For midtown Manhattan resident Stephen Rechner, 58, a trip to Shake Shack is something special. He has been a fan of the fast-casual burger chain since its first branch opened in New York City’s Madison Square Park in 2004, and he doesn’t hesitate to make special trips to get his Shake Shack fix.
“They make the best tasting hamburger for not much more than the cost of a McDonald’s burger,” he said. Rechner noted that the quality of the meat is above par compared to competitors, and the fresh, fast, “no attitude” experience keeps him coming back.
Rechner’s description mirrors exactly what Shake Shack’s founders intended for its customers to experience – a burger known for its high-quality ingredients combined with personal customer service mirroring a small town burger joint.
And it’s a strategy that’s largely worked thus far. Third-quarter sales this year increased 40 percent year-over-year to $71.9 million. The company is banking on the power of the brand to fuel its march to new markets.
“There is a brand power that Shake Shack brings,” said CEO Randy Garutti on the company’s last earnings call. “We always start really big.”
Except, it seems, when it comes to advertising. In a filing late last year, Shake Shack reported that it spent just $1,646 on advertising for the year. Instead of bricks-and-mortar billboard, television and radio ads, the company focused on social media marketing.
That’s a method that might have worked well when the company was riding a loyal following to a small number of restaurants.
The company has hooked millennials with this approach. New Jersey native Sarah Chen, 27, is a student in Florida.
She said she regularly makes trips to Shake Shacks on her visits home, and first heard about the brand after reading Yelp reviews, food blog reviews and conversations between her Facebook friends. For Chen, the social media-based brand has reinforced what Shake Shack means to her.
“When I think of Shake Shack, I think better quality ingredients, and more trendy and more younger people tend to go there,” she said.
This is where things get sticky for Shake Shack. Its determination to remain a cult brand — driven by just word-of-mouth and social media outreach — is coming into direct conflict with its ambition to become a global chain. Though Shake Shack is adding outlets at a rapid clip, a few figures suggest the chain may have to rethink how it markets the brand if it wants to live up to investors’ expectations.
The company continues to add new locations and expand to new markets, having opened its 100th location in August. The chain’s reach spans three continents, and Shake Shack recently signed a licensing deal with HMS Host to allow it to operate in airports.
Sales, however, aren’t actually growing as quickly as they once were. In the third quarter of 2016, Shake Shack reported that sales grew 40 percent to $71.9 million; but during the same quarter a year before, sales climbed a whopping 70 percent to $51.3 million.
The company’s share price reflects the realization of this among investors. After debuting at $46 in 2014, the stock hit an all-time high of $93 in May 2015. These days the stock is trading closer to $37.
One factor behind the slowing sales growth could simply be that sales in locations outside Shake Shack’s New York City home base aren’t nearly as impressive as they are in the city.
For instance, in an SEC filing, latest figures available for non-Manhattan Shake Shacks show that in 2014, non-Manhattan Shake Shacks’ operating profit margin was almost 21 percent, while Manhattan Shake Shacks’ operating profit margin was 10 percent higher.
These numbers tell that successful expansions outside of Shake Shack’s core base of Manhattan shouldn’t be taken as a given.
And herein lies its greatest challenge, flagged as a major risk by Buckingham Research in its most recent guidance to investors:
“The biggest challenge for investors in SHAK, in our opinion, is trying to determine what the financial profile of the business will look like when it has a broader store base in multiple markets relative to its current concentration of real estate in tourist-centric large urban areas,” wrote analyst John Zolidis in a recent note.
It’s a reality Garutti, the Shake Shack CEO, has recently acknowledged.
“We generally, in the new market launches, see a dip in year two,” he said on the third-quarter earnings call. “Each one receives us excitedly, and then we have to earn it one burger at a time.”
What might also work, is turning to a McDonalds-style advertising campaign to stay relevant in the burger wars. Branding experts argue that as a business expands to new markets, it needs to reach out to customers beyond their typical demographics, and Shake Shack is no exception.
“It’s almost hard to believe a restaurant can get away with not advertising as they continue to grow and mature,” said Darren Tristano, president of Technomic, a research and consulting firm serving the food industry.
Tristano explained that as fast-food purchases tend to be impulse driven, brands need to bring their offerings into the mind of the potential consumer through targeted efforts. As Shake Shack moves beyond its home base, it may face no option but to resort to traditional advertising, Tristano said.
“As they move to suburban areas, local billboard advertising is probably going to become more important,” he said.
Hence, the dilemma that Shake Shack faces is how to find an effective means of reaching out to a broader audience when so many options are available on the market.
“Once you grow beyond your cult, then you’re facing some real challenges,” said Nigel Hollis, chief global analyst at market research firm Kantar Millward Brown. “In order to grow, you have to bring in new customers,” Hollis said.
And despite Shake Shack’s impulse toward continued growth, analysts note that digital advertising strategies tend to be more effective when they are combined with some sort of traditional advertising technique.
“Even though online digital is growing as a share and more and more national and local advertisers are making use of it, advertisers aren’t abandoning other platforms including over-the-air broadcasts like television, radio, billboards, taxi cabs and elevators,” said Mark Fratrik, chief economist at consulting firm BIA/Kelsey. “It’s mixes of advertising that national and local companies use to have successful campaigns.”
Shake Shack is well behind competitors McDonald’s, Wendy’s and and Burger King, which spent $802 million, $285 million and $255 million respectively for measured media advertising, according to Kantar Media. Despite these assessments, Shake Shack insists that its small-scale model is what makes it unique.
“The bigger we get, the smaller we need to act,” said Garutti in a call with analysts.
Others feel the move towards big-chain advertising is inescapable.
“They should think ‘now I’m a big boy and I’ve got to play the big game,’” said Hollis.
Video — Edwin Bragg, Shake Shack’s VP of marketing and communications, explains how the chain uses social media to drive the brand:
YouTube / Beet.TV