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Inside Shake Shack's (US) Unusual Global Strategy

18 Jun 2019 - Shake Shack is expanding its global empire with a location in Mexico City.

The burger brand, which turns 15 this summer, is tiny compared to rival international chains. McDonald's (MCD) had nearly 38,000 restaurants worldwide at the end of 2018, and Burger King finished last year with nearly 18,000 locations. Shake Shack, on the other hand, operates about 235 restaurants altogether, but sells in 15 countries. The Mexico City location, slated to open soon, will increase that count to 16.

It's part of Shake Shack's overall plan to maintain a broad international footprint, which is unusual for a company this young and this small. The chain opened locations in London, Istanbul, Dubai and Moscow before it reached Los Angeles in 2016.

International expansion helps Shake Shack (SHAK) punch above its weight and connect with consumers worldwide. But it also poses certain challenges, as the company must navigate supply chains in several markets and make sure several partners replicate the Shake Shack experience. "So much of this story has been our global story," CEO Randy Garutti told CNN Business' Christine Romans.

"What we learned early on is that people don't want us to be a local version of Shake Shack," he said. "They want us to be Shake Shack. So that's what we do."

An unusual path

Most American companies expand regionally before going international, Michael Kark, Shake Shacks' chief global licensing officer, told CNN Business. "We did it from the exact opposite perspective," he said. Shake Shack was started by restauranteur Danny Meyer's Union Square Hospitality Group, which specializes in high-end New York City restaurants. In the beginning, "we had no experience in duplication," Kark said. So as it was starting to expand, it began to partner with international licensing companies to learn how to grow. It's first international partnership was with the Middle Eastern restaurant franchise operator Alshaya.

For Shake Shack, expanding internationally was a way of hedging: If things went poorly, "it was really far away from home." A failure in Dubai likely wouldn't impact US business.

Since then, the company has forged ahead with its international expansion, always using local licensing companies to run the stores. This year, Shake Shack opened locations in Shanghai, Singapore and the Philippines. In each location, the restaurants have been extremely well received, Kark said. The Asian market is so important to Shake Shack that it's planning on opening its first international office in Hong Kong, he added.

But it can be hard for US companies to keep tabs on international partners, noted Morningstar analyst R.J. Hottovy, who covers restaurants. "You're only as good as the experience that you have," he said. "If the experience differs from what it is in the US, then it can give people a different perception of the brand." That could hurt its reputation, he noted. Hottovy does not cover Shake Shack for Morningstar. Still, the strategy is a sign that Shake Shack is "aiming to be much more than just a national brand," he said.

To ensure that Shake Shack remains attractive to international consumers, the company tries to partner with the right international operators, and to closely replicate its core menu and add a local twist. Same burger, different shake Shake Shack prefers to use American ingredients in its global locations. But that's not always possible because of international tariffs or other limitations. When Shake Shack can't use its US suppliers internationally, it has to come up with other solutions, which can be complicated. For now, Shake Shack is small enough to be able to adjust quickly to unexpected geopolitical pressures, Garutti told Romans. "As we scale, those will become more and more important," he said. "Over time, we'll think about tariffs and taxes and how they impact us."

On-the-ground sourcing is also a way for Shake Shack to engage with the community, Garutti said, and get high-quality ingredients from local vendors.

Although Shake Shack tends to stick to its core menu, it does add local flair with some items. In Japan, Shake Shack has sold a cherry blossom shake. In Singapore, it had a shake made with the tropical plant pandan and in South Korea, it's offered a red bean shake.

The US culinary team works with local operators to come up with ideas, and figure out what might work. Sometimes, it brings items — like the cherry blossom shake — back to the United States.

Another way for Shake Shack to maintain its reputation as a global company is by opening up in airports. "The response has been overwhelmingly positive from our guests," said Kark, who added that the company has come up with new items, like breakfast sandwiches, because of its airport locations.

Overall, the company's strategy seems to be working. In the first quarter of 2019, the company's total revenue grew 33.8% to $132.6 million compared to the same period in the previous year.

International expansion is "a great part of our business, and we're really excited and bullish about it," Shake Shack CFO Tara Comonte told CNN Business. Because the company's international business is licensed, it requires less capital than the bulk of its domestic business, she noted.


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