FDD Talk 2021: Steak ‘n Shake Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Steak ‘n Shake franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Steak ‘n Shake franchise, based on Item 7 of the company’s 2021 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Steak ‘n Shake franchise, based on Items 5 and 6 of the company’s 2021 FDD

• Section IV – Number of franchised and company-owned Steak ‘n Shake outlets at the start of the year and the end of the year for 2018, 2019, and 2020, based on Item 20 of the company’s 2021 FDD

• Section V – Presentation and analysis of Steak ‘n Shake’s financial performance representations, based on Item 19 of the company’s 2021 FDD, including information on the:

• 2020 average, median, highest, and lowest sales; and percentage of Steak ‘n Shake restaurants that achieved certain annual sales levels (above $2.0 million, $1.8 to $2.0 million, $1.6 to $1.8 million, $1.4 to $1.6 million, $1.2 to $1.4 million, and below $1.2 million) for the 192 company-operated and 84 traditional franchise Steak ‘n Shake restaurants that had been in continuous operation for at least 18 consecutive months as of December 26, 2019

• 2019 average, median, highest, and lowest sales; and percentage of Steak ‘n Shake restaurants that achieved certain annual sales levels (above $2.0 million, $1.8 to $2.0 million, $1.6 to $1.8 million, $1.4 to $1.6 million, $1.2 to $1.4 million, and below $1.2 million) for the 254 company-operated and 96 traditional franchise Steak ‘n Shake restaurants that had been in continuous operation for at least 18 consecutive months as of December 27, 2018

Section I – Background Information

19 Things You Need to Know About the Steak ‘n Shake Franchise

Shifts to Quick-Service Format

1.  In February 2020, Steak ‘n Shake announced that it planned to reopen locations as quick-service units. Steak ‘n Shake made headlines in the fall of 2018 when it announced a massive refranchising initiative. It wasn’t the proposed structural change, though, that garnered news – it was the fact Steak ‘n Shake put locations on the block for $10,000 in hopes of fostering a single-operator system similar to the one Chick-fil-A built an empire on.

2.  At the end of 2019, chairman of the board Sardar Biglari estimated it would take roughly three years to transition 400 or so company-run stores to a network of franchise partners. Since then, most of the attention has centered on Steak ‘n Shake’s store closures, mounting losses, and declining traffic: 107 restaurants were “temporarily” shuttered as of December 31, 2019.

3.  Biglari provided some updates in the company’s 2019 annual report. Among the key points, Steak ‘n Shake still plans to reopen “most” of the temporarily closed restaurants, he wrote in a letter to shareholders. Only there’s one big update: They’re all going to be counter service.

4.  Steak ‘n Shake has deployed servers since its 1934 debut in Normal, Illinois. All models were sit-down for the company’s first 78 years. A quick-serve format arrived 2012 and grew through universities, casinos, airports, gas stations, shopping centers, and other nontraditional outlets. By the end of 2018, there were 87 quick-service locations – including international operations.

5.  Biglari said this latest decision stems from the same issues that forced Steak ‘n Shake to start closing stores in the first place. “We refused to keep any unit open that could not deliver excellent customer service,” he said. The brand’s problems began in the back of the house. Biglari said Steak ‘n Shake’s dedication to high-quality products and low prices failed to align with its current kitchen design, which was not built for high-volume production. In other words, it could not compete on speed or convenience with industry peers – only price. And that’s a battle it was getting swallowed in.

6.  The combination of labor-intensive, slow production with high-cost table service sent Steak ‘n Shake’s overall labor costs 6-8 percentage points higher than those incurred by competitors, Biglari said. As a result, the flip to a fast-food brand is on.

7.  Biglari offered some updates to the refranchising process, which has been kept pretty close to Steak ‘n Shake’s vest. Operators who sign up for the $10,000 program, where the company pays the construction and equipment costs, agree to a fee of up to 15 percent of sales as well as 50 percent of profits. “Under our arrangement, a franchise partner is able to earn considerable sums, which is the way we want it,” Biglari said.

8.  Biglari said Steak ‘n Shake received roughly 17,000 applications from franchisee candidates. By taking only 29, it represents an acceptance rate of 0.17 percent. Steak ‘n Shake said some of the operators are “on their way” to earning north of $200,000 in their first year. Biglari said a “good number” will become millionaires.

Suffers Sales Declines and Restaurant Closures Due to COVID-19

9.  In mid-November 2020, Steak ‘n Shake continued undergoing its two major transformations – flipping to a quick-service format systemwide, and selling franchises to single-unit operators for $10,000 in an effort to foster entrepreneurship throughout the organization.

10.  In the interim, the legacy burger chain is absorbing its share of COVID-19 blows. The brand saw comparable traffic decline 54.2 percent in Q3, year-over-year. For the first nine months of fiscal 2020, the figure slid 44.6 percent versus 2019 levels “primarily because of the effects of the COVID-19 pandemic,” parent company Biglari Holdings said in a filing.

11.  Meanwhile, Steak ‘n Shake continues to trim its footprint. The brand permanently closed 13 restaurants in Q3 (11 company run and two franchises). Steak ‘n Shake exited the period with 260 corporate units, 69 franchise-partner stores (the $10,000 program), and 199 traditional franchises. On December 31, 2019, Steak ‘n Shake had 368 corporate restaurants, 29 franchise partner, and 213 traditional franchises. Over that span, it’s transitioned 41 locations to franchises and closed a net of 67 restaurants.

