How Shake Shack Flipped the Burger Restaurant: A Case Study

Posted by the Blue Ocean Team

shake shack restaurant

Shake Shack, the American fast food chain, started out as a hot dog stand in New York City in 2001. Today, it operates in more than 100 locations internationally and is expanding all the time. So how did it create a new market in a fiercely competitive industry?

The restaurant industry in the United States

Restaurant industry sales in the US have grown over the past decade to reach US$536 billion in 2016. US$259 billion is attributed to the full-service restaurant sector, which includes premium restaurants and fine dining. The limited-service restaurant sector represents US$223 billion of sales and includes fast food outlets like McDonald’s and premium fast food outlets like Shake Shack. This sector is expected to grow in line with GDP growth rate with sales reaching US$235 billion by 2020.

The restaurant industry can be segmented into three major categories:

1. Limited-service fast food restaurants

This category of restaurant is the largest segment in the limited-service sector. Nine out of the top ten restaurants by revenue come from this category. Despite its huge size, it represents a typical red ocean market. The success of these companies is largely dependent on huge media expenditure and economies of scale, i.e., the cost savings obtained due to their scale of operation.

The availability of substitute offerings – customers have plenty of fast food options to choose from – make pricing an important competitive factor. Not surprisingly, the fierce rivalry among competitors is accompanied by high marketing budgets.

However, players in this category have two advantages. First is the high barrier to entry – new fast food restaurants simply cannot compete on the economy of scale or brand recognition of established chains. Second is the weak bargaining power of their suppliers – fast food restaurants can negotiate the best deal as there are so many suppliers of meat, flour and potatoes to choose from.

2. Full-service (premium) restaurants

Premium restaurants represent 48% of the industry but it is a highly fragmented market, consisting of many small businesses rather than a few big ones. Market players strive to maintain a reputation for delivering a unique, satisfying and memorable customer experience. Even if they can afford to expand and open new restaurants, they are often reluctant to because it may negatively affect this reputation in the perception of customers.

The main advantages in this category are that customers are willing to pay premium prices for the high-quality dining experience on offer. However, the fragmented nature of this market means customers can easily find substitutes and new restaurants can enter the market relatively easily. Also, premium restaurants do not have strong bargaining power with their suppliers. In many cases, the ingredients used are scarce, forcing premium restaurants to accept prevailing market prices.

3. Premium fast food restaurants

Premium fast food is a hybrid category that combines high-level customer experience, convenience and moderate price. In general, players in this category open restaurants based to satisfy certain market niches. For example, Panera Bread, the largest restaurant in this category, targeted customers demanding healthier options that used fresh and organic food. Other players sought to reduce menu choices and improve quality such as the hamburger chain, Five Guys.

The competitive factors in this category lie between the previous two categories. Customers are generally the young middle-class segment that can afford to pay a relatively high price for fast food. The unique business concept limits the substitutes and rivalry in this category, but barriers to entry are low. Moreover, the specific product requirements for these companies weaken their negotiation power with suppliers.

Shake Shack and the three tiers of noncustomers

Shake Shack was able to attract three groups of noncustomers of fast food and premium restaurants, as identified in Kim & Mauborgne’s three tiers of noncustomers framework.

three tiers of noncustomers

First-tier noncustomers

This category includes people who tend to seek cheaper restaurant options and may visit fast-food outlets such as McDonald’s, Subway and Burger King. However, customers in this category also want healthier fast-food chains that offer a higher-quality customer experience.

Shake Shack only uses all-natural 100% Angus beef and its burgers cost slightly more than those offered by McDonald’s and Burger King. Shake Shack invests heavily in staff training to make sure all staff offer a high level of customer service. The result is a better overall customer experience that goes beyond the mere purchase of a hamburger. In this way, Shake Shack successfully gained those customers who used to go for cheaper options.

