- Shake Shack stock has been beaten down due to high expectations and uncertainty.
- The rapidly-growing company is proving a big hit with spend-happy Millennials.
- One can expect a huge surge in Shake Shack stock price in 2016.
Shake Shack (NYSE:SHAK) is stuck between a rock and a hard place. It is an ‘up market’ fast food establishment; however, investors can’t help but compare it to budget-friendly alternatives such as McDonalds (NYSE:MCD). Shake Shack stock enjoyed a meteoric rise soon after its IPO but is currently in the midst of a steady decline. However, this isn’t due to a lack of impressive metrics, but rather a mixture of high expectations and uncertainty surrounding the company.
Recently, Shake Shack announced the decision to expand into more territories, and also introduced a chicken sandwich- a first for the company. Historically, Shake Shack has had little issues with getting people through their doors. In fact, the demand for their food is somewhat cult-like. In fact, it isn’t unusual to see people queue for hours in order to grab lunch from the outlets.
Shake Shack’s positive brand image is due to a focus on providing excellent customer service: they even refer to their customers as guests. Shake Shack is the antithesis to McDonald’s. They proudly advertise their antibiotic-free burgers, and low fat food. At a time when Western consumers are becoming increasingly concerned about their body image and health, Shake Shack is well-placed to ride this wave which could provide a boost to their bottom line. Additionally, Shake Shack’s upscale brand, is akin to a gourmet restaurant than a fast food chain. As a result, they are well patronised by millennials.
Shake Shack Financials
In 2012, the same store sales growth for shake shack was 7.1% which declined to 5.9% in 2013. Fast forward 39 weeks and there was a further reduction in the same store growth by 3%. These falls were due to a decrease in revenue contribution from a couple of stores owned by Shake Shack. McDonald’s on the other hand have maintained a steady growth over the past few years. Moreover, McDonald’s have a perpetual marketing machine powering them. As a result, they reach all segments of the American population. In fact, they sponsor sporting events such as the Olympics in order to grow their global brand.
While same store sales have been falling, Shake Shack has exceeded Wall Street’s expectations with regard to profits in 2015. Moreover, few were expecting the company to become profitable in such a short time, which is a testimony of the company's strong business model.
Shake Shack Marketing Strategy
Shake Shack have fully embraced social media as a means of getting customers into their doors. Arguably, Shack Shack’s more appealing food presentation (as compared to McDonald’s) makes images of their food more ‘shareable’ on social media. In fact, a report by Business Insider showed that Shake Shack dwarfs other major food chains with regard to social media followers in comparison to sales.
The advertising strategies used by shake shack don’t involve marketing themselves through sports events. Nevertheless, Shake Shack has expanded the items on their menu. In addition to their signature dishes which includes cheese crinkle fries, shakes and frozen custard, it has added “Chicken Shack”. This new offering should attract more customers, especially considering that there is a consumer trend towards healthier eating. This should go some way in increasing Shake Shack's market share.
Shake Shack Growth
Shake Shack certainly has the recipe for success in the competitive fast food industry. In order to build on their success stateside, they opened a Shake Shack in Japan and plan on opening more this year. This shows how much the executives of the company are backing up their game. Interestingly, the sites chosen for the new stores are at the centre of public places right in the face of thousands of people. This is likely to expose them to more customers, and as demand increases there will be an increase in sales which, in the long run, will help to drive Shake Shack stock price as it has been on the low for a while now. Another big plan of Shake Shack is to delve into the following lucrative markets; Phoenix, Hollywood, Scottsdale and Dallas.
An increase in the gross revenue by at least 25% is anticipated by the company as a result of the new stores they opened by the end of 2015. In the third quarter, there was an increase in revenue by 67% YoY which was partly driven by a 17% YoY growth in same store sales. This shows that the management are doing their best to maintain the long term growth of the company.
In conclusion, Shake Shack is a healthy fast-food choice for consumers. However, it isn’t exactly cheap... and for lower income households, it is somewhat of a luxury. Therefore, they are unlikely to ever balloon to the size of McDonald’s.
Shake Shack certainly has a growing appeal, but the challenge lies in convincing consumers who like their fast food more on the cheaper side (McDonald’s) to pay more and get something healthier. I anticipate that Shake Shack will create one or two food items which compete with McDonald’s on price. This would act as a way of gaining market share.
Shake Shack is a relentless company. With the addition of new items to the menu and expansion into more territories, they display a massive growth potential which will likely drive Shake Shack stock higher in 2016.