Food

In-N-Out vs. Shake Shack

2016.08

The story behind two of the world’s best burgers (In-N-Out vs. Shake Shack)
Food
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Shake Shack, a fast food chain representative of the East Coast of the US, recently opened up in Korea’s Gangnam district and has been tremendously popular.

  • The SPC Group, which owns Paris Baguette and other well-known Korean food chains, signed a contract with Shake Shack Inc. and proceeded to open up the first Korean Shake Shack on July 22, 2016.
  • For the first four days of its opening, the number of visitors averaged at about 3,000 per day, and the store sold 10,000 of its signature Shack Burger.
  • If the store keeps up the current numbers, Shake Shack will be able to rake in a whopping 15 hundred million won in a month and 17 billion won in a year.

With the enormous success of Shake Shack, Koreans have begun to develop an interest in In-N-Out, another prominent player in the US high-quality burger market.

  • Unlike Shake Shack, which has locations in various cities throughout the United States, In-N-Out is found exclusively in such West Coast cities as Los Angeles and San Francisco, and this has allowed In-N-Out to secure a limited but very loyal fanbase.

The comparisons people make between Shake Shack and In-N-Out are as common as those made between Stanford and Harvard, or between NYC and SF. This age-old battle demonstrates just how much people love these two chains in their own ways.

Shake Shack was established by restaurant industry bigwig Danny Meyer. Thus, the chain required little effort to achieve the $1.5 B market cap and become a unicorn among fast food chains.

  • In 2001, Danny Meyer, a major market player in the US restaurant industry, opened up a hot dog cart in Madison Square Park in an effort to raise money for the renovation of the park.
  • As the popularity of the hot dog cart escalated, Meyer obtained a permit to run a kiosk restaurant in Madison Square Park in 2004. This was how the first Shake Shack came to be.
  • At the time, Shake Shack’s burger patties were made from beef supplied by Pat LaFrieda, a meat purveyor that was owned by Meyer and that usually serviced fine dining establishments throughout NYC. Furthermore, the recipe for the burger sauce was procured Eleven Madison Park, a Michelin Star restaurant that was also owned by Meyer. These elements made for what Meyer considered the “ultimate burger,” which was priced at only 20-30% more than a Big Mac
  • Besides the high quality burgers, Shake Shack also sold fries, milkshakes, and beer, and has distinguished itself above other fast food chains like McDonald’s and Burger King.
  • Meyer initially did not have plans to open more stores, but as the performance of Shake Shack exceeded expectations, Meyer strategized to open more Shake Shacks while maintaining direct control of the stores.
    • Until 2010, Shake Shack opened stores only within the state of New York. After 2010, Shake Shack began to spread to states in the East and the South (Connecticut, Washington DC, Florida, Georgia, Illinois, Maryland, Massachusetts, New Jersey, Nevada, Pennsylvania and Texas). In 2014, Shake Shack opened in London, Tokyo, Dubai, Istanbul, and other international cities, and in 2016, it opened its first store in Seoul, South Korea.
    • Currently, Shake Shack can be found in over 100 locations in 13 countries.
  • Since 2012, sales have been growing exponentially from $19.5M, to $82M in 2013, to $119M in 2014, and to $190M in 2015. The business profit rate was 3% in 2015, and Shake Shack has continued to invest aggressively in order to maintain the positive image associated with their brand.
    • More than half of the money made through sales is spent on food supplies and human resources.
  • January, 2015, Shake Shack succeeded in achieving $21 per share with their IPO (obtained $105M through IPO; the company was valued at $700M at the time). In September, 2015, the price per share rose to $90, achieving a $3B market cap (current market cap: $1.5B).

In-N-Out, on the other hand, had humble beginnings as the brainchild of WWII veteran Harry Snyder, who opened the first store in 1948. In-N-Out has been around for over 70 years in the Western/Mid-Western United States.

