Could This Burger Chain One Day Beat McDonald's?

The American burger chain Shake Shack is valued at US$560 million, and each of its stores is worth far more than a McDonald's. How did it pull that off?

Eating a burger at Shake Shack, they say, is as much a part of a visit to New York as seeing the Statue of Liberty or going up the Empire State Building. It began as a hot dog cart in Madison Square Park. Between 2001 and 2004 it grew steadily more popular and was eventually turned into a small kiosk. Not long ago, Shake Shack filed for an IPO on the New York Stock Exchange at an expected valuation of US$560 million. The company has only 63 stores, so it is not big; against that, US$560 million is a lot of money.

People like it because it is "slow fast food"

Most fast-food chains compete on speed. Shake Shack's founder, Danny Meyer, argues for "slow fast food" instead. It has worked: by putting the customer's experience and the taste of the food first, Shake Shack has found room to survive in a fast-food market that was already crowded.

Its lines are never too long and its food never too slow. In customer reviews, the setting and the taste of the food are the two things praised most often. For its 10th anniversary, the company launched a series of special burgers; on the day the shrimp burger came out, the line thirty minutes after opening was the longest it had ever been. Consumer psychologists point out that herd instinct and a taste for novelty make people willing to spend time queuing to buy things.

Shake Shack has done a lot to make waiting comfortable, including a camera that lets you check the line (the ShackCam) and a buzzer, handed out when you order, that vibrates to tell you to collect your food from the kitchen.

Shake Shack is a "fast casual" chain, and for most of the year you can see customers cheerfully lining up outside its doors. Perhaps because it has brought business to the neighborhood, last year the sixth New Taste of the Upper West Side gave Shake Shack an award for its contribution to the local economy.

Is Shake Shack's listing a "burger bubble"?

Before Shake Shack, a Mexican restaurant chain called Chipotle went public in 2006 and grew at a startling pace. In the years after its listing its share price rose ninefold, and its revenue, sales and number of restaurants all kept growing fast. While many traditional brands struggle to find new growth, investors increasingly favor newer chains that are small but have plenty of room to expand.

That is why many investors were excited when Shake Shack, a company of about the same size, went public. Buyers of its shares crowded in as if at an Apple Store opening. Everyone was glad to see that success repeated, and people called it a "burger bubble economy."

The problem is that Chipotle grew quickly through company-owned restaurants and has been tested by the market, whereas about half of Shake Shack's restaurants are franchised, which does not bring faster revenue growth. That comes from the founder's insistence on high-quality food, and it is also the biggest strategic pressure on the brand's next stage. Shake Shack is likely to grow at home and abroad at the same time. How to balance expansion against food quality is a question it cannot avoid.

You may have heard this comparison lately: Shake Shack is valued at more than US$560 million with only 63 stores worldwide, so each store is worth about US$9 million. By that arithmetic, one Shake Shack is worth 3.6 McDonald's. Which raises the question: will Shake Shack one day beat McDonald's?

McDonald's is struggling, but Shake Shack is not much healthier

You may remember that in our earlier coverage of McDonald's we said McDonald's is facing the biggest crisis in its history.

Coca-Cola, also tied to the "junk food" label, has done poorly this year too. Health seems to have become the deciding factor for food companies this year. Shake Shack, though, breaks that link: a Shake Shack burger has no fewer calories than a Big Mac. In 2013, when First Lady Michelle Obama was seen eating at Shake Shack, nutritionists pointed out that the meal went over the recommended calories and was unhealthy. She replied that it was just "an indulgence." A Shake Shack double cheeseburger meal still packs 2,000 calories, close to 83% of a whole day's energy needs.

Nor is the fast-food market shrinking. According to a survey by NPD Group, overall traffic at US fast-food chains is about level with last year, while traffic at fast-casual restaurants such as Chipotle Mexican Grill and Panera Bread grew by 8% on average.

The heart of the matter: teenagers no longer think eating at McDonald's is cool.

So how did Shake Shack grow?

Shake Shack's owner, Danny Meyer, is hailed as a maverick of the restaurant world. Before starting the burger chain he was already a well-known American restaurateur. He founded Union Square Hospitality Group (USHG), whose Michelin-starred fine-dining restaurants include 11 Madison Park, Gramercy Tavern and Blue Smoke. His Shake Shack stake alone is now worth US$150 million, and Shake Shack is now the largest asset in USHG's portfolio.

Yet until 2010, Shake Shack had only three locations in all of New York. Today it has outlets in the Middle East, Turkey, London, Moscow, Dubai and elsewhere. The brand has more than 60 restaurants, 16 of them in New York City.

Shake Shack plans to keep growing at a steady pace. Its CEO, David Swinghamer, said: "Our goal isn't to open as many stores as possible. If we can't do it right, we'd rather not do it."

