Shake Shack IPO Filing Comes Amid a Hunger for Premium Burgers

January 14, 2015

Passersby walk in front of the Shake Shack restaurant in the Manhattan borough of New YorkCopyright 2015 Thomson Reuters. All Rights Reserved.
By Anjali Athavaley

NEW YORK, Jan 2 (Reuters) – Shake Shack Inc’s filing this week for an initial public offering underscores a question for investors and foodies alike: How hungry are U.S. consumers for another burger chain?

A key part of Shake Shack’s growth strategy involves expanding its locations beyond its New York base, and investors and analysts are bullish on its prospects.

They say there is room for more “fast casual” restaurants that offer higher quality burgers, a variety of toppings and in some cases, beer and wine. Shake Shack’s burgers are described in its preliminary prospectus as all-natural and hormone- and antibiotic-free.

To be sure, there are skeptics who say the excitement over Shake Shack is overblown.

“Consumers love it and it will be well greeted in the market – and then probably fizzle out,” said Doug Kass, president of Seabreeze Partners Management in Palm Beach, Florida, and a noted short-seller.

“That a company of such a small size can get a valuation is symptomatic of the silliness … that develops in a period of zero interest rates,” he said.

A Shake Shack spokeswoman declined to comment.

Still, several factors appear to be working in Shake Shack’s favor. First, 2014 was a solid year for restaurant IPOs, particularly of the fast casual variety.

Burger chain Habit Restaurants Inc’s shares have risen 3 percent since its $30 Nasdaq debut on Nov. 20, based on Friday’s prices, and Zoe’s Kitchen was up 12 percent from its April market debut at $28.72 on Friday. Shares of El Pollo Loco, another fast casual company, were up 5.5 percent Friday from their $19 market debut in July.

Second, premium burger chains are outperforming the burger category as a whole, thanks to demand from younger, more affluent consumers. Sales at such chains including Five Guys and Smashburger rose 9 percent in 2013, according to restaurant consultancy Technomic Inc, while overall sales at all burger chains including fast food restaurants such as McDonald’s Corp were down 1 percent.

“The better burger space has been a pretty disruptive force for McDonald’s and other players,” said Darren Tristano, executive vice president at Technomic.

NEW YORK AND BEYOND

Shake Shack has developed a fervent following since it was founded by restaurateur Danny Meyer in 2001, but the challenge will be to replicate the success it has found in New York in the rest of the United States and overseas. The company has 31 company-operated and five licensed locations in 10 states and Washington, D.C., and 27 locations abroad.

The chain believes it has the potential to increase the number of domestic company-operated Shacks to at least 450 and analysts say that finding new locations with affluent consumers is critical.

Consumers such as Leticia Garza, 33, a middle school teacher in Austin, Texas, help illustrate the brand’s potential in other parts of the country, but also the challenges. Garza says she is excited to hear that Shake Shack planned to expand to Austin.

Still, she notes that she has many similar options. “There’s definitely going to be some competition because we have recently gotten an In-N-Out, and a couple of local versions that are similar to In-N-Out: P. Terry’s and Mighty Fine.” She adds: “We have Smashburger, too.”

Indeed, the market may be just a few years away from being saturated with too many fancy burger places, some analysts say. Furthermore, premium burger chains are not the only ones offering more personalized options: McDonald’s is rolling out a new “Create Your Taste” program this year that will give customers a choice of sandwich toppings.

In December, the world’s biggest fast food chain, which has not had a monthly gain in sales at its established U.S. restaurants since October 2013, said it also planned to cut the number of items on its U.S. menus. It also plans to use fewer ingredients in food, in an effort to reach consumers who want simpler, more natural choices.

McDonald’s is cheaper than Shack Shack and competes for a less affluent consumer. Still, industry watchers say such efforts could put pressure on premium burgers.

“We’re always looking for the latest version,” said Harry Balzer, an analyst at NPD Group, a market research company. But, he said, “there’s a limit to the burgers we’re going to eat.” (Additional reporting by Sinead Carew; Editing by Eric Effron and Tomasz Janowski)


Starbucks Sells 37 Million Gifts Cards During the Holidays

January 13, 2015

pictureStarbucks Corp. (SBUX) sold about 16 percent more gift cards in the U.S. during the 2014 holiday season as shoppers increasingly defaulted to the fail-safe option of treating their loved ones to lattes and Frappuccinos.

