facebook pixal

Why Steak ‘n Shake’s service model change is a big risk

The company is selling real estate to fund a shift to a counter-service model. RB’s The Bottom Line examines why the company is taking this step.
Photograph: Shutterstock

The Bottom Line

Many chains are using the pandemic to make significant changes in their operation, real estate or their menus. But perhaps no chain is taking a step quite as aggressive as the one Steak ‘n Shake is taking: Changing its entire service model.

The Indianapolis-based burger chain, long a weird family dining chain-burger concept hybrid, is making a full shift to a counter-service model, eliminating wait staff in the process. It’s a step that is not unheard of, but is one loaded with risks.

Yet the company has little to lose at this point.

Steak ‘n Shake’s same-store sales increased every quarter for a seven-year period between 2009 and 2016, but they’ve been down ever since. They decreased 13 straight periods as of the end of 2019. The company hasn’t reported the key metric this year, reporting only changes in revenues and franchise fees

That total revenue in the first six months of the year has decreased by more than a third. In the second quarter they were cut in half, which is in part due to store closures and sales of restaurants to franchisees. The company and its franchisees have closed 85 stores since the end of 2018, and currently operate a total of 541.

Meanwhile, the chain has been losing money and has considerable debt. Its credit rating has suffered and the chain itself is believed to be in danger of a bankruptcy filing by the time its debt comes due next year.

Weak sales and a looming financial deadline have a tendency to drive big changes, and if anything Steak ‘n Shake has done that. The company is working to shift its corporate restaurants to operating partners, similar to Chick-fil-A—those partners operate 51 such restaurants, with the company operating the remaining 289.

The shift to a counter-service model is only the latest idea. The company believes that the full-service model is too costly and inefficient to operate. “The combination of labor-intensive, slow production with high-cost table service has led our overall labor costs to be six to eight percentage points above those incurred by our competitors,” Sardar Biglari, CEO of Steak ‘n Shake parent company Biglari Holdings, said in his most recent letter to shareholders.

At the time, he said that stores the company temporarily closed would reopen with a counter-service model. But now that idea appears to be bigger than that. “Steak ‘n Shake is seeking to reopen dining rooms with counter service,” Biglari Holdings said in its second-quarter earnings report.

That transition “will require significant investments in equipment,” which it is funding by selling off real estate. Biglari Holdings had $329 million worth of property and equipment assets as of the second quarter, most of which is tied up in Steak ‘n Shake.

The company has closed a number of locations for which it owns the real estate and has been auctioning off those properties. Earlier this month, 15 such sites went on the auction block. That sale is being run in part by Keen-Summit, an investment banking firm that specializes in restructuring and bankruptcy, along with NAI Global.

Few companies have shifted service models, even as customers have rapidly moved from full-service to fast-food restaurants over the past 15 years. The most visible such shift was Pizza Hut, which has been evolving from a full-service chain to a delivery concept for decades. That shift hasn’t been easy and is taking the bankruptcy filing of one of its largest operators in NPC International to accelerate the move.

Shifting service models is not easy, and Steak ‘n Shake risks alienating some existing customers, particularly the chain’s long-time Midwestern base who were accustomed to going into the restaurants and getting waited upon. “The greater risk for them is customer count,” said John Gordon, a restaurant consultant out of San Diego.

Gordon also questioned Biglari’s point about operating costs. Most states have tip credits that allow restaurants to pay lower wages to workers that get a substantial amount of tip income. That can keep labor costs for full-service restaurants lower.

That said, Steak ‘n Shake as we said is a hybrid. It is frequently labeled a fast-food chain even though it has wait staff, because it does considerable business through its drive-thru. Biglari has long been adamant that it is a quick-service burger chain and not a family dining concept.

And if we’re being honest, I’d rather be a fast-food burger chain in 2020 than a family-dining concept. Demand for drive-thru service is only increasing. Takeout is expected to rule for some time.

Steak ‘n Shake has been losing customers, anyway. Going into this year it had a cumulative same-store sales decline of 13.5%. The diminished capacity of dine-in service because of the pandemic, coupled with the safety of the drive-thru, gives the company breathing room and incentive to make that change now.

As we said, it has little to lose.

Want breaking news at your fingertips?

Get today’s need-to-know restaurant industry intelligence. Sign up to receive texts from Restaurant Business on news and insights that matter to your brand.


More from our partners