This week I visited a recently opened Shake Shack burger outlet in Umeda, Osaka. It was on the ground floor of the newly renovated Hanshin Department store, on the popular Midosuji street.
It’s the first time I’ve seen a fast food restaurant inside an upmarket retailer selling quality branded apparel.
Shake Shack now has 72 stores internationally of which 19 are in Japan, making it one of their biggest markets. There are plans to open an additional 15 outlets here by 2024.
Shake Shack has signed an exclusive franchise partnership with Sazaby League, a privately owned company that owns the rights to over 30 international brands, mostly in fashion.
Sazaby was the original JV partner for Starbucks when it opened in Japan in 1995 and their relationship lasted until 2014 when Starbucks paid US$914m to take full ownership. Sazaby has entrenched relationships with high end retailers and property management companies meaning it has access to key locations, a prerequisite for any retailer.
Losing Starbucks was undoubtedly a shock Sazaby’s pride, let alone revenues, so the emergence of Shake Shack was prescient.
My lunch in Shake Shack was expensive. The burger, fries and shake came to JPY2300 (US$21), over twice the price of a MacDonald’s and roughly 40% more than a coffee and food in Starbucks.
The restaurant was full of diners, but there was no queue and in the 30 minutes or so I was there I hardly noticed any new customers. I found the burger greasy and the bun especially was very soft and poor quality.
Whilst I don’t have access to the contract, I estimate Shake Shack makes roughly US$160,000 per franchise store/year, about 15% less than Starbucks. I suspect Starbucks have much higher outlet turnover as patrons visit more frequently.
Licensing revenue is around 3% of Shake Shack’s turnover currently. In addition it mandates franchises to buy ‘proprietary ingredients’ including meat and buns, so its franchisees’ store traffic and spend are important.
Since Shake Shack was IPO-ed at $21 its stock reached an all-time high of $92 in 2015. Yesterday it closed at $54.
I wonder whether Shake Shack have paid sufficient attention to consumer tastes and the value for money proposition to drive repeat store traffic?
Whilst Shake Shack is premium, it’s not Coach or Louis Vuitton.