About 37 million gift cards were sold during the holiday season this year, up from about 32 million last year, the Seattle-based company said in an e-mail. More than $1.1 billion was loaded onto Starbucks gift cards between Nov. 3 and Dec. 25 in the U.S. and Canada, where a combined 40 million cards were sold, Starbucks said.

The world’s largest coffee-shop chain, with almost 12,000 cafes in the U.S., is an easy choice for consumers seeking the convenience of gift cards, said Darren Tristano, executive vice president at Chicago-based research firm Technomic Inc. Its stores are everywhere, and many customers visit almost daily.

“It becomes a safe bet,” he said. “We don’t want to give gift cards to people that we’re not sure they’re going to use.”

In 2013, Starbucks customers across the globe loaded $1.4 billion onto gift cards, including $1.3 billion in the U.S. and Canada, between October and December. Starbucks hasn’t yet released numbers for the corresponding period in 2014.

Starbucks said almost 2.5 million gift cards were activated on Christmas Eve this year, up from nearly 2 million sold that day last year. More than $20 billion has been loaded onto Starbucks gift cards since the program originated 13 years ago, the company said in a press release before Christmas.

The gift-card program reached new heights this year when the coffee chain sold a $200 Starbucks Card keychain that’s made with sterling silver and comes loaded with $50. The item sold out online and was available only in limited quantities at certain stores nationwide. Starbucks also offers monogrammed cards for $5.

Gift cards increase the amount of money customers spend when they’re in a Starbucks store, and the company should see a boost in sales in the first part of the year as coffee drinkers start to redeem the cards, Tristano said.

“It’s a significant part of what they do,” he said.


Pizza Hut Risks Becoming ‘Pizza What?’ with Bold Rebranding Effort

December 31, 2014

© 2014 Central Penn Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

Go big, or go home.

It’s a catchy phrase. It glorifies the daring move, making a splash, going all in for the win. It even concedes that it might not work. And it’s a risky strategy for an established brand like Pizza Hut.

Here’s a quick summary: Pizza Hut same-store sales have declined for two years. Its parent company, Yum Brands, has seen growth for its Taco Bell and KFC units, but Pizza Hut hasn’t kept up. Archenemy Domino’s seems to be eating Pizza Hut’s lunch with decent sales increases, even though it does not have a sit-down casual dining option.

So, Pizza Hut has launched a rebranding effort that consists of a new logo (more on that later), a completely revamped menu, with a much wider range of toppings and crust flavoring options, and a tongue-in-cheek ad campaign called the “Flavor of Now,” in which its new pizza combos are tested by Old World Italians and flatly rejected as “not pizza.”

Pizza Hut seems to be counting on millennials to bite on the classic reverse psychology presented in the spots as a joke.

“This is the biggest change we’ve ever made,” Carrie Walsh, chief marketing officer of Pizza Hut, said in an interview with USA Today. “We’re redefining the category.”

But, in changing so much about the brand in one fell swoop, is it trying to do too much? After all, this isn’t just adding stuffed crust as an option. This also takes away a great deal of what makes the brand familiar to its core audience.

Darren Tristano, executive vice president at Technomic, the restaurant industry research firm, responded in the same USA Today story in this way: “Pizza Hut may be doing too much too quickly. It would appear that the brand that has lost touch with the consumer is trying to change too much overnight.”

All told, Pizza Hut will add 11 new pizza recipes, 10 new crust flavors, six new sauces, five new toppings, four new flavor-pack drizzles, that new logo, new uniforms, a new pizza box and a partridge in a pear tree.

That Pizza Hut is going big, there is no doubt. But there are risks, starting with its core customers. This isn’t New Coke, but will its loyal customer base be thrown by so much change?

While I’m not sure Old World Italians would think that Pizza Hut’s previous offerings were any more worthy of their blessing, it is a product that’s been more or less established for decades. So, there is some risk that the new menu, which replaces some items, will alienate a percentage of its customers and drive them to try other options.

Let’s say that number is 5 percent of sales. That’s a big chunk to overcome with sales from new customers just to break even on this venture.

The second risk is that, with so much change, will it be possible to tell what’s working and what’s not? The chain has more than doubled its available ingredients at all of its 6,300 locations. Will it be possible to tell which combinations are working well when there will be so many possibilities? Maybe not.

