Hi everyone. Brian Harbour, my third time in this room, but I'm Morgan Stanley's restaurants and food service distributor analyst. Real quickly, for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And now we have Shake Shack. Rob Lynch is the CEO, new to this conference, of course. Katie Fogertey, CFO, not new to this conference. Thank you guys for joining us. We appreciate it. Maybe, you know, just to start, Rob, you know, you joined the company earlier this year. What, you know, what are you looking forward to most in the next couple of years for the company? How do you think your, you know, your past experience can really move the needle with Shake Shack?
Yeah, you know, it's an interesting experience for me given my last two experiences have been turnarounds and come and fix this. You know, Shake Shack isn't a turnaround. It's got a great foundation with a lot of momentum on the business, but there's definitely a lot of upside opportunity, and that's where we're focused. We're focused on driving, you know, profitable growth. And the good news is that we've got, you know, great four-wall margins that continue to get better. We're driving top-line sales, and comp store growth pretty consistently. And, you know, we're building a lot of new shacks, you know, at a low to mid-teens growth rate for new units. So there's a lot of great foundational and structural good things going on at Shake Shack. The upside is really around doing all those things a little bit better.
We don't have to change the model. I think there's a big opportunity to leverage our culinary innovation in a more strategic way to drive accelerated comp sales growth. I think that there's an opportunity for us to continue to invest in marketing, both top of funnel, bottom of funnel. That's kind of a new thing for Shake Shack, and we're obviously underinvested there, but we're seeing great returns, and we'll continue to invest and increase that investment until that return changes. And then, you know, lastly, we've got huge white space. We only have, you know, 330 company units domestically. And, you know, a lot of our markets that we're in are underpenetrated, and there's a lot of markets that we have yet to go into.
All of that equates to a really great growth story, and a lot of fun, and you know, we're really excited about 2025.
Great. And you also brought in a new COO. How has she been, you know, spending her time recently? We can certainly talk about some of the specific initiatives, but I guess just in general.
Yeah, Stephanie Sentell came to us from Inspire Brands. She actually worked for me while I was there, and she's come in. You know, Shake Shack for 20 years had amazing people that took it from, you know, hot dog stand in the park to 300 units and did a lot of great things to do that. There's still a huge amount of opportunity on the operations front for us to manage our shacks in a little bit of a optimized way, hold people, you know, accountable for delivering the KPIs and the metrics, and really drive productivity. And so we're bullish on our ability to get even more productive and continue to, you know, leverage our fixed costs and grow those margins. So she's really focused.
She spent almost all of her time in the shacks, you know, out in the field with the operators and, you know, is building, you know, the strategy and the structure and getting the right people and the right jobs to continue to leverage that.
Mm-hmm. Maybe just focusing on some of your, you know, your sales drivers. You've seen some improvement through this year. You noted that into early Q4. You know, we've seen, I think, generally worsening QSR trends generally. So talk about, you know, what’s been driving that. It seems part of it is regions that are not California or New York. So you talk about some new stores. I think, you know, maybe talk about awareness. What else do you think has been driving that?
You know, we're seeing growth in every region. You know, obviously, we've got higher penetration in California and New York, but we're growing really rapidly in the southeast and in the Sun Belt, but we're growing everywhere. You know, since I got here back in May, I think that the narrative has been this race to value is gonna really negatively impact Shake Shack, and we've actually seen our relative value scores improve this year relative to traditional QSRs, and that's really a function of us continuing to deliver the highest quality food. We have not compromised that despite, you know, the inflation over the last couple of years because this brand's been able to deliver, you know, pricing and been able to sustain momentum and top-line sales growth while protecting our margins.
