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Fast and Not so Fast Food

Joshua PettmanInvestment Analyst

US “fast-casual” restaurants Wingstop and Shake Shack have delivered very different operating results and returns on investment in their relatively short lives. The reason? Two very different approaches to selling fast food – with one proving to be a clear winner for investors.

Standing as a middle ground between “full-service” ­­and “quick-service restaurant” (QSR) concepts, the power of “fast-casual” restaurants comes from their ability to blend experience with convenience at an attainable price point. This premiumisation of fast food has attracted customers in increasing numbers, with fast-casual concepts taking share from traditional QSRs such as McDonald’s at the low end, and sit-down dine-in chains such as Olive Garden in the mid-range.
Although they all fall under the same definition, fast-casual restaurants are anything but homogenous, with concepts spanning a range of cuisines from burgers to burritos and pizza to chicken wings. The varying approaches taken by different concepts can be illustrated by drilling down into the businesses of two fast-casual restaurants: Wingstop (chicken wings) and Shake Shack (burgers).
Wingstop is the largest fast-casual chicken wings-focused restaurant chain in the world, with over 1,700 locations.[1] Restaurants are characterised by small dining areas, B-grade real estate locations, and a simple menu with products made to order. Restaurants typically have five or six fryers with a capacity for two to four frying baskets, and a relatively simple kitchen layout that is accommodating to Wingstop’s relatively simple menu. The straightforward nature of these store operations has allowed Wingstop to franchise 98% of locations whilst keeping the customer experience consistent. A franchisee can expect to contribute an initial investment of US$400,000 to get their restaurant up and running, and will typically require three to five staff to manage a day’s operations.
Contrastingly, Shake Shack, a modern-day “roadside” burger stand known for its quality, is characterised by an urban footprint in premium real estate locations. Unlike Wingstop, the majority of Shake Shack restaurants (better known as Shacks) are company owned. Shake Shack was developed by professionals with backgrounds in fine dining. This fine-dining mantra is reflected in the quality of food and experience at Shake Shack. The beef is freshly ground every night and the burgers are made to order. Consequently, Shake Shack is far more operationally complex than Wingstop, and typically requires an initial investment of around US$2 million.
The differences in the nature of the food offered and the dining occasions they are suitable for are also substantial. Wings are a highly transportable product, especially when cooked fresh as Wingstop does. Both the meat and bone are heated to 165ºF, and during transportation, the hot bone continues to cook the wing from the inside, creating an evenly cooked product regardless of whether you eat it in store or at home. Wingstop’s wings are often ordered online and consumed off premises – especially for big sporting events. Conversely, burgers typically don’t transport well for off-premise consumption. When you dine at Shake Shack, it is often for the premium-quality burgers, and as a result, consumers typically dine in to enjoy the food at its best.
Wingstop’s off-premise dining occasion means they can keep occupancy related costs low, with the model well suited to 1,600 square feet with little seating in out-of-the-way cheap rent locations. In contrast, Shake Shack’s on-premise consumption means restaurants are typically ~3,500 square feet and situated in high-cost, high-foot traffic locations.
Fig. 1: Interior of a Wingstop restaurant