Top-shelf burger joint Shake Shack is growing up fast. The chain is going public with a starting value as high as $1 billion.
That's great for fans of Shake Shack's particular brand of gourmet burgers and milk shakes. Now you can own a part of your favorite business, sharing in its successes and missteps as the brand grows far beyond its New York City beginnings.
But it also begs the question: When will In-N-Out Burger, Five Guys, or maybe even Whataburger follow Shake Shack's lead and jump into the public market?
This iconic Whataburger frame just doesn't belong on Wall Street. Source: Whataburger.
After all, Shake Shack's 63 stores look very modest next to its much larger rivals. In-N-Out Burger lists 301 locations, stretching from its Californian home base to Dallas. Five Guys grills its intentionally simple menu in more than 1,100 locations nationwide, with another 1,500 restaurants under development. And you'll find over 750 of the distinctive Whataburger A-frame buildings across the South. Like Shake Shack, Five Guys even has a smattering of international locations.
Fast-food industry resource QSR Magazine ranks Whataburger and Five Guys among the 10 biggest burger chains in America. Combining the revenues of company-owned stores with sales at franchised locations, Whataburger boasts annual sales of $1.6 billion, ahead of Five Guys at $1.1 billion and In-N-Out at $560 million.
Shake Shack lags far behind with just $140 million in systemwide sales last year.
So why is Shake Shack going public while its larger and equally growth-hungry rivals stay on the sidelines, and will these competitors ever hit the market?
Why is Shake Shack taking the plunge?
In the prospectus for Shake Shack's initial public offering, you'll find roughly 500 words talking about the "use of proceeds" from the stock sale. Looking past the financial sleight-of-hand of setting up a holding company that's legally separate from the company that's actually doing business, there's one very simple goal.
Beyond paying the fees involved in entering the public markets and getting rid of some old debts, the stock sale's windfall will be used for "general corporate purposes, including opening new Shacks and renovating existing Shacks."
That's it. Shake Shack is tapping into the market in order to secure cash that will help it grow. The company aims to run in the neighborhood of 450 locations eventually, though it may take many years to grow that large. This injection of shareholder cash will get Shake Shack off to a running start -- albeit with stock owners gaining some say in how the company is managed.
Sounds like a great idea for a fast-growing restaurant chain, right? All three of my gourmet burger joints should do it!
Why not the other guys?
I can hear the purists at In-N-Out Burger and Whataburger tapping out already. These are family owned businesses with many decades of tradition to protect.
Whataburger chairman Tom Tobson, grandson of company founder Harmon Dobson, is not interested in trading his independence for a few extra dollars.
"Not on my watch," he told the San Antonio Express in 2012. Younger Dobsons stand ready to take over the company when that time comes.
Likewise, In-N-Out owner and president Lynsi Torres carries the torch that her grandparents lit 66 years ago. She is the last surviving member of the founding Snyder family, will soon have sole ownership of the burger chain, and is camera-shy to a fault.
According to fast-food industry insiders, that's always been the calling card of the Snyders. "They're very quiet. That's their culture," says Bob Goldin of food industry analyst firm Technomic.
But Torres keeps a firm grip on In-N-Out Burger's traditions. Never build a restaurant more than a day's drive away from a company-owned distribution center. Never sell franchise licenses that give outsiders control over how the food is made. Don't try to grow faster than the company can afford.
Given these deep roots in rock-solid family backgrounds, I'd be downright shocked to see either one of these companies lining up for an IPO. It's simply not in their blood to cede control over the company in exchange for fast money.
That's a sharp contrast to Shake Shack, which is owned by New York entrepreneur Danny Meyer and his sprawling Union Square Hospitality Group. Meyer is a businessman first and a burger enthusiast, well, maybe 32nd. He has hired top-class chefs to fill out Shake Shack's management ranks, but is more interested in business networking and location research himself.
In other words, I'm not the least bit surprised to see Meyer joining the big leagues with a splashy stock sale. The food quality may be comparable to a Double-Double or a Double Meat Whataburger, but Shake Shack is not a carefully curated, multi-generation operation, it's a business.
Wouldn't this North Dakota location make perfect sense in the Financial District, though? Source: Five Guys.
Why Five Guys, then?
So why do I think that Five Guys stands closer to Wall Street than either Whataburger or In-N-Out Burger do? It comes down to a shorter company history and a slightly looser grip over the company structure.
Five Guys founder Jerry Murrell was dragged into the franchising game in 2002 -- kicking and screaming. But he did it, and that was the start of the chain spreading like wildfire across the map. The company grabbed a $30 million business loan from General Electric (GE +0.01%) to fund its corporate headquarters in Lorton, Virginia.
Murrell didn't want to expand to Florida, or Canada, or the Middle East -- but plain business sense got the better of him, and Five Guys has opened stores in all of these places now. While the company is picky about its food sources, it isn't locked down to a company-owned supply chain like In-N-Out Burger.
The Murrell family definitely owns and operates Five Guys, but with a softer iron fist. Jerry Murrell is a foodie first but knows a good business idea when he sees it. He's not dead-set against using standard tools of the trade like a GE-managed business loan or a franchisee network.
If a stock sale could fuel even faster growth without undermining the company culture, it would take some talking to convince Jerry Murrell that he should go there.
But he just might -- someday. Just don't hold your breath waiting for it to happen.
