How Shake Shack Is Staying Ahead of the Curve

By Markets

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Image source: Shake Shack.

Shake Shack (NYSE: SHAK) recently employed the help of supply chain company ArrowStream to help manage its supply chain. As Shake Shack has grown to 100 locations across the globe in a little over a decade and plans to continue opening more at a high rate, this is a good move. Other fast-growing chains have recently demonstrated what can happen when product isn't closely monitored.

Why supply chain is important

Managing product is important for any business, but it is especially sensitive in the world of food preparation. Just ask fast-casual dining superstar Chipotle Mexican Grill (NYSE: CMG), whose sales have been hit after outbreaks of foodborne illness, how important it is.

Fast-casual restaurants such as Chipotle and Shake Shack boast higher-quality food at speeds similar to the fast-food competition. And when that quality is lacking, consumers have been quick to punish the offenders. Chipotle has recently demonstrated this with multiple foodborne-illness incidents in the past year. As a result, during the first six months of 2016, total sales were down 19.9% and same-restaurant sales down 26.5% as consumers' worry about the company's food safety lingered.

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The 2,000-plus location Mexican-food company has sworn to lead the industry in safety and high quality going forward, but obviously the company and investors alike would have preferred to avoid the incidents altogether. That's where something like supply chain management can come in.

What Shake Shack hopes to accomplish

For fast-expanding restaurants, managing the supply chain is important to maintain quality, safety, and profitability. Shake Shack recently celebrated the opening of location No. 100, and the company hasn't lost momentum, with a total of 18 locations now anticipated being opened during 2016. All U.S. locations are company-owned and it works with "exclusive international partners" to license and run Shake Shacks outside the U.S. Management sees eventual growth to 450 company-operated U.S. restaurants.

Enter the need for ArrowStream's OnDemand software to handle food spending, inventory, limited-time-offer tracking, and contract management with its suppliers and distributors. Handling supply becomes even more sensitive for Shake Shack, not just because of rapid growth, but also when considering the seasonal menu changes and new items the company implements.

Jeffrey Amoscato, vice president of supply chain and menu innovation for Shake Shack, was quoted in a press release as saying: "[ArrowStream's] OnDemand will provide Shake Shack with the analytics and transparency we need across our supply chain to make better supply chain decisions and ensure we are successfully positioned to accelerate into the next phase of our evolution."

ArrowStream's data science and analytics engine was cited as being well-suited to help Shake Shack continue growing while simultaneously unlocking cost savings through more efficient supplier relationships. The company also has experience working with other national chains including Golden Corral, Popeyes, and Jamba Juice.

What it means for investors

Shake Shack investors hone in on new restaurant openings and existing-restaurant sales increases to drive growth. Often ignored, though, is the important "Shack-level operating profit," which measures restaurant costs like food, paper products, and labor, and also helps the company drive bottom-line profitability.

During the last quarter, that operating profit margin increased 0.5% from the same quarter last year. Through the first half of the year, it increased 1.4 percentage points to 29.7%. Helping contribute to higher profitability were decreasing food and paper costs, which fell 1.5% through the first half of the year.

Shake Shack's moves to improve its supply chain should help the company keep profits on the rise, or at the very least help the company keep them in line during expansion efforts in years to come.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends CMG. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.