he wrote, noting that Biglari took over Steak ‘n Shake in 2008. He called the company’s performance last year “a significant disappointment” but noted that over the past decade, the chain has generated $300 million in cash that fueled the company’s growth.

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