Part of the reason it aims to raise US$100 million is to open new stores.

Where it crushes McDonald's: "a more refined burger"

Shake Shack calls itself a "fine casual" chain, an upgrade of the fast-casual concept popularized by Chipotle and Panera. In truth, the one problem it has always worked on, and will keep working on, is how to make a better burger. It is not healthier; it has simply refined its recipes as far as it can. It stands for a trend toward better food, nothing more.

Its signature beef burger, for example, is billed as made with 100% antibiotic-free Angus beef and topped with a house sauce that USA Today described as "a little spicy, a little sweet and a little tangy." It has drawn plenty of customers. Other signature items include fries and milkshakes.

Shake Shack is a "restaurant with a modern sensibility," and it "expresses that modernity by keeping its food high quality," says Paula Scher, who designed for Shake Shack. "It's different from McDonald's. They share the same modern spirit, but McDonald's, the model for the burger business after the 1950s, used it to produce low-grade food." Put another way, Shake Shack is the opposite of McDonald's: it holds to 1950s quality in a modern idiom.

Push personality as far as it goes, and you give yourself the best odds

Shake Shack's design made its mark before its food did. The mixed-material metal shack won its designer, James Wines, the 2013 Lifetime Achievement award at the National Design Awards. That building has quietly shaped the company's development ever since. Pentagram, the long-established American design consultancy, led the second high point of Shake Shack's brand design: as part of the Conservancy's project for the square, its principal Paula Scher redesigned the logo, signage, bags and uniforms free of charge. The results were the modern feel of the metal wordmark and a new icon inspired by neon signs. Fitting into the cityscape while still standing out became part of Shake Shack's character.

It keeps close to the health trend and cares about the quality of its food. First, Shake Shack serves breakfast, and not just a mini version of its usual menu in new packaging. Second, it offers a vegetarian burger made mainly from mushrooms rather than the usual soy protein. On its menu you will find what it calls the "classic menu": burgers, New York-style hot dogs, fries and the shakes that give the place its name. There is also a frozen custard called "Shake Shack Concrete" (billed as having a rich flavor that never disappoints), along with humanely raised beef that is not fast-grown, and the restaurant's own beer and wine (you can buy a whole bottle to take home if you like).

On top of that, it runs the Shack Track & Field fitness club, which holds regular events.

Did you know? This was once McDonald's appeal, too

McDonald's, which grew fast in the 1950s, stood for typical American culture. The drive-in model of the 1940s had kept restaurant food cheap but labor costs kept rising. The McDonald brothers made a series of changes: they cut service time to raise output; replaced waiters taking orders with customers ordering directly at a kitchen window; trimmed the menu to control costs; swapped the old tableware for disposable utensils; lowered prices; created a new kind of customer centered on children; ran food production and service like an assembly line; and tightened work procedures. Together these created a new, standardized way of doing business. McDonald's did shape American culture this way in its day, but now it looks dated. Today, when management is no longer what decides success in fast food, the truth is that eating at Shake Shack is what looks cool.

According to Technomic, a US food research and consulting firm, young people care less about the product itself than about whether a brand is on trend and exciting enough, and they take pride in their brand loyalty.

What Shake Shack still lacks: scale

Its distinctive personality has won Shake Shack a valuation of US$560 million, far above what anyone would usually expect. The story is a familiar one: the number-two player in a market always stands out through personality. But to match McDonald's, let alone overtake it, Shake Shack still needs scale, which is exactly where McDonald's is strongest.

Scale means drawing in more people, and Shake Shack has its own ways of doing that compared with traditional fast-food chains. Another part of its personality is its use of social media to build its brand. Its official Instagram account, for example, has more than 140,000 followers, and every photo of tempting food draws thousands of likes or comments. Shake Shack has won over the younger generation: many young Americans think showing Shake Shack food to their friends online is very "cool."

Many young people post photos of Shake Shack food on Facebook, Twitter and Instagram the way they would show off the latest, flashiest gadget. Most are what foodies call "foodporn" (close-up photos of food meant to excite the senses).

Social media has also won it the attention of many celebrity fans. From promoting its #SHACK 10 Spotify playlist in support of musicians, to its Shack Pride merchandise, to the New York SHACK Exchange, which handed out free food from trucks on the day of its NYSE listing, the brand events Shake Shack stages do not aim for mass-market fun.

But it still has to think about its long-term strategy. Shake Shack must find an edge that sets it apart from the many local burger brands. In the US, almost every state has burger joints with their own signature flavors, such as In-N-Out, Smashburger, Five Guys and Habit, whose shares have recently soared. Can a steady pace of ten new stores a year keep investors excited while preserving the aura of a niche restaurant? That is the question Shake Shack has to answer.