So we don't need to go into the supply chain and make changes that are gonna compromise our long-term point of differentiation. So we're still delivering the highest quality food. We've got great innovation. Korean barbecue was on the menu when I got there. We had a summer barbecue platform, and now we've got truffle burgers. I mean, these are $25 burgers that we're selling for $10. And I think that holistic real value versus just pure price-pointed value is what has allowed us to continue to grow despite a challenging macro. And, you know, the other piece is we've gotten really good at doing surgical digital, you know, incentive marketing. So we are, you know, going out and delivering incentives through the digital channels to the customers and the guests that need incentives to come.
But we're not doing blanket incentives that are having margin implications across our business. So that's been, I think, over the last year, the team's gotten really good at that. That's gonna continue into 2025 as we continue in this kind of macro environment.
Mm-hmm.
I'd also just build on that point too about value, not just always equaling the lowest price, especially, you know, with premium ingredients and a differentiated offering. You know, Rob mentioned black truffle, and it's. You've been hugely successful. It's the most expensive that we've ever run black truffle at, and yet we're selling the most we ever have.
And to that point, it does seem like you have a bit of a different view of LTOs have been important to Shake Shack. It seems like you have a bit of a different view of how to do that. Could you just discuss what that is? And I mean, you know, what is the typical LTO uptake? Do you have customers that sort of, you know, only come for those sorts of things, and that's a very reliable customer for you?
I would say that because of, you know, some people might think we have a lot of things on our menu. Relative to the places where I've come from, it's a pretty streamlined menu. So we do have a higher mix on our LTOs. As Katie said, you know, truffle was actually even higher and doing really well, but you know, I cut my teeth and learned, you know, kind of the restaurant model at Taco Bell, and at Taco Bell, they're launching a new LTO every month, and every month they know exactly what the check contribution and the trans contribution's gonna be, from that LTO because they've modeled it, they've tested it, and they're ready, they are able to forecast it. You know, I took that model to Arby's and built an innovation pipeline that was grounded in that same model.
Not quite as rapid, and as many LTOs, but that same model where we started testing and really building a calendar that had building blocks, check, and trans, and we knew what they were gonna do. Shake Shack has never had any of that. Shake Shack, to their credit, has been all about, like, the culinary experience. And so they, you know, if the leadership really liked a burger or a sandwich or something like that, showed up on the LTO calendar, and it, you know, it was, "Hey, you know, whatever it sells, it sells." And there's, you know, there's challenges with that from a supply chain standpoint, from an operations standpoint.
We're trying to actually make the LTOs and the culinary schedule much more planful and much more strategic so we know, you know, what we should launch with, you know, that complement each other. So if we're doing a certain burger, we might have, you know, a different fry or a different side item or a different shake mixture so that we can maximize and optimize the relationship and drive the most comp sales possible. So that thinking and that model that, you know, just was kind of second nature at Taco Bell and Yum! Brands really hasn't existed at Shake Shack, and that's what we're bringing.
Yeah, makes sense. Do you think your channel mix is gonna be somewhat similar, or do you, I mean, have a desire to lean into any, you know, ordering channels specifically going forward?
Yeah, I mean, we launched. We now have kiosks in all of our shacks, and it's been an amazing contributor to our business. You know, I think when the brand originally launched them, they thought it would be like a big labor savings. It's not so much a labor savings, but it's definitely delivering a check benefit. It's definitely delivering a margin benefit because of the upselling that happens. But it's also impacting accuracy, right? I mean, you know, there's a lot of benefits that are coming from the kiosk, but we haven't yet maximized that, and right now, we're investing heavily in our guest recognition capability.
You know, long run, it'll lead to a loyalty program, but in the short run, it'll allow us to recognize a guest, whether they come in through our app, through the web, or kiosk, and be able to cater to their needs and their historic ordering preferences to be able to upsell them and offer them things that they may have not added to that particular order. I think the kiosk, which is now the largest channel for our business, is a great tool to allow us to do that.
In the mix component of same-store sales that gets reported to us, I mean, you have promotional impact, but then I guess you'd also have the check benefit from kiosk. I mean, do you see that moving back to neutral as we go forward or?