But maybe it won’t matter. If the pizza-makers at the country’s leading pizza chain can manage all the extra ingredients and make what will be essentially custom pizzas for anyone who wants one, Pizza Hut could be on to something. Personalized menu items are working for Chipotle and Panera, so why not take a shot at riding the wave? It can always moonwalk its menu back to where it came from if it doesn’t move the needle. It’s got Pizza Hut Classics in its back pocket just in case, right?

Now, about the new logo. It’s great to signal a rebranding effort with an updated logo. People take notice. It makes them curious. And this one uses a mark that resembles a pizza, or, more accurately, the sauce of a pizza, which puts the product front and center.

The part that gets me is that the roofline “hut” image from the old logo has been dropped in the middle of the sauce. Now it looks like a hat, not a roof. Unless it’s supposed to be one of the new toppings, it just looks like pieces of the logo have been redistributed.

Pizza Hat, anyone? Or Pizza What? In a few months, we’ll know whether this little pizza rebrand went to market or if it went all the way home.

But there are risks, starting with its core customers.


Quiznos sees Asia move as key to its future

December 16, 2014

© 2014 American City Business Journals, Inc. All rights reserved.11aquiznostaiwan-304xx2905-1937-0-76

Quiznos is undertaking a major expansion in Asia as it emerges from bankruptcy, with plans to open 1,500 stores in China and several hundred more in other countries.

Kenneth Cutshaw, president of the company’s international division, says the overseas move is important to help restore the company’s financial health.

The Denver-based sub chain filed for bankruptcy protection in March, citing a need to reduce its debt load by more than $400 million and to aid franchisees who have fought with the company over their profitability.

It exited Chapter 11 protection in July after court approval of a prepackaged plan in which three senior lenders acquired 70 percent of the company’s shares in exchange for debt.

These new efforts in Asia represent the first substantial growth plans the company has announced since then. In addition to the Chinese partnership, Quiznos signed deals with master franchisees to open 100 stores each in Malaysia, Taiwan and Indonesia, including a 24/7, 10,000-square-foot location in Indonesia that will be the chain’s biggest in the world.

In betting big on growing Asian markets — it also has franchisees who have opened stores in South Korea, Singapore and the Philippines — Quiznos is following in the footsteps of larger chains such as McDonald’s and KFC that have found success in that region.

But Quiznos enters these new arenas after spending 10 years reducing its number of American stores from more than 5,000 to about 1,100, making Cutshaw keenly aware of how important this growth is.

“Yes, it is a key component to restoring our company’s financial health,” Cutshaw said. “We’re not alone. There are other brands that have had tremendous success outside the country and are still rebuilding their operations in the U.S.”

Quiznos entered the international market in 1999 in Latin America and now has more than 100 locations in that region. For its international expansions, it seeks out master franchisees who know the markets and who have experience operating chain restaurants. About 35 percent of its total stores are outside of the United States.

Asia would host the largest concentration of its overseas stores if the growth is completed as projected. Key to that is the 1,500 Chinese locations planned over the next 11 years in a partnership with AUM Hospitality and Parkson Holdings Berhad. Parkson operates about 60 top-tier stores of other brands throughout China now, Cutshaw said.

Quiznos will enter the market with what Cutshaw believes is a built-in advantage.

“American brands are given the strong benefit of the doubt when they enter an international market,” he said. “It’s perceived as a superior-quality product.”

Brands that have experienced Asian success have changed their culture and menu somewhat, adapting to the use of Asian meats and vegetables and an inclination toward spiciness, said Darren Tristano, executive vice president of Technomic Inc., a Chicago food-industry consultant. But there are big opportunities present.

“Looking abroad for growth … is definitely a way for brands to grow, especially for Quiznos as it comes out of bankruptcy,” Tristano said.


Carl’s Jr. Revolutionizes Fast Food with New All-Natural Burger

December 15, 2014

(c) 2014 Business Wire. All Rights Reserved.temp_image_445085_3

New All-Natural Burger features the first all-natural, no added hormones, no antibiotics, no steroids, grass-fed, free-range beef patty from a major fast food company

Today, Carl’s Jr.(R) announced the All-Natural Burger, featuring an all-natural, grass-fed, free-range beef patty that has no added hormones, antibiotics or steroids. With the introduction of the All-Natural Burger, Carl’s Jr. is the first major fast-food chain to offer an all-natural beef patty on the menu. The All-Natural Burger will be available in participating Carl’s Jr. locations beginning Wednesday, Dec. 17 and features the charbroiled, all-natural beef patty topped with a slice of natural cheddar cheese, vine-ripened tomatoes, red onion, lettuce, bread-and-butter pickles, ketchup, mustard and mayonnaise, all served on the brand’s signature Fresh Baked Buns.

