Operations

Shake Shack's C-suite will look different for the next phase of growth

The chain was already looking for a new COO. Now the search is on for a new CEO, and if an activist investor gets its way, the new leaders will have strong operational experience in limited service.
Randy Garutti Shake Shack
Randy Garutti has shepherded the brand from early days. | Photo courtesy of Shake Shack.

While news of Shake Shack CEO Randy Garutti’s planned retirement comes at a high point for the fast-casual brand, it also raises questions about where the burger brand will head from here.

A search for a new CEO was announced on Monday, and Garutti will stay on to ease the transition and will remain as an advisor through the end of 2024. But it comes at a time when Shake Shack was also searching for a new COO—though VP of Operations John Vandegrift is currently leading operations. And it has been noted in recent company presentations that CFO Katie Fogertey is expecting a baby shortly, indicating she will also likely take leave temporarily.

So change is happening in the C-suite at Shake Shack as the 500-unit chain moves into its next phase of growth.

The committee responsible for finding the new CEO, with the help of executive search firm Korn Ferry, will be led by Shake Shack founder and chairman Danny Meyer.

But the committee will also include independent directors Chuck Chapman (former COO of Panera Bread), Jeff Lawrence (a former CFO of Domino’s), Lori George Billingsley (former Global Chief Diversity Equity Inclusion at Coca-Cola) and Josh Silverman (CEO of Etsy), the company said.

Garutti told Wall Street analysts the decision to retire was his own and that he wanted to spend more time with his wife and three kids.

The company also reiterated guidance, saying the chain expects to see operating profit margin between 19.7% and 20%, which will be about a 220 to 250 basis point improvement year over year. The company expects to finish fiscal 2023 with about 40 new company-owned restaurants open (including 14 in the fourth quarter) and another 40 licensed locations. And development will be similar next year.

Garutti, who came from Meyer’s Union Square Hospitality Group where he helped grow Shake Shack from its seedling beginnings as a hot dog stand, guided the chain through the pandemic, took it public and has grown the brand into 33 states and 18 countries.

Though Shake Shack, like many restaurant chains, is struggling to revive flagging traffic, the brand is on a good path, observers said.

“While we were surprised by Garutti’s announcement, we believe Shake Shack is on solid footing,” wrote analyst Sharon Zackfia with William Blair.

But the next phase of growth might require a different set of leadership skills.

She noted an “agreement” with activist investor Engaged Capital earlier this year, saying she believes the board will look for a CEO candidate with a strong operational background and proven ability to drive operating efficiencies and productivity gains, “with a likely preference for limited-service leaders given Shake Shack’s embrace of drive-thru formats in recent years.”

In May Shake Shack said it had entered into a cooperation agreement with Engaged Capital, which brought both Lawrence and (later) Chapman to the board as independent directors, and, now, to the search committee.

Garutti in recent presentations outlined other ways the company is working to boost profitability.

Shake Shack is also working with an outside consulting firm to refine the burger concept’s prototype, with an eye on improving operating margins and efficiency.

Garutti, for example, has said the company is looking to trim 10% from the cost of new openings and another 10% from the cost of new builds. But he also said the company is looking to do more drive-thrus. Roughly 17 to 19 were expected to open this year.

Brian Vaccaro with Raymond James in a report Monday pointed to other potentially margin-boosting changes afoot, including new scheduling practices instituted this year that will be further tweaked to fit different store types. Vaccaro said new kitchen layouts could also drive more labor efficiencies and increase throughput. And he predicted 2024 would be a year of supply chain savings—despite higher beef costs expected—as the chain realizes benefits of scale.

This year Shake Shack also finished its rollout of kiosks to all U.S. locations, which Garutti at the Morgan Stanley Global Consumer and Retail Conference said would have one of the biggest impacts, both from the margin standpoint and consumer experience. Roughly half of sales now come through those kiosks, which also tend to generate a higher average check.

During the Morgan Stanley presentation last week, Garutti said it has been a “really good year” for Shake Shack after setting out last year with a clear strategic plan.

“It was focused on retaining our team, our guest experience, having a great class of new Shacks and development team going forward, improving our margins and being disciplined with capital. That was the plan,” he said, according to a transcript from Sentieo/Alphasense. “That’s what I really feel, looking back at the end of the year now, that we’ve executed.”

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