Steak n Shake’s move from a family dining chain with a drive-thru into a counter-service burger concept fueled by kiosks has made the brand more profitable.
That, at least, is according to the annual letter to shareholders from Sardar Biglari, the chairman of Biglari Holdings, the conglomerate that owns the Indianapolis-based Steak n Shake.
Biglari’s letter details the chain’s shift into a traditional fast-food burger chain, its use of technology, and the resulting improvement in food and labor costs as a percentage of restaurant sales.
It features this brag: Steak n Shake’s improvement in “gross margin,” or sales less food and labor costs, “has been better than that of every other publicly owned restaurant company.”
Steak n Shake’s prime costs, food and labor, were 56% of net sales last year, down from 69% in 2019. Biglari Holdings does not break out data by brand in its annual report—the company also owns the buffet chain Western Sizzlin—so we’ll just take his word for it. Overall, the restaurant companies spend 60% on prime costs.
Also, as a reminder, occupancy and other costs are still pretty important, and those were 30.1% of net sales last year.
Another problem in examining the company has been its closures. Steak n Shake closed another 50 locations last year. It operates 457 locations between corporate units, traditional franchisees and “partner units,” or what are effectively managing partners that share store profits.
Steak n Shake has closed about 170 locations since 2018, when the chain’s profitability problems began. Those closed locations are probably less profitable, which could inflate the profitability improvement.
They certainly have influenced Biglari’s willingness to dive into a company like Steak n Shake again.
“Admittedly,” Biglari wrote, “it is not a sign of strength for a business to repeatedly encounter emergencies that cause it to rise from the ruins, phoenix-like, stronger than before. In future acquisitions, we will try to steer clear of businesses presenting multiple, high-degree problems in a tough industry.”
But its shift from a full-service family dining concept into a traditional fast-food chain has been fascinating.
Steak n Shake was always a bit weird, operating with a wait staff and a drive-thru. It was open 24 hours and served breakfast and late night. But under Biglari it was viewed as a burger-and-shake chain, which has traditionally been its specialty.
But the brand began officially shifting in 2020, eliminating wait staff and pushing people to order from kiosks. All the company’s corporate and partner stores, about 329 of the chain’s 457 locations, are now self-service.
Those restaurants are now open 14 hours a day, rather than 24. They generate less sales overall, but sales per employee, he said, increased to $135,000 last year from $64,000 in 2019.
The stores also need less revenue to make a profit. “Our breakeven point declined by about 40%, obviating our dependence on high unit sales to register a profit,” Biglari wrote.
Yet the profitability isn’t enough for Steak n Shake to remain in the store operations game. The company has converted 181 of its restaurants to its “operating partner” model. Its remaining 148 corporate units are not doing as well as those that it sold to the operators. As such, it has slowed the sale of those units to partners until the restaurants improve.
The remaining company locations “have low sales volumes and marginal profits,” Biglari wrote. “Reversing the performance of these units will not be an easy task, but we have dedicated resources to effectuate an upswing in their earnings.”
The shift to counter service does leave one problem: Traditional franchisees have been slower to make the change, which requires capital investment they may not be able to afford.
And Steak n Shake franchisees have closed a lot of locations.
Since peaking at 213 traditional franchise locations in 2019, those operators have closed a net of 85 locations, about half the total number of system closures.
But Biglari wants to get traditional franchises growing again. The company is developing a new prototype “that should inject verve into this segment and achieve satisfactory unit economics for franchisees,” he wrote. “The traditional franchise business is an important dimension of Steak n Shake because the funding necessary to expand the brand is borne by third parties.”
So, Steak n Shake has improved its profitability. But it won’t use its own money to open new restaurants.