Shake Shack Rides on Global Forays: Rivals' Food for Thought?

In a classic example of following a rather unconventional path to fuel its growth engine, popular ‘roadside’ burger brand Shake Shack Inc. SHAK has chalked a global strategy of international expansion to better connect with its consumers worldwide. The company recently decided to open a new store in Mexico City, Mexico, to take its international footprint tally to 16 – a remarkable achievement for a relatively young establishment that turns 15 this summer.

What makes this expansion strategy all the more unique is the fact that the company opened restaurants in London, Istanbul, Dubai and Moscow before it reached Los Angeles in 2016. Altogether, Shake Shack currently operates about 235 restaurants across the globe with annual revenues of $459.3 million in 2018.

David vs. Goliath?

Despite significant international presence, Shake Shack appears to be lagging way behind its rivals in terms of number of operating restaurants. By the end of 2018, McDonald's Corporation MCD had nearly 38,000 restaurants worldwide, while Restaurant Brands International Inc.’s QSR iconic brand Burger King operated nearly 18,000 restaurants. In 2018, McDonald’s and Burger King recorded annual revenues of $21,025 million and $1,651 million, respectively.

However, in spite of the skewed-up numbers, Shake Shack seems to be a force to reckon with, generating 27.3% year-over-year growth in estimated U.S. system sales per 2019 Top 200 research. The company also remains poised to claim a position in the top 3 fast-casual chain operators ranked by Latest-Year growth in U.S. systemwide sales.  

The Success Recipe  

The penchant for international expansion appears to be the primary driving force that has helped Shake Shack to punch above its weight. Most U.S. companies usually tend to strengthen their regional presence to gain key insights about customer behavior and consumption patterns before foraying into foreign shores with different culinary tastes and cultures. However, Shake Shack has chosen the offbeat path to success as a way of hedging – cashing in on the fact that if anything went wrong in foreign territories, it would hardly have any impact on local business.

The company uses local licensing companies to run stores in foreign locations. Although the core menu remains broadly similar, it tries to add a local twist without compromising on its brand image. Shake Shack mostly prefers to use American ingredients in international locations to remain true to its distinct taste. In situations where it fails to procure the raw materials from U.S. suppliers due to supply constraints or trade tariffs, the company sources the items from local vendors, thus offering it an opportunity to engage more with the community. When a particular menu item with a local flavor becomes a huge hit, Shake Shack tries to introduce it in the U.S. market to replicate the success story.

Being a relatively small firm, Shake Shack is quite nimble, and quickly adapts to the evolving market conditions and usually turns every possible disadvantage in its favor. Moreover, as the international operations are mostly licensed, it requires comparatively less capital than the bulk of the domestic business. The company also aims to tap the huge footfall in international airports to better connect with diverse customer base. This has further created significant customer interests and generated wide publicity through word of mouth and point-of-purchase display.

Reaping Rewards

The combination of all these factors seem to be working for Shake Shack as it braces for cut-throat competition with respect to price, service, and healthier menu options. Total revenues for the company in the first quarter of 2019 improved 33.8% year over year to $132.6 million. The stock has recorded average return of 45.9% year to date compared with the industry’ s rally of 20.8%.

The company is betting big on extending its international footprint and plans to open 16 to 18 licensed stores this year with an emphasis on expanding in China, Singapore, the Philippines and Mexico. CEO Randy Garutti perfectly summed up, "So much of this story has been our global story. What we learned early on is that people don't want us to be a local version of Shake Shack. They want us to be Shake Shack. So that's what we do."

Food for thought for the rivals?

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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