Yeah, I think we have, you know, mixed opportunity from the innovation pipeline that we're building. As we optimize how we launch LTOs and how they all complement each other, we'll be able to allow customers to self-select into more premium items, and that's gonna give us some mixed benefit. I think there's some mixed benefit, particularly from our side item innovation. Today, we have great high attach rate on french fries, but over the summer, we launched, you know, fried pickles, and everyone loved them, and so we have fryers. There's opportunities for us to, you know, innovate there. We have 'em and create even higher attachment rates, so I think some of our product innovation is gonna allow us to drive some mixed benefit.
But yeah, I mean, the more we can lean into our digital channels, the more we can get people to order through the kiosk, the more upselling we're gonna be able to do, and the, and the better we're gonna be able to drive mix.
Okay. That being said, right, I mean, you do make use of some promotions, whether it's for, you know, chicken or shakes. You know, what should we expect from that going forward? I mean, it's fair to say that the environment's still gonna be fairly value-oriented into next year. Do you see it sort of just a continuation of what you've done this year?
Yeah, I mean, our volume sold on promotion is still in the single digits. You know, that's a lot less relative than a lot of the peer group. So I think we've been able to be really surgical with our promotions, and that's allowed us, you know, despite this mixed impact, we're still seeing margin accretion.
Yeah.
And so that's our goal. Our goal is to drive trial and drive frequency, with our product innovation and our promotions, but do it in a way that continues to be margin accretive.
Okay, makes sense. And then.
You know, you mentioned the Chicken Sundays. Like, yeah, I mean, the Chicken Sundays is definitely, we're giving away a free chicken sandwich on Sunday, but that's a very strategic promotion in the sense that we have the best chicken sandwich in the business. I mean, we're hand-breading chicken on the line, back of house, and a lot of people don't even know we have a chicken sandwich. So creating, yeah, we may be taking some margin impact when we're giving away a free chicken sandwich, but the lifetime value of getting a larger population of prospective guests to try our chicken definitely exceeds the cost of doing that.
Yep.
I'll also just add on that too. You know, when we think about, you know, a buy one, get one or some kind of promotional strategy like that, I think in this moment, most consumers are looking for some kind of hook, some kind of reason to transact, and they're getting kind of accustomed to these messages out there in the industry. And what we're actually seeing is that the check size from these transactions is quite big. So it's not what you would expect that somebody's just coming in for a free chicken sandwich and, you know, walking. I mean, these are large orders. And, you know, to Rob's point, you know, building that awareness and that repeat guest, we're already starting to see, you know, those brand metrics, brand awareness metrics move.
Mm-hmm. Okay. Just on pricing, I mean, I think you said stepped down to about 4.5% in the first quarter, low single digit next year. I assume that's sort of still consistent at this point. And I guess just more broadly, I mean, how do you sort of benchmark, you know, price point, check size? Obviously you have a number of good competitors, and that may vary quite a bit by market. So how do you sort of think about the right, you know, absolute price point and price architecture in the category in which you're playing?
Yeah, I mean, the quality of our ingredients are always gonna warrant a premium price point. So, you know, there's not a day where I come in and say we have to be price competitive with McDonald's or Burger King. It's just different products. So, you know, we're always gonna have that premium, but the right amount of premium is very important, right? And the gap relative to a lot of those super value players has actually closed over the pandemic as they've taken more pricing. So, you know, we have kind of our benchmarks. We kind of have our targets on what we wanna sell our products relative to their products, but it's always gonna be at a premium.
You know, I think we have an opportunity to get more strategic in our pricing, not necessarily just on like burger versus burger, but on how we price our beverages and how we price our side items, the sizes that we offer. So there's a lot of opportunities within our menu to optimize our offerings and the price points of those offerings that we haven't yet taken advantage of.
Okay. Maybe let's talk about marketing a little bit, which you mentioned. What's been effective in 2024? Where are you gonna kind of focus in 2025 from a marketing standpoint? Should this be generally, you know, do you benchmark it against other QSR brands? Is that kind of the right level of marketing over time or?
