Shake Shack Sizzles With IPO As McDonald's Fizzles
Shake Shack, the Manhattan-based burger chain, has a cult following, and investors gobbled up shares Friday when it became a publicly traded company.
In its initial public offering, shares were priced at $21, but they jumped to nearly $50 as trading began, and closed the day just under $46.
Aaron Allen, a consultant, says a revolution is taking place in the restaurant business. People want their food fast, but they don't want fast food. They want to see their food made to order and put together right in front of them.
"If you take Red Lobster and Olive Garden, TGI Fridays, IHOP, Applebee's, Chili's, add them all together and their valuation is less than just Chipotle," Allen says.
The founder and chairman of Shake Shack, Danny Meyer, visits the floor of the New York Stock Exchange.
Shake Shack hopes to be the Chipotle of burgers, Allen says. But the company already faces much competition from chains such as Five Guys, In-N-Out and Habit Burger. He adds that the so-called fast-casual movement has been very profitable, and it's expected to more than triple its sales within the next decade.
"This sector is actually cannibalizing parts of the industry," Allen says.
It's certainly taking a bite out of McDonald's, which this week announced its CEO would step down amid global sales problems.
Allen says fast casual has a leg up on traditional fast food. The assembly line format requires both less space and fewer employees, which are a restaurant's main expenses. And he says Shake Shack, Chipotle and others focus on fewer menu items with better, more healthful ingredients.
McDonald's cannot recast itself to fit the current trend, he says.
"Part of the reason that there hasn't been more innovation there is because the supply chain is built around heavily processed frozen food product, and so to change the product offering, you'd have to re-engineer everything from the supply chain to the kitchen layouts to the training systems and more," Allen explains.
But what's exactly behind the appetite for Shake Shack? The menu options are fairly limited: five options for burgers, four hot dogs and seven flavors of shakes. On a recent day at the burger chain's downtown Washington, D.C., location, tables were still packed at 3 p.m., which is pretty late for lunch.
Shake Shack customer Jason Cheever is the restaurant industry's prize consumer. He dines out eight to 10 times a week. "More healthy fast casual, not necessarily fast food," he says. "I have a Sweetgreen right next to my house, I go there," says Cheever, referencing the fast-casual salad chain. "I'll go to [Mediterranean fast-casual chain] Roti ... faster food places that have quality ingredients."
Cheever, who is 29, says most of his peers feel the same way.
"They'd rather pay a few dollars more to go to somewhere that has better food and is healthier for you, and they know that the people that are making it are preparing it in a sanitary environment," he says.
Public investors will pressure Shake Shack to grow quickly from its current base of 63 stores, says Dean Small of Synergy Restaurant Consultants.
"Growing strategically, finding the right locations, the right sites, will be one of the biggest challenges," he says.
Especially with so many other restaurants with similar models nipping at their heels.
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Transcript
MELISSA BLOCK, HOST:
It's a good time to be making trendy hamburgers. Shake Shack is a burger chain out of New York. Fifteen years ago, it was a single hot dog cart. Well, today it became a publicly traded company, and investors gobbled up its IPO. Shares started at $21 and closed at $45. NPR's Yuki Noguchi reports on what's behind the appetite for Shake Shack.
YUKI NOGUCHI, BYLINE: Aaron Allen, a consultant, says a revolution is taking place in the restaurant business. People want their food fast, but they don't want fast food. They want to see their made-to-order food put together right in front of them.
AARON ALLEN: If you take Red Lobster and Olive Garden, TGI Fridays, IHOP, Applebee's, Chili's - add them all together and their valuation is less than just Chipotle.
NOGUCHI: Allen says Shake Shack hopes to be the Chipotle of burgers. But there's already a lot of competition from chains such as Five Guys, In-N-Out and Habit Burger. But he says the so-called fast-casual movement has been very profitable and is expected to more than triple its sales within the next decade.
ALLEN: This sector is actually cannibalizing parts of the industry.
NOGUCHI: It's certainly taking a bite out of McDonald's, which, this week, announced its CEO would step down amid global sales problems. Allen says fast-casual has a leg up on traditional fast food. The assembly-line format requires both less space and fewer employees, a restaurants main expenses. And, he says, Shake Shack, Chipotle and others focus on fewer menu items with better, healthier ingredients. McDonald's, he says, cannot recast itself to fit the current trend.
ALLEN: Part of the reason that there hasn't been more innovation there is because the supply chain is built around heavily processed, frozen food product. And so, to change the product offering, you'd have to reengineer everything from the supply chain to the kitchen layouts to the training systems and more.
NOGUCHI: It's three o'clock, which is pretty late for lunch, but every single table here at Shake Shack in downtown D.C. is taken. The menu is fairly limited - five basic options for burgers, four for hot dogs and seven flavors of shakes. Shake Shack customer, Jason Cheever, is the restaurant industry's prize consumer. He dines out 8 to 10 times a week, often at salad and Mediterranean chains.
JASON CHEEVER: More healthy fast-casual, not necessarily fast food. I have a Sweetgreen right next to my house, I go there. I'll go to Roti, like, faster food places that, like, have quality ingredients.
NOGUCHI: Cheever, who is 29, says most of his peers feel the same way.
CHEEVER: They will rather pay a few dollars more to go somewhere that has better food and is healthier for you and they know that the people that are making it are preparing it in a sanitary environment.
NOGUCHI: Public investors will pressure Shake Shack to grow quickly from its current base of 63 stores, says Dean Small. Small is president and CEO of Synergy Restaurant Consultants.
DEAN SMALL: Growing strategically, finding the right locations, the right sites, will be one of the biggest challenges.
NOGUCHI: Especially with so many other restaurants with similar models nipping at their heels. Yuki Noguchi, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
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