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 7×7
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. Check out one of our newest videos right here! Plus, even more Mashed videos about restaurant
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