Second-tier noncustomers

This category is made up of customers who are looking for a dining experience without the hefty price of premium dining. They want a place to hang out with their friends in an atmosphere that does not feel like a standardized food chain.

Shake Shack takes steps to ensure its restaurants integrate with the local community. It hires employees locally and offers menu items that are unique to certain restaurants. It also sells signature merchandise such as cups and t-shirts that are only available in the local outlet. Customers in this category come to the local Shake Shack to enjoy an experience and menu that are not available elsewhere.

Third-Tier Noncustomers

This is the group of people who would not usually consider going to a hamburger restaurant. However, Shake Shack successfully attracted many in this group by serving its own brand of beer and wine. Sometimes people want to socialize with friends in a comfortable, informal environment rather than go to an expensive bar or restaurant. By offering alcohol and staying open until midnight, Shake Shack attracted customers who want to enjoy alcohol with their burgers, as well as those who just wanted to have a drink with friends.

Shake Shack and the buyer experience cycle

Shake Shack has built its strategy on combining convenience and customer experience thus filling a huge gap in the restaurant market. The current focus of the industry and Shake Shack’s blue ocean offering can be identified in Kim & Mauborgne’s buyer utility map.

Low prices and speed of service (represented by customer productivity and convenience respectively) are not enough to fulfill buyers’ needs. Market players have failed to realize that consumers, and especially the ‘millennial’ generation, are more willing to pay for more customized experiences.

As previously mentioned, Shake Shack achieved this by offering alcohol and creating menus that reflected the local area. It also chooses attractive locations near parks and recreational areas. The result is a full dining and drinking experience that is both fun and affordable.

Catering to a generation that is used to convenience, Shake Shack creatively designed its menus to reduce choice and simplify the ordering and selection process for customers. Additionally, the company addressed the issues that customers care about such as whether it uses environmentally friendly products and gives back to the local community.

How Shake Shack reconstructed market boundaries

Rather than try to beat the competition, Shake Shack set out to reconstruct market boundaries, as identified in Kim and Mauborgne’s Six Paths Framework.

Path 1: Looking across alternative industries

Shake Shack doesn’t limit itself to serving meals. Customers can also have drinks and hang out with friends, just as they do at major coffee shop chains such as Starbucks. Shake Shack positioned itself as a place to socialize rather than just another dining option.

Path 2: Looking across strategic groups

Shake Shack was able to differentiate itself from other fast food chains by positioning itself between fast food and premium food.

Path 3: Redefining the industry’s buyer groups

An important factor in Shake Shack’s strategy is that the buyer and the user are the same person. Unlike fast food restaurants where parents often pay for their children, Shake Shack visitors are usually adults seeking an alternative experience which they perceive to be healthier than the rest of the fast food industry.

Path 4: Looking across complementary product and service offerings

Location is critical to Shake Shack’s strategy. Shake Shack makes sure that its outlets are located in popular places. Most of its customers are looking for somewhere to relax and socialize that is also nearby cool and interesting parts of town.

Path 5: Rethinking the functional-emotional orientation of the industry

In a functional-oriented industry, Shake Shack thrived by focusing on the emotional experience of its customers. Factors like speed and price, which are so important to fast food players, became secondary to more significant aspects that customers care about. The high quality of the food was a starting point, but Shake Shack understood the importance of atmosphere too.

Path 6: Shaping external trends over time

What determines future market trends in the food industry is the way customers want to consume fast foods. The customer demographic has shifted largely towards millennials, who have a different set of priorities to previous generations. Shake Shack capitalized on this.

  • Millennials seek authentic, personalized experiences

Shake Shack has set out to create unique customer experiences based on the quality of food, and the design and atmosphere of its outlets.

  • Millennials care about corporate value

Millennials are conscious capitalists – they want to consume goods and services, but demand that companies be socially responsible. Shake Shack addressed this point through two dimensions: first by having environmentally friendly products; and second, by developing a corporate policy that supports local communities.