  • After WWII, Harry Snyder got involved with a food business in Seattle. After getting married to Esther Johnson, who had been a waitress in a diner he frequented, the couple moved to LA.
  • The couple settled in Baldwin Park, a small town located in the suburbs of LA, and opened the first In-N-Out, which primarily served hand-made burgers.
    • Founder’s vision: "Give customers the freshest, highest quality foods you can buy and provide them with friendly service in a sparkling clean environment."
  • In order to maintain the high quality of In-N-Out’s products, Harry Snyder managed the 18 stores, all located in the LA area, with an iron fist until his death in 1976.
  • In 1976, Harry Snyder’s son Rich Snyder became the company president. Under Rich Snyder’s leadership, In-N-Out experienced a period of rapid growth, expanding to over 90 restaurants in 20 years (!4.5 restaurants/year).
  • Only after 1990 did the chain expand to regions outside of LA (first, San Diego). In the 90s, the chain spread to other West Coast regions (Las Vegas, SF, etc.) In the 2000s, the chain opened restaurants in Arizona, Utah, and Texas.
  • In-N-Out has resisted franchising its operations or going public; the chain is still family-owned. Currently, Harry Snyder’s only grandchild Lynsi Snyder is the president of the company.
  • In-N-Out’s burgers are as good (if not better) than those of Shake Shack. Furthermore, they are bigger and cheaper (20-30% cheaper than a Big Mac) than those of Shake Shack. The burgers are sold alongside fries and milkshakes as well.
  • Compared to the elegant, swanky, and refined atmosphere of Shake Shack restaurants In-N-Out restaurants market the rustic vibe of old-fashioned burger shacks.
  • 2014 sales are estimated at about $575M, and there are around 310 locations in just the US.

Quality is a point emphasized by both Shake Shack and In-N-Out, and the two companies also make it a point to keep the employee satisfaction rates high.

  • Maximizing the burger quality: burgers are hand-made in the store with the highest quality beef and the freshest vegetables.
  • Maximizing employee satisfaction: the salaries are far above those of industry standards and the companies offer a multitude of employee benefits. The companies strive to create an environment that helps employees feel proud of their work.
    • Shake Shack’s core value is “hospitality”: However, this hospitality is aimed at the employees rather than the customers, so that workers can proudly take ownership of their work. This would increase customer service and secure regular customers.
  • Maintaining quality despite expansion: rather than focusing on the profits that can be made through rapid expansion, the two chains prioritize the maintenance of the quality of their products and their customer service. They follow a principle of “slow and steady” regarding the expansions.
  • Minimizing miscellaneous costs (marketing, etc.): both companies have grown successfully without large, media-driven marketing campaigns because of the reputation they uphold through consistent production of quality food and customer service.

The two companies differ greatly in the prices of their food and restaurant positioning tactics.

  • Product prices and restaurant locations: Shake Shack spends about 1.5-2 times as much as McDonalds in order to provide an environment that is spacious and tidy. On the other hand, In-N-Out spends very little on their interior design and location choices, and their food costs substantially less than Shake Shack’s.
  • How the two companies secure investments: Shake Shack has opted for rapid growth through IPO-fueled external funding, whereas In-N-Out has remained a family-operated business that grows solely through sales profits.
  • In-N-Out is a deeply Christian establishment; there are bible verses inscribed on several of their servingware.

Shake Shack and In-N-Out have yet to infiltrate into each other’s territories. However, the two companies are still in fierce competition for their customer’s loyalty and support.

  • Shake Shack has very restaurants in the West Coast, and In-N-Out has stubbornly refused to migrate its restaurants to the East.
  • The three cities with both Shake Shack and In-N-Out are Las Vegas, NV, Los Angeles, CA, and Austin, TX. In all three cities, In-N-Out has shown to be slightly more popular than Shake Shack.

Which of the two chains do you prefer? If both Shake Shack and In-N-Out were available in Korea, which company do you think would be more successful? What lessons can we obtain from the two companies?

Please take this opportunity to talk about Shake Shack and In-N-Out with your Ringle Tutor and listen to their opinions as consumers of either or both products.

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