Delivery pricing and the high cost of chicken cut into the chain's profits this quarter.
— Erika Adams
Higher prices are coming for two things Shake Shack’s customers love: chicken and delivery.
Like its peers in the industry, Shake Shack has been hit from all sides by higher operating costs including higher food prices and steep delivery commission fees. But the core principals on which Shake Shack has built its brand — high-quality food, avoiding a value-driven approach to selling — are the same sticking points that could make it tougher to navigate the industry’s rising costs compared to the competition.
In the first quarter, every store operating expense at domestic, company-operated stores rose as a percentage of revenue. Food and paper costs were up by 41 percent compared to the same period last year. Other operating expenses, which include delivery commission fees, were up by nearly 45 percent. The line item now accounts for 12.1 percent of revenue as compared to 11.2 percent of revenue in the first quarter of last year.
Shake Shack currently operates 129 domestic, company-owned stores, as compared to 95 domestic stores in operation in the same period last year.
Higher Chicken Costs
The quickest answer to rising operational costs is to raise menu prices accordingly. Shake Shack CEO Randy Garutti specified that the chain had not bumped up menu prices nearly as much as competitors, staying resolutely in a 1 to 2 percent range when it does raise them. (For comparison, Chipotle raised prices by 2.5 percent last quarter.)
“There’s a lot of companies out there that are taking a lot of price right now,” Garutti said on the company’s first-quarter earnings call with analysts. “We obviously have had an impact to our margins with some of the creeping costs that we’ve had. But we are in this for the long haul.”
Shake Shack’s domestic, company-operated stores generated a 21 percent operating profit margin in the quarter, as compared to a 25 percent operating profit margin in the same period last year.
There are several specific instances in which Shake Shack will rethink its pricing. For instance, Garutti admitted that the company priced its new Chick’n Bites too low for its nationwide launch. While consumers loved the product, the $4.39 starting price in top-tier markets was simply not high enough to cover the costs of the hormone- and antibiotic-free chicken while still turning a reasonable profit. The chicken nuggets now start at $4.99 at Manhattan restaurants.
While others have negotiated lower fees with delivery partners by forming exclusive deals, Shake Shack is still testing potential partnerships with several delivery services. Given the increased consumer demand for the service, the company is considering raising prices specifically on delivery menus to counteract higher operational costs.
“Today, our menu pricing does not change on any channel,” Garutti said. “That said, we are wide open to considering those things. I think there seems to be a great willingness to pay on digital channels.”
Shake Shack navigated new menu items and higher costs as the company is simultaneously experiencing a high rate of expansion and growth year-over-year. Along the way, customers have proven that they are likely willing to pay for the burgers, the fries, and even the chicken: System-wide sales were up 34 percent compared to last year, and same-store sales (calculated on a 24-month operating basis) were up by 3.6 percent. The numbers were encouraging enough that the company raised its full-year guidance on the same-store sales metric by 1 to 2 percent.