Real Estate & Retail

CEO Dunn not afraid to shake it up: Changes help Steak n Shake capture Enterprise Award

September 12, 2005

When an executive recruiter contacted Peter Dunn a few years ago about a top post at The Steak n Shake Co., he wasn't sure what to think.

"I wondered what kind of steaks they served with milkshakes," he recalled with a laugh.

Today, Dunn, Steak n Shake's president and CEO, probably knows more about the company than anyone in its 71-year history.

The newcomer to the restaurant industry, a Harvard grad with an MBA from the University of Virginia, has put in place systems to measure and improve almost everything, from employee retention to customer satisfaction.

He's taken the same approach with the company's menu, embracing market research to test and roll out a stream of new products-including sideby-side milkshakes and sippable sundaes.

Now, with operations on track and sales surging, Dunn, 50, is ready to rev up expansion. The 438-restaurant chain, now in 19 states, plans to add 19 stores this fiscal year, 26 in 2006, and even more in years thereafter.

Dunn's efforts to revitalize and expand Steak n Shake, one of the nation's oldest restaurant chains, have earned the company IBJ's 2005 Enterprise Award, which recognizes risk-taking and achievement among central Indiana businesses.

The new England native's moves also have earned shareholders a handsome return. Since Dunn came aboard as president and chief operating officer in September 2002, the company's stock is up more than 80 percent.

And more gains may be in the offing, according to analysts, who say they're impressed with Dunn's attention to detail.

"Management is conservative and has a slow-and-steady approach that will not let the core business suffer at the seduction of hyper-expansion," Dean Haskell, an analyst with JMP Securities, said in a new report.

Lessons learned

Before joining Steak n Shake, Dunn was an executive in the packaged-foods industry. At Kraft General Foods in the 1980s, he led the team that created Oscar Mayer Lunchables, among the most successful new products in supermarket history. In the first year, Kraft sold more packages of Lunchables than it did Oscar Mayer hot dogs.

He was then off to Borden Foods, where he served as president until the owner, Kohlberg Kravis Roberts & Co., decided to sell the business in pieces and cash out its investment four years ago.

As he explored career options, Dunn said he found a lot to like at Steak n Shake. He called it a "much-beloved brand" with "a clear point of view of what it is best in the world at-steakburgers and milkshakes."

He said the chain had differentiated itself from the crowded fast-food field by offering superior food and full service. And its quirky TV advertising campaigns reinforced those strengths.

On the other hand, Dunn said, "I would describe Steak n Shake as a wonderful small company that had found itself big. It was a natural time to bring some more systematic processes to bear that could ensure high-quality, consistent execution."

Atop Steak n Shake back then was E.W. Kelley, whose investment group had swooped in in 1981 to revitalize the 125-restaurant company. Kelley was serving as chairman and Alan Gilman was CEO and president.

In the late 1990s, the pair had Steak n Shake humming. It had posted 11 straight quarters of increased same-store sales, and rapid growth had ballooned the number of locations past 400.

But in 1999, the expansion derailed. That fall, Steak n Shake announced it was putting on the brakes, amid struggles finding and training management staff. Growth-oriented investors bailed, sending the shares down 21 percent in a single day.

Meanwhile, the board began focusing on succession planning. It came across Dunn as it looked for a younger executive to work alongside Kelley and Gilman. Kelley died in 2003 at age 86; Gilman, who is 74, is now chairman but relinquished the CEO's post to Dunn a year ago.

Opportunities abound

Talk to Dunn about Steak n Shake for any length of time, and he's almost sure to drop the phrase "virtuous cycle."

It's a simple business-school concept, Dunn said.

"If you want to delight shareholders, the best way to do that is to treat your guests really well, so they come back more often," he said. "The best way to do that is to have associates who are inspired to be great in service of their guests, and the best way to do that is to have leaders who are capable of inspiring people to be great."

Trouble was, when Dunn came aboard, Steak n Shake was not formally measuring key parts of the equation, such as employee turnover and customer satisfaction, much less setting standards for improvement.

Dunn said working in the packagedfoods industry taught him "the tremendous importance of quality and consistency measurements." He imposed that mind-set at Steak n Shake and began identifying best practices within specific restaurants to spread company-wide.

For example, if Steak n Shake executives noticed a restaurant had low employee turnover, they'd find out how managers handled interviews and what they did to support employees during their first weeks on the job.

Under Dunn's system, restaurants "are now clear what the score is," he said. "They are now clear how to play the game and what the game is. That has been helpful."

Since Dunn's arrival, Steak n Shake says, annual management turnover has fallen from 40 percent to 27 percent, and turnover among other employees has fallen from 220 percent to 148 percent. Company officials say that's translated into improved customer satisfaction, as measured through a mystery shopper program and customer surveys.

Shaking up shakes

Also fueling improved performance: a blizzard of new shake offerings. The company in early 2004 unveiled side-by-side milkshakes and this year unveiled sippable sundaes, with exotic flavors like strawberry fudge cheesecake and caramel mocha macchiato.

In addition, Steak n Shake has debuted an array of seasonal shakes, such as caramel apple, which the company is selling in the weeks leading up to Halloween.

"Customers like to make choices, and like to have choices," said Sue Perram, an analyst with Avondale Partners. "The biggest, most important factor in improving store sales has been the innovation in new products."

In the second quarter of fiscal 2004, she noted, milkshakes accounted for just 15 percent of Steak n Shake's sales. In the second quarter of this year, that figure increased to 24 percent.

It had been years since Steak n Shake had rolled out a new shake and had rarely brought out new products of any kind. Dunn said he wanted to change that because "I just believe new product development is an integral part of keeping any brand vital.

"We have decided to be the category killer in milkshakes, to have the best assortment anywhere in the world," he added.

He's not stopping at shakes, however. He said they were a natural place to start because market research showed strong demand, and adding offerings created few logistical headaches.

Other menu items now in testing include burgers with premium toppings, such as grilled mushrooms, grilled onions and bacon. The company also is testing new salads and lower-fat shakes, including one with a yogurt base.

Dunn said the company wants to include more healthful alternatives on its menu because it's the right thing to do and because they lure customers to visit more frequently.

"We have a number of guests who want to come here more often but hesitate because they are appropriately sensitive to managing their calorie intake," Dunn said.

Eyes on expanding

Dunn spent his first two years with Steak n Shake focusing on improving operations. In his third year, the company began looking toward expansion, investing $3 million to build up its pipeline of managers and to expand its real estate and construction departments.

But investing so much in the future heightens the challenge of meeting Wall Street's quarterly profit expectations. In the third fiscal quarter, which ended July 6, the company narrowly missed the mark, reporting profit of $7.8 million on revenue of $148 million.

Investors responded by lopping 6 percent off the stock price in a single day, leaving it a shade below $20. The shares haven't recovered the lost ground. On Sept. 8, they were fetching $19.80, down from a recent high of $21.95 on Aug. 1.

Despite the earnings disappointment, "we believe Steak n Shake is headed in the right direction," BB&T Capital Markets analyst Barry Stouffer said in a report. "The positive customer count trends in eight of the nine last quarters is evidence that the new management has righted the ship." He said the stock might hit $24 in the next 12 months.

Dunn said he won't let such setbacks distract him from managing the company for the long term. It takes an upfront investment to build the infrastructure to support expansion, as Steak n Shake itself learned the last time it ramped up growth.

The company won't stumble this time around, he said.

"We will do our expansion in a way that ensures our success and manages the risk associated with it," he said.

"But we will also do it in a way that is determined, because we think a lot more people should have the right to eat at Steak n Shake, and we are going to make that dream come true for them."
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