This post is part of the On the Margin blog.
Shake Shack Inc. yesterday closed up just more than 2 percent.
The reason: A rumor that McDonald’s Corp. was going to buy the New York City-based better burger chain.
That’s highly unlikely. McDonald’s buying Shake Shack would be a shocking move for a company focused on cutting costs and sending cash to shareholders. And the giant hasn’t exactly given up on improving the quality of its offerings, as its fresh beef test in Texas — and CEO Steve Easterbrook’s talk of creating a “modern, progressive burger company” — can attest.
But there is some precedent. McDonald’s in the 1990s and early 2000s bought up a handful of growth concepts, looking to diversify amid its own challenges. One of them was Chipotle Mexican Grill, in which McDonald’s invested in the 1990s and provided the funding and support to turn it into one of the most successful restaurant chains of recent vintage.
But McDonald’s later realized that owning all of these other chains, which also included Boston Market and Donatos Pizza, distracted too much from its core business and sold them all off. And in 2006 it spun off Chipotle in a highly successful initial public offering. McDonald’s is hardly about to return to its late-1990s acquisition strategy.
So the rumor is pure fantasy. But it’s not illogical, either. Shack is different from McDonald’s in almost every way except the fact that both sell burgers and fries in a counter service format.
McDonald’s is aimed at the masses, offering low-cost food that people can get quickly on their way to work or shuttling kids from school to evening soccer practice. It has peppered the world with its restaurants, 14,000 of which are in the US.
Shake Shack, meanwhile, is aiming for the specialty burger market. It plans to operate relatively few, high-volume locations in high traffic areas. It has no drive-thrus and cooks its burgers to order, making its service times much slower. But its customers are willing to pay more and wait longer for burgers they consider high quality.
In theory, at least, Shake Shack could give McDonald’s an inroad into the high quality market that it hasn’t been able to achieve.
McDonald’s in recent years has struggled getting consumers to eat its Big Macs and Quarter Pounders — even as its same-store sales improved in recent quarters on the strength of its breakfast items, which have a better reputation. It has long struggled to win the market for higher-priced, quality burgers as efforts like the Angus third-pound burgers fell by the wayside.
McDonald’s could focus on convenience and value, while nurturing along a Shake Shack that targets customers in search of quality. And, with beer companies buying up craft breweries, who is to say that a big burger chain couldn’t buy a high-quality burger concept?
Shake Shack isn’t exactly cheap. It had a successful IPO in January 2015 and though its stock has come down after post-offering highs it still has a market cap of more than $1 billion. Of course, McDonald’s has more than enough cash stuffed between moving boxes at its to-be-vacated headquarters in Oak Brook, Ill.
As we said, it’s all fantasy. But it sure would be interesting.