It's no secret that America's culinary landscape is changing, and that change is bringing along
more than a few difficulties for longtime staples in the restaurant industry.
One chain that's starting to close a lot of doors is Steak 'n Shake.
Here are some of the reasons for the chain's slide.
In May 2019, Steak 'n Shake announced it had temporarily closed 44 restaurants, according
to QSR Magazine.
"There's a sign here on the door saying they will be closed until a new franchise owner
comes in, and that has quite a few customers very disappointed."
At the time of the announcement, there were 367 corporate locations and 213 franchise
stores in operation.
Those numbers were down quite a bit from the previous year, when the company had 415 corporate-run
locations and 201 franchise stores.
Customer traffic fell 7.7 percent in the first quarter of 2019, and same-store sales fell
5.1 percent over the course of 2018.
That followed two more years of sales losses, and that's not good for anyone involved.
All in all, 2018 ended with a $10.7 million loss, according to IBJ, and in the first quarter
of 2019, the company had a loss of a whopping $18.9 million.
Steak 'n Shake is part of Biglari Holdings, and when Chairman and CEO Sardar Biglari addressed
shareholders in their annual meeting, he made it clear that a turnaround was going to take
time.
Does Steak 'n Shake have that kind of time?
It's hard to tell, but no business can sustain those kinds of losses for too long.
In August 2018, the company announced it was selling off some corporate-run locations for
a shockingly low price: just a $10,000 initial franchise fee.
For comparison, it costs a $45,000 fee to franchise a Taco Bell.
Head honcho Sardar Biglari announced he was making the shift for almost humanitarian reasons:
"I want to provide an opportunity to other entrepreneurs who are highly motivated to
excel but lack the financial means."
Those entrepreneurs would have to complete a training program, and would get 50 percent
of their restaurant's profits, which doesn't sound like a bad deal.
"Our whole goal here is to provide our customers with a consistent, gold-standard dining experience."
A month later, Steak 'n' Shake announced the response had been "amazing," but that it would
be a while before any location made it into franchisee hands.
But by May 2019, IBJ reported that they had only signed four of these new franchisees,
making it look likely that the majority of the locations would stay closed.
Perhaps part of why the franchises didn't sell was Steak 'n Shake's checkered relationship
with at least one franchisee.
According to Restaurant Business, a nine-location franchisee in Virginia filed a lawsuit after
corporate refused to let them raise prices.
While Steak 'n Shake CFO of franchise operations Tom Murray said that not raising prices was
an important part of keeping the brand uniform, the Virginia franchisee said they were being
forced to take, quote, "substantial financial losses" because of overcharges from vendors.
"Transport charge.
Storage surcharge.
Additional overcharge.
Finder's fee."
"Finder's fee?
It was on the lot!"
"Yeah, that's right."
The franchisee also alleged that corporate declined to provide agreed-upon support services,
such as fixing errors on menus and the website, and charged random fees without any explanation
of what they were paying for.
In 2015, a Minneapolis-based investor group made a push to grab control of Biglari Holdings
and, in turn, Steak 'n Shake.
It was incredibly messy, with accusations flying from both sides.
According to the IndyStar, Biglari Holdings was quick to play up alleged connections that
the leader of the investor group was a man who supposedly was convicted of running a
Ponzi scheme in 2010.
The investors, on the other hand, condemned Biglari as overpaid and using his position
to hire his family members.
Biglari Holdings stresses, however, that those family members are paid less than $120,000
a year.
"Nepotism!"
Biglari himself took over in 2008 and kicked prior management to the curb.
While Biglari Holdings lauded what they saw as, quote, "one of the great brand turnarounds
in the history of the restaurant industry," all their numbers continue to slide in the
present day.
Biglari remained in control in spite of the conflict.
In 2015, Biglari Holdings was singing the praises of Sardar Biglari in Fortune, saying
he was responsible for the re-elevation of Steak 'n Shake into something sublime.
Just a few years later, Biglari was apologizing.
He originally did right by the company.
According to QSR Magazine, when he took over in 2008, Steak 'n Shake was losing around
$100,000 a day.
After a year, of Biglari's leadership, the company was making $100,000 a day.
But the downward slide kicked in again after a few years.
Why?
As Biglari wrote,
"We failed customers by not being fast and friendly."
Essentially, Steak 'n Shake banked on making money by selling a lot of food for cheap.
But they didn't put updated equipment and processes in place to keep up with the market
or the demand.
They ended up putting out a product that was slow, high-cost, and labor-intensive.
Not only does that mean each steakburger ended up costing them more to produce than it should
have, but it also meant that customers weren't likely to come back when they know they've
got to plan on waiting, hanging around, and waiting some more for that burger.
In February 2019, Biglari said the company was in the process of increasing efficiency.
A group of 286 managers took Steak 'n Shake to court in 2019, seeking a $7.7 million judgement.
They claimed that Steak 'n Shake had unlawfully labeled them as exempt from receiving overtime
pay, and regularly demanded they work 50 hours or more in a week.
Part of that work, the suit claimed, was non-managerial work they had to do because the restaurants
were understaffed.
According to Restaurant Business, that lawsuit covers mainly the area of St. Louis, which
was, incidentally, the same area where those 44 locations were closed pending transfer
to franchisee hands.