I mean, I think that's an aspiration as, once again, as long as we're seeing the returns on that investment. 2024 marketing was mostly bottom of the funnel. I mean, as we discussed, a lot of, targeted surgical promotions to, to continue to drive that value perception and drive traffic in a, in a traffic challenged category. You know, as we move forward, we're gonna have to strike a better balance of, bottom and top of funnel. You know, we launched this Worth It campaign, tested it, I should say, in a couple markets in 2024. I think, you know, in New York City, there's obviously an awareness of Shake Shack and an awareness of the, you know, why Shake Shack is different and special with Danny Meyer and the, you know, Madison Square Park.
Like, that same level of awareness doesn't exist in, you know, Omaha, Nebraska, or Tucson, Arizona. And so I think there's a big opportunity for us to continue to invest in marketing and drive that premium differentiation story, in markets as we continue to expand across the country. So I think there will be a better balance moving forward as we continue to, we have to make sure that we're getting the returns. Obviously, as a company owned, we don't have franchisee marketing budgets to go out and spend. You know, we're making sure that we get a return on that investment every day.
Mm-hmm. And, you know, have you been able to see the extent to which that's brought, you know, new guests in? And I guess sort of like to ask the flip side of that, who do you think you're, you know, not reaching or what exactly is the awareness gap perhaps in some of those younger markets?
Yeah, you know, we don't have a huge brand awareness gap. We actually have relatively high brand awareness given our smaller footprint.
Yep.
It's really about driving conversion and then repeat. And, you know, I think once again, like continuing to tell our story and help people understand why our product is different, will drive a lot of that conversion, and people will recognize, "Hey, it is a little bit different. Yeah, there's a premium price point, but it's worth it." And that's the whole idea behind the Worth It campaign. And then, you know, from a repeat standpoint, that's why we're investing so heavily in guest recognition and loyalty so we can continue to bring customers back. But most of our, you know, most of our advertising right now is digital, and so we are able to track really closely kind of what the effectiveness is of that.
As we continue to scale that marketing investment and maybe move a little bit of that into terrestrial TV or what have you, that may evolve. But right now, we have a pretty good idea. And there really aren't a lot of segments that we're not reaching, but we obviously appeal more to kind of the higher income customer. And frankly, our footprint caters to that. You know, that's another piece that insulates us from kind of this value battle that's going on. Most of our shacks are at the corner of Main and Main in almost every market we compete in. Like, that's how we go in. We buy really impactful real estate. We don't have franchisees looking for like the cheapest pads out there. And so most of the customers that are going past our units have higher disposable income.
So we're less exposed to kind of that lower income segment that's really struggling right now.
Yeah, makes sense. What are the investments that you're kind of making in guest recognition this year? And I mean, it sounds like loyalty is coming. I don't know if you have a timeframe that you expect that or, or it's like, "Look, we'll kind of see how it goes.
Yeah, I mean, that capability is. Our plan is to build that out in 2025 and start to test it towards the end of 2025 and into 2026. Now, that being said, we're right now not planning on kind of like a traditional points-based pure discount play for loyalty.
Mm-hmm.
Like, you know, our roots are grounded in Enlightened Hospitality. So our goal is really to kind of surprise and delight our customers and create a relationship with them by offering them, you know, it's more about giving them early access to our culinary innovation and more about doing things that make Shake Shack special versus just kind of reducing the price.
Okay, makes sense. Let's talk about the margin side and operations, you know, as part of that. So, you know, this year, you'll see store margins expand likely over a hundred basis points. Throughput is certainly one of your focus. I mean, what, you know, what'll be most important in, I don't know what the momentum will be, you'll eventually guide us for next year, but what are at least the pieces that will drive that most significantly as you have, continuing what you've done this year?