  • Technology, social media and brand creation

The new generation of customers wants to identify with the brands they consume. Social media plays an important part in making customers feel that they are part of the brand through fun online interactions. Shake Shack realized that technology can play an important role in understanding their customers. Unlike fast food chains that are reliant on conventional media strategies, Shake Shack built its marketing strategy on social media and used data analytics techniques to understand their customer profiles and meet their expectations. This both reduced its marketing budget and improved its product and service offering.

Factors Shake Shack eliminated, reduced, raised and created

Shake Shack was able to create a new category for itself known as ‘fast-casual food’ by asking four basic questions.

  1. What factors should be eliminated that the industry has taken for granted?

Shake Shack eliminated conventional advertising on TV, radio and in magazines, and focused its effort on reaching millennials via social media. This significantly reduced their marketing cost compared to traditional fast food chains. Shake Shack also eliminated tipping, offering customers a worry-free dining experience. The franchise compensates employees by providing above average compensation and benefits. From a psychological perspective, this attracts more customers and makes them think the business is customer-centric. It also helps make Shake Shack distinct from the local bar and grills where tips are standard.

  1. What factors should be reduced well below the industry standard?

Shake Shack avoided having a large number of small outlets, such as we find with fast food chains. Instead, it focused on setting up in a small number of unique locations that customers want to spend time in. It also reduced the emphasis on speed – a critical factor in the fast food industry. Since its customers are more concerned with the quality of the experience, speed became less significant. Finally, Shake Shack reduced the choice of offerings, thus simplifying the experience of ordering food and deciding what to eat.

  1. What factors should be created that the industry has never offered?

Every Shake Shack location is specifically designed with a unique aesthetic, such as life-size sliding puzzles in Chicago and an art installation in West Hollywood. This generates a sense of locality and authenticity for Shake Shack’s stores, exuding the charm of a mom-and-pop shop. This is the combination of your local restaurant and a typical fast food franchise. The brand new image and offering help Shake Shack bring in customers, which may not be attracted to either category. Offering high- quality craft beers further propel Shake Shack to a new frontier.

In terms of marketing, Shake Shack focuses on word of mouth advertisement and social media interactions. The fulcrum of its social media strategy, user-generated content, has helped the brand amass hundreds of thousands of followers. The fans and followers help the business advertise and spread its concept and story to the communities.

  1. What factors should be raised well beyond industry standard?

Shake Shack raises the food quality and customer experience to another level. Because of this and above-mentioned differentiating factors, people flock to Shake Shack despite the higher prices. As a result, Shake Shack enjoys higher profit margins and per-store volume than its counterparts, setting the business apart from the competition.

Future Challenges and Opportunities

Shake Shack’s blue ocean strategy has enabled it to achieve double-digit growth at a time when most market players are struggling to maintain modest growth. Sustaining this performance is largely related to the way the company has dealt with business challenges.

Shake Shack’s social media advantage, for example, is under threat as more players imitate their media strategy. Social media trends continue to evolve with customers switching from one platform to another. This requires an agile and innovative marketing strategy that keeps pace with such developments.

Expanding the business without compromising the identity of the company is another major challenge. Replicating the strategy in new locations requires careful planning to ensure that new Shake Shack outlets properly integrate into the community and maintain a high quality of service. Maintaining food quality is another significant challenge since it requires finding appropriate local suppliers that can offer ingredients that meet Shake Shack’s specifications.

Failing to address these issues could dent the corporate image and significantly reduce the quality of customer experience, which is the most important element of the company’s business strategy. These challenges apply to international expansion as well.

In the meantime, the company can create new blue ocean opportunities. This might include using its premium locations to attract new customer segments. Stores located near business might cater to employees working in such areas by offering a weekday lunch menu with more healthy options and snacks.

For now, Shake Shack is in full swing and expanding its operations around the world. But to stay ahead of the game, the burger giant will need to find new ways to renew its blue ocean.