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 A key part of Shake Shack's growth strategy involves expanding its
locations beyond its New York base, and investors and analysts are
bullish on its prospects.
They say there is room for more "fast casual" restaurants that offer
higher quality burgers, a variety of toppings and in some cases,
beer and wine. Shake Shack's burgers are described in its
preliminary prospectus as all-natural and hormone- and
antibiotic-free.
To be sure, there are skeptics who say the excitement over Shake
Shack is overblown.
“Consumers love it and it will be well greeted in the market - and
then probably fizzle out,” said Doug Kass, president of Seabreeze
Partners Management in Palm Beach, Florida, and a noted
short-seller.
“That a company of such a small size can get a valuation is
symptomatic of the silliness ... that develops in a period of zero
interest rates," he said.
A Shake Shack spokeswoman declined to comment.
Still, several factors appear to be working in Shake Shack's favor.
First, 2014 was a solid year for restaurant IPOs, particularly of
the fast casual variety.
Burger chain Habit Restaurants Inc's shares have risen 3 percent
since its $30 Nasdaq debut on Nov. 20, based on Friday’s prices, and
Zoe's Kitchen was up 12 percent from its April market debut at
$28.72 on Friday. Shares of El Pollo Loco, another fast casual
company, were up 5.5 percent Friday from their $19 market debut in
July.
Second, premium burger chains are outperforming the burger category
as a whole, thanks to demand from younger, more affluent consumers.
Sales at such chains including Five Guys and Smashburger rose 9
percent in 2013, according to restaurant consultancy Technomic Inc,
while overall sales at all burger chains including fast food
restaurants such as McDonald's Corp were down 1 percent.
"The better burger space has been a pretty disruptive force for
McDonald's and other players," said Darren Tristano, executive vice
president at Technomic.
NEW YORK AND BEYOND
Shake Shack has developed a fervent following since it was founded
by restaurateur Danny Meyer in 2001, but the challenge will be to
replicate the success it has found in New York in the rest of the
United States and overseas. The company has 31 company-operated and
five licensed locations in 10 states and Washington, D.C., and 27
locations abroad.
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The chain believes it has the potential to increase the number of
domestic company-operated Shacks to at least 450 and analysts say
that finding new locations with affluent consumers is critical.
Consumers such as Leticia Garza, 33, a middle school teacher in
Austin, Texas, help illustrate the brand's potential in other parts
of the country, but also the challenges. Garza says she is excited
to hear that Shake Shack planned to expand to Austin.
Still, she notes that she has many similar options. "There’s
definitely going to be some competition because we have recently
gotten an In-N-Out, and a couple of local versions that are similar
to In-N-Out: P. Terry’s and Mighty Fine." She adds: "We have
Smashburger, too."
Indeed, the market may be just a few years away from being saturated
with too many fancy burger places, some analysts say. Furthermore,
premium burger chains are not the only ones offering more
personalized options: McDonald's is rolling out a new "Create Your
Taste" program this year that will give customers a choice of
sandwich toppings.
In December, the world's biggest fast food chain, which has not had
a monthly gain in sales at its established U.S. restaurants since
October 2013, said it also planned to cut the number of items on its
U.S. menus. It also plans to use fewer ingredients in food, in an
effort to reach consumers who want simpler, more natural choices.
McDonald's is cheaper than Shack Shack and competes for a less
affluent consumer. Still, industry watchers say such efforts could
put pressure on premium burgers.
"We're always looking for the latest version," said Harry Balzer, an
analyst at NPD Group, a market research company. But, he said,
"there's a limit to the burgers we're going to eat."
(Additional reporting by Sinead Carew; Editing by Eric Effron and
Tomasz Janowski)
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