Food and paper costs weigh on Shake Shack profit

Rising food and paper costs bit into the profit of rapidly expanding New York-based burger brand Shake Shack, its latest trading update has revealed.

Total revenue for the company, in the third quarter to 25 September 2019, increased by 31.9% to $157.8m (£122.6m), while same-site sales rose by 2%.

But the brand’s income before tax dropped to $8.2m (£6.4m), down from $9.3m (£7.2m) in the same quarter last year, while operating income margins fell from 7.7% to 5.2%.

By the end of the most recent quarter, Shake Shack had opened 11 new restaurants in the US market as well as another six international outlets, including its first in Mexico City, its third in Osaka, Japan, and its first in South Korea’s second-largest city Busan.

After the end of the quarter, the brand opened another five US Shake Shacks and five licensed sites, including its first airport site at London Gatwick.

Shake Shack said margins reduced because of increases in food and paper costs driven by higher food costs associated with its Chick’n Bites brand which began a nationwide rollout in the USA at the start of the year, as well as some price inflation on dairy and beef. Paper costs also rose as a result of digital sales which come with additional packaging.

There were also increases in labour costs driven by inflation and the fact that new Shacks typically open with higher staff costs.

The brand expects to open between 40 and 42 more restaurants in its 2020 financial year, with along with 20-25 net new licensed sites.

Randy Garutti, chief executive officer of Shake Shack, said: “We're pleased to report total revenue grew nearly 32% and the team delivered another quarter of positive same-Shack sales of 2%, continuing to drive positive traffic of 1.2%. Based on our results to date, we are raising our 2019 revenue guidance, including our licensing revenue guidance.

“This has been the biggest development year in Shack history as we’ve grown our presence around the country and internationally in the new markets of mainland China, Singapore, the Philippines and Mexico. In 2020, we will continue to expand even further within key domestic and international markets. Overall, we continue to execute this year’s plan while gearing up for the key strategic initiatives of 2020. We’ll be focused more than ever on putting our people first, simplifying and supporting our operations, and enhancing our winning guest experience."

Shake Shack now has a total of 11 UK restaurants in London, Cardiff, Lakeside in Essex and at Gatwick Airport.