The Carl’s Jr. All-Natural Burger features an all-natural, grass-fed, free-range beef patty that has no added hormones, antibiotics or steroids. With the introduction of the All-Natural Burger, Carl’s Jr. is the first major fast-food chain to offer an all-natural beef patty on the menu.

“We’ve seen a growing demand for ‘cleaner,’ more natural food, particularly among Millennials, and we’re proud to be the first major fast food chain to offer an all-natural beef patty burger on our menu,” said Brad Haley, chief marketing officer of Carl’s Jr. “Millennials include our target of ‘Young Hungry Guys’ and they are much more concerned about what goes into their bodies than previous generations. The new All-Natural Burger was developed specifically with them in mind. It features grass-fed, free-range beef that’s raised with no antibiotics, no steroids and no added hormones. The charbroiled All-Natural Burger also has a slice of natural cheddar cheese, vine-ripened tomatoes, lettuce, red onion, bread-and-butter pickles, the classic trio of condiments – ketchup, mustard and mayo – and it’s all served on one of our Fresh Baked Buns that we bake fresh inside our restaurants every day. Whether you’re into more natural foods or not, it’s simply a damn good burger.”

“Greater awareness for health and wellness is driving the growth in healthful menu items, yet our research indicates that the majority of consumers still opt for more indulgent food,” said Darren Tristano, EVP of Technomic Inc. “The push and pull between healthfulness and indulgence makes an All-Natural Burger on-trend. All-natural products also have a ‘health halo’ impact and often help consumers feel confident that they are getting a product better for them and from a source they can feel good about.”

The new All-Natural Burger is available as a single all-natural beef burger for $4.69, as a double burger for $6.99, and may be ordered in a combo meal with fries and a drink. Guests may also substitute the all-natural patty on any burger on the menu for an additional charge. Prices may vary by location. For a limited time, visit carlsjr.com/coupons to download a coupon for $1 off any All-Natural Burger combo meal, valid at participating locations.

The new burger will be supported by an advertising campaign created by Los Angeles- and Amsterdam-based creative agency, 72andSunny. The first of two TV spots will begin airing on Dec. 29 with an additional commercial to debut Feb. 2015 during the super big football game many will be watching.


A Big Production

December 12, 2014

Legacy chains employ large-scale marketing stunts to generate long-term buzz.tim-hortons_2

This summer, Canadian coffee chain Tim Hortons made quite the splash: The brand covered one of its Québec locations in blackout materials to promote its new dark roast coffee. Equipped with night-vision goggles, employees handed guests samples of the brew, and the action was all captured in two-minute videos, later posted on YouTube to the tune of 2.6 million–plus views.

Tim Hortons’ head marketer, Peter Nowlan, found the experience a big success for the chain. “The dark roast is Tim Hortons’ first new blend in the company’s 50-year history, and we wanted to put it to the ultimate test: allowing guests to try it in the dark, limiting their sense of sight, and enhancing their senses of taste and smell,” he says.

Large-scale marketing stunts like these are few and far between, but when a quick-service brand does employ them, consumers take note.

“Many brands, especially older legacy brands, have to work harder to stay relevant to a younger generation of less loyal customers constantly looking for what’s cool and what’s next,” says Darren Tristano, executive vice president at Technomic. Whatever the expense to companies may be, the resulting public-relations blitz usually pays dividends, he adds.

Advertisers today are focusing heavily on social media and buzz marketing, so anything a brand does locally on a grand scale will likely be shared and tweeted to people far and wide, Tristano says. “This reminds consumers about brands and their role within the restaurant industry,” he says.


Habit Looks to Trade on ‘Better-Burger’ Standing in IPO

December 11, 2014

© 2014 Orange County Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

RESTAURANTS: Recent growth, timing of offering look favorable

The Habit Restaurants Inc. in Irvine appears to have a number of factors working in its favor for an initial public offering that’s expected sometime this week, including some that reflect its strong run of recent years and others that indicate the chain is well-positioned for the future.

Among them:

* Habit has staked out a spot in the meaty middle of the “better burger” category with an effective mix of competitive standing on price and quality.

* The burger chain has quadrupled in size in seven years and now has 99 locations in four states.

