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Ailing Steak n Shake rehires ad agency, but will pact stick?

June 30, 2008

Local advertising powerhouse Young & Laramore signed a new contract with Steak n Shake, one of its flagship clients, just two weeks ago, but ad industry observers can't help but wonder if the 18-year-old relationship is about to run its course.

Before the ink on the contract was dry, the struggling hamburger chain had a new board chairman who is likely to shuffle Steak n Shake's executive suite and take the company in a new direction.

"I'd say right now, everything is under review," said Steve West, an analyst covering Steak n Shake for Stifel Nicolaus in St. Louis. "When a struggling company looks to bolster its financial situation, they often look at [overhead] expenses, and sales and marketing usually fall under that. I don't think anything is untouchable."

Sardar Biglari and his San Antonio-based Lion Fund have been agitating for change at Steak n Shake since they began buying its stock in August 2007. Biglari and an adviser won two of Steak n Shake's nine board seats at the company's annual meeting in March. On June 19, he took over as chairman. Reached by phone, the 30-year-old declined to comment on the company or his plans.

Y&L CEO Paul Knapp is confident the relationship between his firm and Steak n Shake is on solid ground.

Though Young & Laramore officials declined to say how much of their business Steak n Shake represents, the city's largest ad agency based on full-time employees lists the restaurant chain as one of its top three accounts.

Local industry experts pegged it as one of the top 10 accounts in the entire state, likely bringing in a mid- to high-seven-figure sum annually for Young & Laramore.

Knapp said he has not spoken with Biglari about the campaign.

"We recognize marketing is an easy place to go for change," Knapp said. "But we are intent on helping regrow this business in an economically difficult time, and that's where our focus is."

Steak n Shake has reported 11 consecutive quarters of declining same-store sales, and its stock has slipped to $6 a share.

Officials for Young & Laramore and Steak n Shake wouldn't comment about provisions of the new contract, but advertising industry experts said most deals can be killed within 90 days.

Losing the account could mean layoffs at the 75-employee shop, said Ball State University advertising professor Bob Gustafson.

"It would be a big blow, and as talented as the people at Young & Laramore are, you can't replace that size account overnight," Gustafson said.

Those who follow the industry said putting the account out to bid would draw the attention of every large to mid-size agency in Indiana--and probably beyond.

The worst-case scenario, Gustafson said, would be to see the account go out of state.

"It would be a devastating blow to the local ad community," Gustafson said. "But with someone from Texas calling the shots, you never know. When there's a change at the top of a company like this, all the equity built up in a relationship like the one forged by Young & Laramore ... all the blood, sweat and tears can suddenly be wiped away."

West, the Steak n Shake analyst, said Biglari has a track record of making sweeping changes at other restaurant operations his firm invests in, including Western Sizzlin' and Friendly Ice Cream Corp.

West, for one, likes the ad campaign.

"Actually, I think the company's branding is one of their strengths," West said. "I think their TV advertising is very strong. But cutting that expense is an easy way to gain a savings real quick. It wouldn't surprise me if [Biglari] went that direction."

Bruce Bryant, president of locally based Promotus Advertising and past president of the Indianapolis Ad Club, said Steak n Shake could follow a strategy employed by Dick's Sporting Goods.

"Dick's goes for the cheapest cost per point, and isn't concerned about great creative work," Bryant said. "That's where Young & Laramore has made their mark with this account--it's creative."

Y&L's ad campaign--especially its television ads for Steak n Shake--have become almost as iconic as the restaurant itself. Ads featuring sharp-tongued servers preparing hand-made hamburger patties and hand-dipped milkshakes have netted the ad agency myriad local and national awards.

Through much of the campaign, sales trended upward at the chain founded in Normal, Ill., in 1934. Over the years, the campaign created by Y&L has been cited along with Chick-fil-A's as representing some of the best work in the industry by such publications as The New York Times, US Ad Review and Nation's Restaurant News.

But with sales falling the last two-plus years, Bryant and others within the ad industry wonder if it isn't time for a change.

"Young & Laramore has done great work for Steak n Shake, but the campaign is well-worn, and you can't rely on the same foundation when introducing new products and trying to stay relevant," Bryant said. "Even a good campaign needs to be freshened up."

Y&L's Knapp said the campaign is continually reviewed to maximize its impact.

"In tough times, we always take a very close look at a campaign," Knapp said. "We have gone through a level of scrutiny that shows the campaign to be very competitive. But the bottom line is, we have to grow the business."

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