Why Shake Shack won't be the next Chipotle

Stand for Something Good. Sounds like a non-profit tagline, or maybe a communal chant at a Burning Man riot. Au contraire, it’s actually the vision behind fast casual success story Shake Shack (SHAK).

Shake Shack has come a long way from its humble beginnings. The burger chain started as a single hot dog cart that restaurateur Danny Meyer’s Union Square Hospitality Group (USHG) established in 2001 to support the rejuvenation of Madison Square Park in New York City.

Fourteen years later Shake Shack is still on a roll, a clear standout success in the better-burger group. Shares of the burger seller are up 22% since its much-hyped IPO on Jan. 30 of this year. But when it comes to growth strategy, the company is taking its time.

Shake Shack had 63 restaurants around the world when it went public. Today it has 71 in its portfolio. That means it added just eight new restaurants over the last seven months – about one per month.

In other words, Shake Shack is pacing its expansion very strategically. The restaurant chain plans to open 12 total new domestic locations by the end of 2015 (an increase from its original projection of 10) and plans to expand at the same rate for the next several years.

Though at face value this rate may seem sluggish, it actually represents a 17% increase in its store base expansion year-over-year.

To give you a comparison, Chipotle (CMG) had over 500 stores before going public in 2006. It currently has nearly 1,900 stores throughout the U.S., Canada, France, Germany and the U.K. In its second quarter earnings report, the company said it plans to open between 190 and 205 new locations by the end of 2015, which is a 10.5% increase.

One key concern for Shake Shack is that its regional strength may not be representative of its larger potential.

“It has brand recognition in New York City, but the true test is how well it can perform where it isn’t as well known. And we have yet to see whether that can happen,” said Alton Stump of Longbow Research.

In the second quarter, Shake Shack opened its first restaurant in Texas, its second location in Chicago, and its third in New Jersey.

Though domestically it is just beginning to branch outside the New York area, Shake Shack has an impressive global footprint, with 29 locations outside of the U.S., all of which are franchised. There are 20 in the Middle East alone.

Compared to its competitors, the burger joint is in more countries worldwide, yet its total restaurant count is a fraction of Panera’s and Chipotle’s.

So given its popularity, why is Shake Shack’s scope still so limited?

Two words: Enlightened hospitality.

The term, trademarked by Meyer, describes the core of his philosophy as a restaurateur: to make customer service warmer, friendlier, and more engaging.

Shake Shack’s modern aesthetic, use of all-natural proteins and sustainable sourcing practices all contribute to a unique dining experience that has fans thinking nothing of waiting on long lines for its ShackBurgers, hot dogs, crinkle fries and frozen custard. Perhaps the secret sauce to the company’s success is precisely this belief system. Meyer’s USHG includes high-end New York institutions like Union Square Café, Gramercy Tavern and Blue Smoke.

Though each of his properties offers a different cuisine and character, all emphasize the need for top-notch employees who know how to provide outstanding service.

This emphasis on employee excellence, however, can inhibit the ability for Shake Shack to build out at scale.

In Shake Shack’s IPO prospectus, the company said it sees potential for the company to have 450 stores domestically, without specifying a timeline for this goal.

“[Shake Shack] could certainly grow more quickly, but it might not make the most sense to do so, particularly because the company is known for being so selective with their hires. They have to have the right labor in place,” said Stump.

Shake Shack employees -- a.k.a. the “Shack Team” -- are expected to embody Meyer’s “5 Tenets of Enlightened Hospitality: Taking Care of Each Other, Our Guests, Our Community, Our Suppliers and Our Stockholders."

The Shack Team must also complete a leadership development program, dubbed “The Shacksperience,” which teaches staff to “live and breathe the Shack Pact, the agreement that encompasses our value system and brand ethos.”

This high bar for its workers can be both a blessing and a curse for Shake Shack’s runway ahead.

“Enlightened hospitality has absolutely been a key factor in Shake Shack’s success,” said Stump. “They have a higher-end image than their fast-casual competitors, but that makes it all the more difficult to find and keep good employees.”

You’d be hard-pressed to find a location without a line out the door (classic newbie move to go during primetime lunch hours), so it’s clear customers are eating up the stellar service. The original Madison Square Park location even has a Shack Cam that helps customers gauge how long before they can down that Shackburger.

Until there’s a new foodie innovation that sweeps the nation – which there surely will be – it looks like Shake Shack will keep us waiting in line for a while longer.