What Sardar Biglari needs to fix to save Steak n Shake

The Indianapolis-based chain has seen declines in customer traffic that started in 2016 accelerate this year. The drop was 9.2% in the second quarter. (IBJ photo/Eric Learned)

Behind the News: Greg AndrewsSardar Biglari created the mess at Steak n Shake. Can he get the company out of it?

The latest quarterly results further push the needle toward “no.”

Biglari, a San Antonio-based hedge fund manager, has exuded supreme confidence since gaining control of the Indianapolis-based burger chain in 2008 at the tender age of 30.

From the start, he wasn’t one to take other’s counsel. Months after Biglari took charge, a board member—Wayne Kelley, son of former CEO E.W. Kelley—resigned, declaring in a regulatory filing that “the advice of board members has not been sought, either before or after major decisions affecting the company.”

As Biglari declared in February in his annual letter to shareholders of his holding company, Biglari Holdings Inc., “As the sole capital allocator, I employ neither analysts nor advisors.”

In addition to owning Steak n Shake, Biglari Holdings has an 11% stake in Cracker Barrel Old Country Store Inc. and owns the steakhouse-franchising firm Western Sizzlin, an insurance company and Maxim men’s magazine.

For years, Biglari’s outsized authority seemed well-earned. He turned around Steak n Shake in the teeth of the Great Recession with relentless discounting—a strategy that led to an incredible 29 straight quarters of same-store sales gains.

But that run ended in 2016, and the performance has progressively worsened since, with the company losing $10.7 million in 2018 and $21.9 million in the first half of this year.

Here are the big hurdles he faces to right the chain, which has 307 company-owned stores (down from 413 before a closing spree started this year) and 213 franchised outposts:

Get lenders off his back.

Steak n Shake owes $183 million on a loan it took out in 2014. It comes due in March 2021 and has a $5 million interest payment due next month.

Biglari Holdings has plenty of resources to rescue Steak n Shake—including $836 million in cash and investments as of June 30.

But there is a hitch: Biglari Holdings is not a guarantor on the debt. Sardar Biglari said at the company’s annual meeting in April that he made the conscious decision not to do so, forgoing the lower interest rate he would have received if he had.

Standard & Poor’s in July lowered Steak n Shake’s already-horrid credit rating—CCC, which is eight notches below investment grade—by another notch, to CCC-. According to S&P, companies in that range have at least a one in two likelihood of default.

“The negative outlook on SnS reflects our view that the company may be unable to meet its financial obligations because of its weakened liquidity and could pursue a restructuring … in the next six months,” S&P said in a July 19 report.

Win back customers.

Steak n Shake’s traffic counts are in a tailspin, declining 13% over the last three years, 7.7% in the first quarter and 9.2% in the second quarter.

Sardar Biglari’s critics say customers are staying away because his relentless focus on low prices, including four menu items for $4, has so strained restaurant operators that the dining experience is suffering.

But at the annual meeting, Biglari said the company must make and serve food faster—a shortcoming it wants to address by investing millions of dollars in new milkshake machines.

“To be a market leader in the fast food business, we should have paid greater heed to becoming, well, fast,” he said in the February shareholder letter.

The percentage drop in traffic likely would have been even worse had the company included the 106 restaurants it closed this year—presumably its weakest locations. In the calculation, Steak n Shake counted only company-owned locations that had been open at least 18 months and remain open.

Fix franchising problems.

The company maintains that 103 of the 106 closings are temporary. It says they will reopen after Steak n Shake identifies and trains participants in its new “franchise partnership” program—which gives would-be entrepreneurs an opportunity to operate a single store for $10,000.

That’s a fraction of what traditional franchisees would pay. But single-store operators don’t actually own the busiiness, and they have to share profits.

Steak n Shake announced the program last August and says it hopes to transition all the company-owned stores to single-store operators within three years.

The program is off to a slow start, however. According to Nation’s Restaurant News, only one previously closed restaurant, in St. Louis, has reopened.

In a regulatory filing, Biglari Holdings stated, “Steak n Shake is actively working to identify franchise partners for these closed stores. However, no assurances can be given that Steak n Shake will be able to secure suitable franchise partners or that its strategy will restore profitability.”

Steak n Shake in recent years also has invested heavily in ramping up its traditional franchising program, but that effort also is sputtering.

Ten new franchised locations opened in the first quarter, but another 10 closed. The story was similar in the second quarter, with five opening and another five closing.

