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Shake Shack sales hurt by exclusive Grubhub partnership

Chain pivots expansion plans with renewed focus on established markets

Shake Shack’s new partnership with Grubhub dragged down third-quarter sales for the New York City-based fast-casual brand, which is pivoting its aggressive growth from new markets to more established regions.

The brand, whose shares tumbled nearly 20% on Tuesday, recently transitioned to an exclusive delivery and marketing partnership with Grubhub. Delivery from the troubled Chicago-based company is now available in nearly all 151 company operated Shake Shacks.

But switching delivery partners caused “some noise” in the third quarter as customers have not made the jump to Grubhub, which has come under fire this year for alleged sneaky business practices. CEO Randy Garutti said customers are used to finding the brand on DoorDash, Caviar and Postmates.

Same-store sales for the quarter increased 2% on top of a 1.3% rise in traffic. Average weekly sales for domestic company stores declined to $80,000, down from $86,000 for the same quarter last year.

“We're going to have to do a lot of marketing, a lot of work to move people over to the Grub platform, which we think we’ll do,” Garutti said Monday during the brand’s third-quarter conference call.

Specifically, that transition will be harder in cities where Grubhub is not the market leader such as Los Angeles, he added. Though the two companies launched a national marketing campaign on Monday, Garutti cautioned investors that fourth-quarter earnings might still be "volatile" especially as the brand weans itself from the remaining markets where delivery is still available through DoorDash and Postmates.

“We expect it to be pretty noisy,” he said. “We feel really good about the path that we're on. It's going to have some turns and twists as we go there.”

Analysts questioned why the company has opted to have an exclusive relationship with Grubhub at a time when other chains are working with multiple third-party delivery operators to expand reach.

Garutti said the company went with Grubhub for a variety of reasons. It is less complicated on stores to work with one delivery operator; the long-term economics tied to commission fees are projected to be better; and, most importantly, Grubhub has agreed to share customer data, which delivery companies often hold hostage.

“Data collection is one of the most important parts of why we chose Grub,” the CEO said.

With pressure to provide consumers more convenience, Garutti said the chain is also stepping up its growth of small format stores that focus more on carryout sales such as locations at mall food courts and airports.

In the third quarter, Shake Shack opened 17 restaurants systemwide, closing the period with 245 worldwide units. Of those, 168 are domestic locations. For fiscal 2020, Shake Shack plans to open around 40 domestic company operated restaurants, shifting areas of expansion to established regions.

“Our forward focus is shifting to greater existing market penetration,” he said.

The brand still plans to enter new markets, but going forward the company is looking “to build deeper brand awareness” by opening stores “in and around established Shacks,” Garutti said.

For the quarter ended Sept. 25, total revenue increased 32% to $157.8 million. Net income increased 7.2% to $11.4 million, or 31 cents per share.

Contact Nancy Luna at [email protected] 

Follow her on Twitter: @fastfoodmaven


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