Franchises and Public Companies and Steak n Shake and Growth and Restaurants and Strategic Planning and Retail and Real Estate & Retail

Steak n Shake hoping to roll out lower-cost, limited-service stores

May 4, 2009
TV spots for Steak n Shake Co. used to play up the chain's full-service restaurants, complete with friendly servers, real plates and glass ketchup bottles—a departure from the "workaraunts" operated by McDonald's and Burger King.

Now, Steak n Shake is developing plans for its own workaraunts.

The new management of the Indianapolis-based chain hopes to sell as many as 1,500 Steak n Shake franchises, including smaller-format, limited-service locations in strip malls. They also are working on a new design for standalone locations.

Adding 1,500 restaurants to the chain's roughly 400 current locations would give Steak n Shake as many outlets as Applebee's.

The rationale for new store formats comes down to simple economics: The chain's standalone stores cost more than $2 million to build and generate an average of $1.4 million in sales. The goal is to reduce overhead costs so franchisees can expect $1 in annual revenue for every $1 they spend to build their stores.

CEO Sardar Biglari discussed the strategy at Steak n Shake's annual meeting in late April. He said the company has hired a firm to design the restaurants and plans to unveil them at next year's shareholder meeting. Steak n Shake will test the smaller units in the middle of strip malls and at the ends with drive-throughs.

Fast growth, new markets

The plan should help Steak n Shake grow faster, said Steve Huse, president of Steak n Shake in the early 1990s and current co-owner of St. Elmo Steak House. He said he pushed for years to embark on a similar effort but was rejected by the chain's board.

"Part of the problem in the past was the overhead for the buildings, land and interiors were so high, giving each location a high break-even point," said Huse, who said he doesn't need a plate or silverware to enjoy a steakburger meal.

Huse believes customers will find Steak n Shake locations in strip malls and won't be offended by the lack of service. About 40 percent of Steak n Shake customers already take their food to go.

The move would allow the chain to penetrate new markets without as large an investment, said Steve Delaney, a local real estate broker who once owned several franchise restaurants. It also puts them in the middle of the fastest-growing segment of the restaurant industry.

The walk-up model has worked brilliantly for Lorton, Va.-based Five Guys Inc., which has opened 400 locations since it debuted in 1986. And other popular casual restaurant concepts such as Qdoba and Panera often take strip-mall spaces.

A depressed real estate market and half-vacant strip malls should put franchisees in a good position as they negotiate for space, said Jeff Moore, a Steak n Shake shareholder who blogs for the investing site Seeking Alpha.

Moore is hoping the plan will help add locations in his hometown of Lexington, Ky., which now has only one Steak n Shake.

Quality, value

Biglari, 31, said Steak n Shake's focus will remain on quality food at a good value, regardless of the format of each store. Since taking over as CEO in August 2008, the activist investor has closed underperforming stores, halted development of new stores and found dozens of ways to cut costs, ranging from headcount reductions to switching from grape tomatoes to sliced tomatoes in Steak n Shake salads.

But new restaurants without a full-service option would be a major departure for the chain.

In one of the most popular of the chain's TV spots, a witty server explained what made Steak n Shake different: "A workaurant is a place where you work your way through the line, work to see the menu, work to carry your tray and fill your drink, work to balance your tray and drink while you get your condiments, work to find a place to sit, and work to clean your own table, thank you very much," she said. "At Steak n Shake we're a restaurant. You sit, while I do the work."

The chain, which turns 75 this year, has no other choice but to change, Biglari said.

"We can be 75 years old, but we can't act like it," Biglari said.

The company just snapped a 14-quarter streak of declining same-store sales, but its outlook remains cloudy. The improvement came in large part because of heavy discounting, lower food costs and a low target to beat.

What's old is new

If Steak n Shake proceeds with limited-service locations, it wouldn't be the first time for the company.

In the 1970s, the chain tested a "Junior Steak n Shake" restaurant in St. Louis in an effort to compete with McDonald's and other fast-food joints. But the limited menu and lack of car service doomed the test, said former Steak n Shake President Robert P. Cronin in his 2000 book "Selling Steakburgers." The store, which generated lackluster sales, was later turned into a standard Steak n Shake.

The chain had slightly better results with a limited-service location in Indianapolis along Market Street just east of Pennsylvania Street, but the location ultimately closed as well. The restaurant had no silverware and offered ketchup packets instead of Heinz bottles.

"Although the store was a success as downtown office workers began to flock in, there was, clearly, confusion about what to expect," wrote Cronin, who led the company in the 1970s. "I wanted to call the downtown operation Takhomasak but didn't get it done." 
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