* Habit plans more growth in 2015, notably on the East Coast and other new regional markets.

* It’s the first better-burger chain to go to market, and the move comes just a few months after the IPO by Costa Mesa-based fast-food chicken chain El Polio Loco Holdings Inc., whose shares have more than doubled since their July debut.

Habit’s offering of 5 million shares at $ 14 to $16 a share would put about 20% of the company on the market and raise about $66 million for the parent of the Habit Burger Grill chain after costs, according to its Securities and Exchange Commission filings.

Habit Restaurants Inc. would trade on Nasdaq under the ticker symbol “HABT.” Its market capitalization at $15 a share would be about $380 million.

When El Polio Loco’s similarly priced offering-$15 a share-hit July 25, its stock quickly traded above $20, and it now trades at about $35 for a market cap of some $1.3 billion.

Habit has been busy with expansion plans in the run-up to its public offering. It signed master franchise deals for 15 units in Las Vegas and 25 in Seattle in May. The first restaurant in a planned East Coast expansion came in August in Fair Lawn, N.J.

Growth

Habit was founded in 1969 in Santa Barbara.

Greenwich, Conn.-based private equity firm KarpReilly LLC led a group in 2007 that bought a majority stake. It will own 37% of the company after the offering, with voting control of 55%, the SEC filings said.

Habit had $162 million in sales for the 12 months ended Sept. 30, according to the documents. It ranked No. 16 this year on the Business Journal’s list of OC-based restaurant chains.

Net income has grown from $2.4 million in 2011 to $5.7 million in 2013.

It has had 43 consecutive quarters of samestore sales growth, and average unit volumes have grown from $ 1.2 million in 2009 to $ 1.7 million for the trailing 52 weeks as of Sept. 30, the filing said.

“They have strong leadership and strong growth,” said Darren Tristano, executive vice president at Chicago-based restaurant consultant Technomic Inc.

Tristano said Habit benefits from being the first prominent hamburger chain to go public this year. New York-based Shake Shack, which has about 50 units, is also considering an IPO, according to reports.

“If you believe in this segment, this is the first available investment,” Tristano said.

He attributed several restaurant IPOs this year to private equity investments that led to “operators trimming the fat” and then tapping the public markets to slash debt.

El Pollo Loco raised $113 million to pay down part of $289 million in debt when it went public.

That and a prior refinancing cut its debt service from $36 million a year to $10 million. It said resulting cash flow would fund growth.

Habit said it would use $41 million of its offering proceeds to close out debt, with $25 million for working capital, according to the filing.

Company representatives declined to comment for this article.

‘Better Burger’

Tristano placed Habit firmly in the “better burger” category: chains with a higher-quality hamburger than a $2 McDonald’s or Burger King selection, but at a lower price-$3 to $5 compared with $8 to $10-than restaurants such as The Counter.

Habit’s roots are in fast food, and “they’ve evolved toward fast casual, so they’re in-between,” he said.

He said El Pollo Loco has staked out similar territory-somewhere between Chipotle and Taco Bell.

“Quality and price means a better deal for lower- and middle-income customers,” Tristano said.

He said Habit-again, like El Pollo Loco- is strong in California, but sounded a note of caution.

“They’ll have strong regional competition in other markets,” he said.

One example: Prairie du Sac, Wise.-based Culver’s, which is similar in style to Habit and has 450 company-owned and franchise locations in 20 mainly Midwest states.

Tristano said Habit has shown it can do well against established competitors, including Irvine-based In-N-Out Burgers, a standardbearer in the better-burger category.

“They have to introduce themselves to a new audience, but they can be competitive,” Tristano said. “And they did well in the Consumer Reports [national] test early this year.”

Habit Burger Grill: 99 units and counting, initial public offering slated for this week

The Habit Restaurants Inc. in Irvine appears to have a number of factors working in its favor for an initial public offering that’s expected sometime this week, including some that reflect its strong run of recent years and others that indicate the chain is well-positioned for the future. Among them:

* Habit has staked out a spot in the meaty middle of the “better burger” category with an effective mix of competitive standing on price and quality.

* The burger chain has quadrupled in size in seven years and now has 99 locations in four states.

* Habit plans more growth in 2015, notably on the East Coast and other new regional markets.

* It’s the first better-burger chain to go to market, and the move comes just a few months after the IPO by Costa Mesa-based fast-food chicken chain El Polio Loco Holdings Inc., whose shares have more than doubled since their July debut.


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