There's a similar lawsuit that covers more than 1,000 managers working in other parts
of the country, and that one is still waiting to be settled.
In early 2019, IBJ reported that Sardar Biglari was warning his shareholders that turning
Steak 'n Shake's fortunes around was going to take time.
But the clock is ticking on a $184 million loan that's coming due in March 2021.
At the time Biglari was attempting to calm his shareholders, the entire company was only
worth $211 million.
Some of the lenders have gone as far as hiring legal counsel to find out what their options
are if things continue to spiral downward.
"Thus began the debt."
"Crushing debt."
There is the potential for a way out.
In theory, Biglari Holdings could guarantee to cover Steak 'n Shake's debts if the whole
thing goes sideways, but Biglari has refused, even though they would be paying a much lower
interest rate on those debts.
According to CBS News, part Biglari's plan to save the company involved cutting costs,
specifically around $1 million a year, by getting rid of the cherries that have been
on the top of Steak 'n Shake's trademark milkshakes for more than 80 years.
How well is that going to go over with longtime fans?
In addition to saving money by removing the cherries, IBJ reported that Biglari offered
up plans to reinvent and patent the milkshake-making process.
The idea was to help speed up service.
But when Biglari added that it was going to cost $40 million to update equipment and put
the plan into action, investors were doubtful.
According to Nation's Restaurant News, Sardar Biglari technically earns $900,000 per year
as CEO of Steak 'n Shake parent company Biglari Holdings.
But Biglari Holdings also pays a massive amount of incentives to Biglari Capital, which the
CEO himself owns.
When all is said and done, Biglari took home $32.5 million in 2016, more than the combined
salaries of the CEOs of Chipotle and McDonald's.
It's complicated.
Steak 'n Shake isn't the only restaurant in the mix, because Biglari's also making money
off his investments in Cracker Barrel.
Yet even as Steak 'n Shake lost tons of money, Restaurant Business reported that in March
2019, Biglari Holdings removed the cap on the pay package its CEO can receive.
Previously, the CEO pay package was capped at $10 million, but no more.
The pay cap removal came after a series of changes that put Biglari himself firmly in
control of the firm's holdings.
He also owns enough stock that he has controlling voting rights, too.
People are becoming more and more aware of where their food comes from.
Even the most die-hard carnivores are beginning to admit animal welfare and ethically raised
meat are hugely important.
According to QSR, the trend to press chain restaurants into sourcing their meat and other
animal products from responsible, humane farms really started in 2007 with Burger King and
Carl's Jr./Hardee's changing their policies.
Many others, but not all, were quick to follow.
Steak 'n Shake has been one of those lagging behind, and they've been called out for it.
In 2016 and 2017, Cruelty Free Investing reported that the chain still had no plans to even
begin the switch to cage free eggs.
It's a big deal for investors as well as customers.
In 2017, Folio Institutional issued a press release on its partnership with the Humane
Society of the United States.
The goal was to create a list of corporations that were lacking in their commitment to animal
welfare standards in order to better guide investors who wanted to steer clear of companies
without policies regarding the treatment of farm animals.
Topping the list was Biglari Holdings and Steak 'n Shake.
Everyone loves a milkshake once in a while, but that's the thing: it's usually just once
in a while.
There are a ton of health-conscious consumers out there, and even if you're not looking
for an ultra-healthy, super-delicious meal that's still affordable, it's safe to say
you're also not looking for a heart attack on a plate.
And if you hit Steak 'n Shake, well, there aren't that many options there that aren't
kinda bad for you.
Steak 'n Shake has the distinction of being named in the Center for Science in the Public
Interest's Xtreme Eating Awards.
In 2015, their completely unnecessary 7x7 Steakburger 'n Fries, which has seven patties
and seven slices of cheese, and Chocolate Fudge Brownie milkshake made it onto the list,
coming in at a whopping 2,530 calories and 68 grams of saturated fat combined.
That's enough to make your arteries start to clog just thinking about it.
When SFGate looked at the potential healthy options there, there wasn't a heck of a lot.
They recommended just the mini Steakburger Shooter, noting that even the healthier-sounding
turkey club came with your entire day's worth of sodium.
That's unfortunate, because in the 21st century, restaurants really must have a few decently
healthy choices to keep all their customers happy and coming back through the doors.
Is this the end for Steak 'n Shake?
It's tough to say, because the chain has recovered from the brink before.
Sardar Biglari turned it around in 2008, and a complete overhaul of the business model
helped keep it relevant.
As of 2019, Steak 'n Shake is looking at a shakeup that QSR Magazine says will take a
minimum of three years to complete.
For the first 78 years Steak 'n Shake was around, it was strictly a chain of sit-down
restaurants.
The quick service format is something that's still pretty new, and it opened up a whole
host of new possibilities, not the least of which involves catering to a younger, university
crowd.
Unfortunately, it also opened up the company to a lot of problems, and that's what execs
are going to need to rectify, especially now that a large portion of franchise units are
counter-service only.
That's a far cry from what they used to be, and while that isn't necessarily a bad thing,
the company still has a long way to go to streamline processes from start to finish.
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