Shake Shack CEO: 'You’re not going to see us discount'

Shake Shack CEO Randy Garutti and CFO Katherine Fogertey sit down with Yahoo Finance's Brian Sozzi at the 2022 Goldman Sachs Annual Retail Conference.

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SEANA SMITH: Welcome back. A big day for Goldman Sachs, kicking off its 29th annual Global Retailing Conference in New York City. Let's head over to our very own Brian Sozzi, who is on the ground at the conference and joined by two very special guests. Brian.

BRIAN SOZZI: Hey, thanks so much, Seana. Yeah, joining me now is Shake Shack CEO Randy Garutti and CFO Katherine Fogertey. Good to see you both. Randy, I have not seen you since we were talking chicken nuggets at our headquarters. It's been some time.

RANDY GARUTTI: Chicken bites, Brian. Chicken bites.

BRIAN SOZZI: Chicken bites. Chicken bites. All right, fine. OK, OK. All right.

So talk to me. You've been wandering the halls here, getting back in that conference zone. How's business doing?

RANDY GARUTTI: It-- it's good. You know, it feels good to be here today. It's a perfect example.

Here we are. We're wearing suits. We're at the office. Everybody's here, you know.

Katie and I have been doing so many conferences over the last few years, and it's really a signal for our business when you see people coming back and especially in our urban environments. So many of our Shacks rely on that back to office and the tourism, travel, commuting. You know, we're happy to see people getting back at it, getting back to conferences like this, talking in person. And, you know, I don't know about you, but I'm tired of being in my living room and seeing--

BRIAN SOZZI: I kinda like the suits. I'm liking the suit looks. I'm feeling it again.

RANDY GARUTTI: We're happy to be back.

BRIAN SOZZI: So talk to us-- split up the business between urban and rural. How are they performing relative to one another?

KATHERINE FOGERTEY: Yeah, sure. So we have an urban business. We're a New York company, founded in Madison Square Park, a small little hot dog stand that has just grown leaps and bounds. But we do have a pretty substantial exposure to urban markets.

We also have a growing suburban business as well. So about-- call it, 40%, 50% of our units are in suburban markets. We're really excited because we've just opened six drive-thrus. This is a new format for us. And we're just learning, going deeper and deeper into the suburban markets, while at the same time, still having a really strong presence in urban markets.

As Randy just talked about, everybody coming back to the cities, that's all awesome. But really, throughout the entire pandemic, we've had a pretty resilient suburban business. We didn't have nearly the same impact that we had in our urban markets, and it's been really exciting to see that momentum still hold. And we're still building on that, even with the urban recovery coming out here.

BRIAN SOZZI: And drive-thrus are a big focus by the Shake Shack brand. I remember you and I talked, what, six, seven years ago. You didn't even have a drive-thru. But how are they different in terms of margins compared to the old-school Shake Shacks?

KATHERINE FOGERTEY: Still very early. We've just opened six. But what's very exciting is that the sales potential that we have at drive-thrus. So we shared last quarter that the drive-thrus that we have open have generated more than $80,000 a week in AWS, or average weekly sales. This is above our system average, and that's certainly what we're building here.

We're building added convenience at touch points where our guests really want that. And we're also providing them a great in-Shack experience, as well. We have amazing dining rooms at these restaurants. So if you're with your kids and you're in a rush, we-- come through our drive-thru, get your dinner, get your lunch.

But if you want to hang out for a little bit longer with the family or with friends or with whatever, come in to the Shack. Hang out, eat. It's a great experience.

BRIAN SOZZI: Randy, are you inclined to look at promotions for the Shake Shack brand? I see a lot of discounting out there.

RANDY GARUTTI: Yeah, there's a lot of discounting out there. Like we-- we've decided a long time ago when we created this company, we weren't going to do what kind of fast food did. We have premium ingredients in a premium environment. But we understand that this is a harder time with inflationary pressures. People have different economic pressures.

And we want to find some new ways to give value to people. So you're not going to see us discount our brand, but you will see us do a lot of added value. Right now, we just started something called Burger Buds yesterday that we launched, where people can get a kind of two-for-one burger. We also have had various things like a two-for-one shake in the afternoon, after school, you know, get that old "Happy Days" kind of vibe.

BRIAN SOZZI: So no value menus. You're not going down the value meal.

RANDY GARUTTI: That's not-- that's never been who we are. This is a premium brand. And that's not to say that Shake Shack isn't a great value for our guests, but when you use the kind of no-hormone, no-antibiotic ingredients, our freshly-made ice cream, our frozen custard that is made in-house in our machines day in and day out, never sees day two, there's a cost to doing that right. And what we've always said is, look, you shouldn't eat a hamburger every single day. When you eat one--

BRIAN SOZZI: Really?

RANDY GARUTTI: --it should be a really good one. And you're probably going to choose Shake Shack. And that's the premium positioning we're going to continue to be while finding new and exciting ways to get our guests to continue to come back more often.

BRIAN SOZZI: Pass that mic over to her because I want to talk some costs. You talked about potato inflation--

KATHERINE FOGERTEY: Yep.

BRIAN SOZZI: --Katie, on the conference call. What are you seeing with potatoes?

KATHERINE FOGERTEY: It's really across our entire supply chain. A number of ingredients that we use, as Randy talked about, we source very premium, no antibiotic, no hormone, no-- you won't find high-fructose corn syrup in our ingredients. But all of that comes at a cost, and our suppliers are dealing with, in many cases, unprecedented inflationary pressures, which are impacting us, as well.

BRIAN SOZZI: What about labor inflation? Any sign of that easing at all?

KATHERINE FOGERTEY: You know, we-- we're really proud to invest in our teams. And quite frankly, one of the things that makes the guest experience at Shake Shack so special is how our guests treat our guests-- or our team members treat our guests with such amazing hospitality. And we really do believe that, as an ethos of this company, that when we support our team members, that we provide a better guest experience. So, no, don't expect to kind of ease up on our investments in our team members in the near term. We're really proud of the teams that we've built here and those that are going to staff the Shacks that are to come.

BRIAN SOZZI: Lastly, you used to be an analyst. Now you're the CFO of Shake Shack. What is that transition like? Why did you make that move?

KATHERINE FOGERTEY: It's been incredibly fun. I wouldn't have picked a better team to work with. So, yes, I covered the restaurant sector at Goldman Sachs and was just really itching to kind of roll my sleeves up, put the proverbial sleeves up, and dig in with just this great company, this great team. They've built something so amazing from a humble hot dog cart in Madison Square Park to what it is today. And I'm just ever excited to help take them to the next level.

BRIAN SOZZI: Randy, last word to you. Biggest thing you're looking that is on your plate for next year?

RANDY GARUTTI: Continue to be innovative with our menu and our guest experience. The way people access Shack digitally, in-person, however you want. There's so much transition now that we've all kind of settling, I hope, through this COVID time period.

We want to be there for you, however, whenever, wherever you want your Shack with great food hospitality and a guest experience that puts, really, the power in your hands. So really proud of the team and the good work they're doing. A ton of growth ahead, and we've got a lot of work to do.

BRIAN SOZZI: Did I call them chicken nuggets before?

RANDY GARUTTI: We'll call them chicken bites.

BRIAN SOZZI: Chicken bites. OK, Randy Garutti, good to see you. Katherine Fogertey, good to meet you, and congrats on that new position. Seana, Dave, back to you.

DAVE BRIGGS: Sozzi, not cool to talk all this food at 3:40 and not having any here. Smoke Shack, please.

BRIAN SOZZI: Sorry, not sorry.

DAVE BRIGGS: Good job, Sozz.