Yeah, you know, it's in an industry that's named quick service. Shake Shack didn't measure service times up until about a year ago. There just was no focus on how fast we were delivering the food. I mean, part of it was a source of pride. Like, the longer the lines, the more people want our stuff, like the more special we are. And there's some truth in that. I mean, we come from fine dining. The key indicator of a great fine dining restaurant is you can't get a reservation, you know? So that's kind of the mindset. As we move outside of New York and we move into these other markets and we build drive-throughs and we build other formats, you know, people, the benefit of speed and accuracy becomes much more important.
Mm-hmm.
So we've focused on that a lot, and we have significantly reduced our time to serve over in 2024, really in the last six months. And Stephanie and her operators that are running our restaurants have done an amazing job driving that mantra. We still have a long way to go. We still have a big opportunity. In the short term, it's gonna be around process improvement, how we can do things faster while still delivering the same quality and customer service. Over the long term, it's gonna be about, you know, kitchen design. And, you know, right now, most of our shacks that have drive-throughs don't have the food ending up at the drive-through window. It ends up somewhere else, and someone has to walk it out there.
You know, we don't always have, you know, two beverage service areas, one at the drive-through and one to serve the dining room. So you have people walking from the dining window over to make a beverage and walk back. Like, those are just things that are kind of drive-through 101 in QSR that haven't existed at Shake Shack. So a lot of low-hanging fruit, a lot of upside opportunity there. You know, the biggest thing we can do in Manhattan and New York and the surrounding area is increase throughput because we have the longest lines here. We have the longest peak windows here. So you know, just getting people through the line will absolutely be a comp sales driver.
Right, well, I think you said it was lowest wait times in five years, and so was that, you know, really kind of training and staffing that's driven that so far largely? 'Cause it sounds like some of that is still ahead, right?
We don't know if it's the lowest wait time in five years 'cause we didn't measure it up until a year ago.
Oh, so you think it might be.
Yeah, I think, I think we're probably about at the lowest wait times ever. I mean, that's, you know, it's going all the way back to store number one in Madison Square Park. It was, I mean, our mission is to Stand For Something Good. And that's actually a play on people having to stand in line waiting for something good. So, you know, it's just a little bit of an evolution of kind of the mindset and how we approach the business moving forward.
Right. Can you tell us just about the labor scheduling tool that's been rolled out and, you know, how that sort of provides further benefits?
So I, I'll let Katie talk specifically to that 'cause she and her team kind of helped operations develop it. But what I would just macro say is that, you know, we are not going to cut labor to drive margin that negatively impacts the experience at our shacks. So, any labor optimization that we have will come from a process improvement or some form of, you know, new thinking that allows us to optimize our labor, versus just coming in and saying, "We're gonna cut hours that will risk the experience that we deliver." So I just wanna make sure we're all on the same page there.
Yeah, 100%. I'll just give you an overview of how labor was formally allocated per shack and the changes that we've made, which I think will reinforce Rob's view here. So before it was just based on sales bands. And you could have a restaurant that was a drive-through, big dining room, multiple points of order, and that had the same labor as a, you know, let's just say a food court with no dining room, and a very low labor mix of menu items, right? And so there was just an inherent inefficiency in that where, you know, the drive-through locations or the very big dining rooms were probably not getting enough labor to execute their sales. And at the same time, you know, we had mall locations or locations with different heuristics that were just getting way too many hours.
And so what this labor model did was looked and did a time and motion study, and really gave a bespoke staffing model based on menu mix. We have some menu items that are very labor intensive. As Rob said, we hand bread and fry all of our chicken to order. We make all of our custard in-house. We hand spin our shakes. That takes time, versus you know fries and maybe a cold beverage, which might require a little bit less labor. We also looked at the order mode.
