Why Shake Shack is About More Than a Burger

Sort of like the Coca-Cola formula, the hamburger blend at Shake Shack is top secret. Probably a mixture of chuck, skirt steak, brisket, and short ribs, the Shake Shack hamburger is what makes them unique. LaFrieda, their meat purveyor, says it took 20 different samples for them to select their “perfect blend.”

As a high end restaurant supplier, Shake Shack’s meat purveyor provides different burger blends to its customers:

From: New York Magazine

But the burger is only a part of the story. We can start with McDonald’s during the 1950s when Ray Kroc, a milk shake maker salesman, realized that two brothers had unusually high milk shake sales. Visiting the McDonald brothers’ California roadside establishment, he saw how they used mass production techniques to speedily serve a huge lunch time crowd. Kroc bought their name and concept and the rest is history.

Where are we going? Responding to the contemporary economy, Shake Shack is taking the next step.

The Shake Shack Market

From an unexpectedly popular hot dog cart in Madison Square Park in 2001, to a Shake Shack kiosk in 2004, to the realization that they had a reproducible concept, by 2014 Shake Shack had 63 Shacks in nine countries and 34 cities. Last Friday, they also had an Initial Pubic Offering (IPO) through which they were able to sell five million shares of stock to the public. Priced at $21 a share for the people who got the IPO distribution, the stock closed at $45.90 after it began trading on the NYSE. So, we now have (for the moment?) a $2 billion company.

What is happening?

More than a hamburger story, Shake Shack is about changing consumer tastes and income distribution. Explained by New Yorker writer James Surowiecki, we no longer have the the fast food world in which McDonald’s thrived. Now, for an increasingly affluent group of single and two adult households, fast food is less about “fast” and more about “food.” It is about specially sourced hamburgers, hot dogs and bacon, decadent milk shakes and an upscale casual dining experience.

In this video, you can see the image that Shake Shack is trying to convey:

Our Bottom Line: Monopolistic Competition

In its prospectus, Shake Shack places itself in the $72 billion (2013) burger market. Twice the size of the U.S. pizza market, like pizza, the U.S. burger market has many of the characteristics of monopolistic competition. Because you just need a grill and hamburger meat, market entry is easy. But to be successful and have some price making power, you also require something unique—the monopolistic part. And that takes us back to LaFrieda and the secret hamburger formula.

Along the following continuum, Shake Shack would be close to monopolistic competition. Then, further along near the oligopoly slot, are businesses with more pricing power like Apple and Kellogg’s.

I wonder also whether a McDonald’s demise and Shake Shack rise take us to Joseph Schumpeter’s creative destruction but let’s save that story for another day.