12.  Steak ‘n Shake closed most of its dining rooms by March 17, 2020 as COVID struck the landscape. The remainder went offline before the end of Q1. Additionally, as of September 30, 37 of 260 company-run stores were temporarily closed. That time a year ago, 106 of 282 corporate venues were temporarily shuttered as Steak ‘n Shake searched for franchise partners to transition stores to. So it has been a complicated stretch for the brand.

13.  The company said most of its restaurants remained open with limited operations, such as takeout, drive-thru, drive-in, and delivery throughout the pandemic. It relaunched “Drive-In Service” over the summer where carhops delivered food on trays and attached them to an open window for guests to enjoy in their car – just like Steak ‘n Shake did back in the 1950s. Customers pull up to a spot denoted by signage evoking a 45 RPM record popularized in the 50s, then place their order via Steak ‘n Shake’s app. Outdoor tables were available for the service as well.

14.  However, a key point in its COVID response is Steak ‘n Shake’s desire to reopen dining rooms with counter service. The transition, the company said, will “require significant investments in equipment.” It expects to fund these costs mainly by selling owned real estate via an auction process. The company put 15 restaurants on the block in August. Steak ‘n Shake said the funds needed for the transition were “limited under its debt agreement.”

15.  “Absent a resolution with the lenders, Steak ‘n Shake may need to seek refinancing options, which may not be available. In addition, the duration of the pandemic could have a material adverse effect on financing options or Steak ‘n Shake’s ability to comply with the terms of its credit agreement,” the company said.

Company History

16.  Steak ‘n Shake was founded in 1934 by Gus Belt in Normal, Illinois. After serving in the Marine Corps for four years, Belt decided to convert the combination gas station and chicken restaurant that he owned (Shell’s chicken) into a hamburger stand. Belt wanted to serve freshly ground steakburgers. Steak ‘n Shake’s slogan “In Sight It Must Be Right” originally referred to Belt’s practice of wheeling a barrel of T-bone, sirloin, and round steaks into the public area of his restaurant, then grinding them into burgers in front of his customers. Belt’s gimmick worked and Steak ‘n Shake was a big hit with customers.

17.  In order to keep up with demand and grow Steak ‘n Shake, Belt purchased a local chain named Goal Post which he converted over to Steak ‘n Shake. Sometime in the late 1930s, Belt began franchising the Steak ‘n Shake concept and the brand continued to grow. After Belt passed away in 1954, his wife Edith ran the company until 1969. Ownership of Steak ‘n Shake passed threw a few companies before it was acquired by E. W. Kelley and Associates in 1981. Chairman E. W. “Ed” Kelley ran Steak ‘n Shake until he passed away in 2003.

18.  Following Kelley’s death, Steak ‘n Shake’s growth slowed. Then in 2008, entrepreneur Sardar Biglari took control of Steak ‘n Shake and worked to turn things around. Sometime in the past, during its previous ownership, Steak ‘n Shake moved away from franchising and focused on company-owned locations. In 2018, Biglari decided to revive franchising operations and turn all 400+ company-owned restaurants into franchise operations. Today, there are company-owned and franchise locations of Steak ‘n Shake across the United States, Europe, and the Middle East.

Entrepreneur’s Franchise 500

19.  Steak ‘n Shake did not rank on Entrepreneur’s 2021 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Steak ‘n Shake franchise costs, based on Item 7 of the company’s 2021 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Steak ‘n Shake’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2021 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2018

• Outlets at the Start of the Year:  0
• Outlets at the End of the Year:  1
• Net Change:  +1

2019

• Outlets at the Start of the Year:  1
• Outlets at the End of the Year:  29
• Net Change:  +28

2020

• Outlets at the Start of the Year:  29
• Outlets at the End of the Year:  86
• Net Change:  +57

Company-Owned

2018

• Outlets at the Start of the Year:  173
• Outlets at the End of the Year:  185
• Net Change:  +12

2019

• Outlets at the Start of the Year:  185
• Outlets at the End of the Year:  183
• Net Change:  -2

2020

• Outlets at the Start of the Year:  183
• Outlets at the End of the Year:  159
• Net Change:  -24

Section V – Financial Performance Representations (Item 19, 2021 FDD) and Analysis

• The historical financial performance representations in this section include unaudited results for:

• (1) the 12-month period ended December 23, 2020 (“FY20”) for 192 company-operated and 84 traditional franchise Restaurants (respectively, the “Company-Operated Restaurants” and the “Traditional Franchise Restaurants”) which had been in continuous operation for at least 18 consecutive months as of December 26, 2019; and

• (2) the 12-month period ended December 25, 2019 (“FY19”) for 254 Company-Operated Restaurants and 96 Traditional Franchise Restaurants which had been in continuous operation for at least 18 consecutive months as of December 27, 2018.

• Steak ‘n Shake has not included sales results from locations based on its franchise partner franchise offering, or non-traditional locations.

• As used in this Item 19, the term “Net Sales” is the same as “Gross Receipts” upon which your continuing fees are based (that is, total sales, excluding sales tax, promotional and employee meal discounts).

• Also excluded from fiscal year 2020 is the 53rd week ended December 30, 2020. This week has been excluded for comparability purposes.

• For the majority of the Company-Operated Restaurants and the Traditional Franchise Restaurants, the dine-in component of the business was either closed or severely restricted beginning in the second quarter of 2020 and extending through the end of 2020.

Part 1 – Average, Median, Highest, and Lowest Sales for Company-Owned and Traditional Franchise Restaurants (December 26, 2019 to December 23, 2020)

Company-Operated

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