Shake Shack vows menu innovation, operational changes to counter declining sales and traffic

The fast-casual burger chain’s stock fell sharply Tuesday on its 3.6% same-store sales drop for Q4.
shake shack storefront
Photograph: Shutterstock

Shake Shack stock tumbled more than 13% in early trading Tuesday after the chain reported steep drops in sales and traffic and warned of “potentially significant volatility” in delivery sales after forming an exclusive partnership with Grubhub last year.

Shake Shack’s same-store sales fell 3.6% for the quarter ended Dec. 25, caused by a 5.4% drop in traffic partially offset by a 1.8% increase in price and sales mix. The chain is forecasting a low single-digit decrease in same-store sales for the 2020 fiscal year.

The fast-casual chain’s executives also said declining traffic was caused by the decision to reduce menu innovation and promotional activity. Increases in beef prices, the highest since 2015, also impacted the company’s earnings.

For 2020, Shake Shack plans to roll out “buzzworthy LTOs,” CEO Randy Garutti said during a call with analysts, including hot chicken and new hot Chick’n Bites in Q2. The new items will feature customizable heat levels, including a “fire level” that’s available only via digital channels.

The chain is also testing a mini-size shake offering as well as a vegetarian Shack Burger made with 13 vegetables, herbs and grains.

“We’re certain this category will evolve as we listen to guest feedback, and we may create other products to expand vegetable-based menu options,” Garutti said, according to a transcript from financial services firm Sentieo.

Shake Shack opened 12 company-operated stores and 13 licensed units in the U.S. during Q4, for a total of 39 new company restaurants and 34 licensed stores in 2019, the chain’s largest new class of stores in its history. At the end of Q4, Shake Shack operated 163 domestic restaurants, with 22 licensed units.

Turning to operations, the New York City-based chain said it is experimenting with new store layouts that provide a greater separation between off-premise orders and in-unit dining, as well as updated back-of-house designs to increase efficiency, accuracy and throughput.

Shake Shack is currently “not quite halfway” through its move toward exclusivity with its third-party delivery partnership with Grubhub, Garutti said. It had originally planned a swift systemwide move to Grubhub before switching to a market-by-market rollout strategy. Under the partnership agreement, Shake Shack receives access to guest data and other sales information from Grubhub, critical for use in personalized marketing.

“We’re learning a lot,” he said. “There are some markets that have been easier than others. … We are thinking about things … like what kind of marketing works best? What placement? What kind of offer, like a free delivery offer for an initial period? … There’s a lot of good things happening in our partnership. We’ve got a lot to continue to learn and we’re watching it very closely as we look at the future of this.”

Meanwhile, Shake Shack continues to strengthen its own digital-ordering channels, Garutti said.

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