Steak ‘n Shake, whose sales have been sinking the past few years, plans to reopen temporarily closed locations as counter service restaurants to save on labor costs.
The service model pivot and a new franchise partnership program are expected to right the ship at the chain.
“A good number of our franchise partners will become millionaires,” Sardar Biglari, CEO and board chairman of Biglari Holdings Inc., stated in his annual shareholder letter.
The company said refranchised restaurants are showing signs of recovery. The new model, adopted by a group of elite operators, allows franchisees to earn 50% of a store’s profit.
“For operators to think and act like owners, we believe they must be owners,” Biglari said. “We are on our way to becoming a company of owners, changing the culture of the organization in our quest for service excellence.”
To date, 29 operators have been selected to take part in the program, which Biglari called a “monumental change” at the 610-unit chain.
“Our franchise partner agreement stipulates that the franchisee make an upfront investment totaling $10,000, a modest figure for the opportunity. Because of our significant investment in the business, including the construction of the restaurant and its equipment, we assess a fee of up to 15% of sales as well as 50% of profits,” Biglari said.
The first round of operators participating in the program were chosen from a pool of 17,000 applicants. Getting selected is no easy task, as these entrepreneurs must have a proven track record of being resourceful and energetic, Biglari said.
Stores involved in the program are seeing improvements.
Same-store sales increased 2.2% in 2019 at franchise partner restaurants, according to the regulatory letter. That compares to a 6.9% decline in same-store sales in 2019 at company operated stores. Profits are also up, further incentivizing operators involved in the program.
“Our 50% share of profits from these units exceeded the sum they generated in the prior year, when we claimed 100% of profits,” according to the letter.
As a result, the “financial effect for a franchise partner can be substantial,” Biglari said.
“Some of our 29 franchisees are on their way to earning north of $200,000 in their first year,” the letter stated. “But make no mistake: We are not minting millionaires but are merely providing the means — they are earning every penny.”
Last year, the company shuttered more than 100 company operated restaurants while it searched for franchise partners to take over the units. In the shareholder letter, Biglari said the company is fixing issues that led to operating shortfalls at each location.
One of those issues is labor.
With high costs associated with table service, Biglari said the company has decided to reopen most of the temporarily closed units “with counter service rather than table service.”
He didn’t elaborate on the switch, or indicate how many employees would be impacted by the service model change.
Attempts by NRN to reach Biglari Holdings, which has no public relations or investor relations departments, were unsuccessful.
Restaurant analyst Tim Powell said he's not surprised Steak 'n Shake is going with a counter service model.
"One of the biggest problems with the chain (and there are others) is speed of service. With waitstaff, many consumers were left waiting even when store traffic died down," said Powell, managing principal at Chicago-based Foodservice IP. "What's also happened is the store cleanliness has taken a hit in the past three years, which might reflect the cost of labor."
Since 2016, same-store sales have been in rapid decline at company operated stores. In 2019, same-store sales decreased 6.9% compared to a decline of 5.1% in 2018 and a drop of 1.8% in 2017. Steak 'n Shake restaurant operations reported a loss of $18.6 million in 2019, compared to a loss of $10.7 million in 2018.
“Results have gone from bad to worse,” the company said in the regulatory filing.
The number of franchise and company owned stores at the end of 2019 was 610, compared to 626 in 2018. Of those, 213 are traditional franchise stores and 29 are franchise partner locations.
The company estimates that it will take about three years to transition to a network of franchise partners.
“The American dream is alive and well at Steak n Shake. Becoming a franchise partner does not involve great capital but it does require great talent,” Biglari stated.
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Updated: This story has been edited to clarify same-store sales data, and to add commentary from an industry analyst.