Many franchisees say they are losing money—not the kind of performance that’s likely to spur other prospective franchisees to jump aboard.

A lawsuit filed in April 2018 by a Virginia Beach, Virginia, franchisee charges that Steak n Shake forced it to adhere to such low menu prices that all nine of its restaurants were losing money.

The franchisee gave up the legal fight last spring, after cutting its losses by shuttering restaurants.•

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3 thoughts on “What Sardar Biglari needs to fix to save Steak n Shake

  1. Steak n Shake has long been one of those concepts and product lines, like Noble Roman’s, that was so good it managed to survive in spite of suicidal (and even imbecilic) business decisions. But Biglari has so intertwined his fast food mentality, cost-slicing tactics, and bargain-basement philosophy with the operational set-up of stores that the important audience decided they’d had enough – the actual customers who pay for what he’s selling. He didn’t care about the generations of old customers who kept him in business – he had to attract the Taco Bell dwelling bargain hunters who want it fast and for pennies. Quality? What’s that?

    SnS was always a hybrid concept that wasn’t ever meant to be fast food – even the drive-thru has never worked there properly, and it can’t. It never could. They’d frankly be better off to return to the car hops they had into the 1980s. At least he’d attract the nostalgic crowd, if nothing else. The food doesn’t lend itself to being passed through a window in under three minutes, any more than a Denny’s or a Ruby Tuesday. And slashing staff has made basic restaurant operation impossible now. You can’t run a SnS with two or three people.

    Biglari thinks cheap is the answer, and yet look down the street and you’ll see that Culvers is cleaning his clock. Similar menu items, labor- and time-intensive food preparation, no conveyor belt style of cooking, lots of employees. Even similar (if not better) food now that Big Larry’s shucked off any notion of food quality. Yet they haven’t slashed their prices to attract hordes of penniless teenagers. And they’ve taken a rational approach to expansion.

    Now that he’s got his name attached to SnS as part of his bizarre formula and claims his own name has some hilariously inflated financial value, I fear that he’ll kill the company but cling to the brand to his last gasp of life rather than let anyone else resurrect it. The hedge fund wünderkinds have destroyed more great businesses in this country in the last twenty years, and he’s about to do this one in.

  2. The above quote about “fast food” speaks to the root of the issue.

    The Culver’s and Freddy’s of the world are taking off and doing pretty well with the customers who used to eat at Steak and Shake when they wanted something nicer than McDonalds. Literally, I take my kids to Freddy’s and tell them “this is what Steak & Shake burgers used to taste like”. Which is why we go to Freddy’s instead of Steak & Shake even though it costs more.

    Meanwhile, Biglari has a higher end brand and he’s bound and determined to serve a fast food product. He’s losing stores and customers so fast he will never make the pivot to fast food.

    No understanding of his brand, no understanding of his customers, and no one around to help give his advice on how to fix the mess because he doesn’t want it that way. I’d love to see how long he would last if he actually had to run one of his own stores as the manager.

    Maybe someone will buy the brand out of the inevitable bankruptcy and relaunch it in my lifetime and it’ll be good, even great, again. But the sooner the company closes, the better.

  3. I was the VP/Human Resources & Training at Steak n’ Shake during their renaissance from 2009 to 2017. My employment was terminated in 2017; Mr. Biglari desired a “change in strategic direction.” Obviously, his changes since my departure have resulted in more harm and good.
    During my tenure, we emphasized the importance and role of people and training. It appears that those principles have all fallen on deaf ears now. Mr. Biglari is brilliant, but self-centered, egocentric and in his mind, infallible.
    Mr. Biglari spent millions of dollars on fresh-cut French fries, restaurant growth in the Middle East, shake machines for convenience stores, and frozen Steakburgers that didn’t look or taste like the original. All of these ideas failed.
    His inner-most circle paid him lip service to feed his desires. As an outlier to that group, every suggestion for improvement I and other outsiders made were considered inappropriate. It was a recipe for failure.
    Potential franchise partners beware; Mr. Biglari will take at least 10% of your profits; if you know anything about restaurant margins, run away fast!
    SnS will continue to erode, but somehow Mr. Biglari will prevail. He is and will always be a very wealthy man. In his wake, will be a countless number of poor, worn-out, bullied people who tried to do their best for the Company only to be labeled as failures!
    Rest in Peace SnS
    DK