So if it's a shack that has a heavy dine-in mix where, you know, we wanna have people greeting our guests and being in there and keeping the dining rooms nice and clean and running food to the table, that's gonna require different labor than if you have a shack that's largely delivery and to go, right? And so all of these things together created a more bespoke labor model, which is really aimed at helping our operators better staff locations and providing the best guest experience that we can. The output of that is less labor overall, but there are a number of shacks, especially in different peak times that are getting more labor as well to execute our, you know, with the best hospitality.
Makes sense. Okay. And I mean, you know, a lot of this I think is, we've obviously talked about kind of labor and processes, but I mean, maybe just talk generally about sort of, you know, occupancy, OpEx, sort of supply chain initiatives, other things that might kind of affect margins as we look forward. Either of you can provide comment.
I can go or you can go.
Sure.
Whatever. Okay. Yeah, so our supply chain team, we're constantly working on ways to get more efficient and leverage our scale. And so a big focus of ours next year as we open up 45 new shacks, on the company operated side is really building density in core markets and getting scale. That helps us from a sales driving initiative, brand awareness from, how we're able to hire and train up managers, but it also helps us from a supply chain perspective as well. We're expanding the number of suppliers we have. We're optimizing our freight, and that's kind of the work that we do every single day. You know, as Rob said, we're not gonna compromise the quality of the ingredients that we're using.
We're just, you know, starting to leverage our size, and be more efficient with how we're purchasing the ingredients for that we use. On the labor side, you know, continuing to refine on the hourly side with the hourly labor model that we put in place last quarter. That should be a tailwind for us next year. But then I can't really, you know, underemphasize all the work that Stephanie Sentell is doing within our shacks and really helping us to optimize our operations. It's a new muscle for us. And, you know, Rob can kind of go through the scorecard that she's created. It's just been a really great way to help direct our leadership, our top of restaurant leadership, to have best operator restaurants. And so those are kind of the two main things that I would focus on.
But really at the end of the day, it also comes down to how we're leveraging our marketing investments and our brand awareness to drive top of funnel, and drive sales and, you know, being mindful about how we're running our restaurants and really providing the best throughput possible.
Mm-hmm.
I'm gonna go through the scorecard.
I think you nailed it.
Okay.
scorecard.
Yeah, come on.
You know, in the past, you know, Shake Shack has been managed by, run by four different regional vice presidents, and each of those regional vice presidents essentially kind of did things the way that they thought best.
Mm-hmm.
I mean, that would include kind of regional menu items. That would include processes. That would include formats, and, you know, I think there's definitely some benefit that comes from localized knowledge, but there's definitely benefit that comes from scale.
Mm-hmm.
And so Stephanie has kind of come in and said, "Look, here are the things that matter: speed of service, you know, four-wall margins, cost of goods, labor attainment, these, you know, a scorecard of all these things," and said, "Everyone's gonna be held accountable to these things. Everyone knows, like, what we're measuring, how we're measuring it, and what, how everyone racks and stacks." That's been like, I mean, this is once again, this is kind of like restaurant management 101. It's just not the way we've done things in the past, but like, we rack and stack every shack. Well, that's.
Rack and stack the shack. There you go.
I didn't mean to do that, but I'm gonna use that. We rack and stack our shacks.
Rack and stack our shacks.
And so we know who's operating the best and who's operating the worst, and we know where we have to focus, and we know the people that are at the bottom know that they're at the bottom, which wasn't always the case. They're like, "Oh, I'm doing a pretty good job." So, that has driven a very high degree of accountability and is driving activity for people to drive improvement.
You know, at a very basic level, if you don't know that you're at the bottom, you don't know that you have opportunity for improvement. We don't have an ability to direct and train and coach. So it's not about making people feel bad about being at the bottom. It's about helping to develop our future leaders and our people and giving them the skills that they need to be successful.
Right. Okay. Maybe we'll talk about store development a little bit. So you obviously have said, you know, about 45 new Shacks next year, 35 to 40 licensed. You know, I don't know how many of those are. I think it's fewer new markets, but maybe if there are any, which are those? I don't know if you commented on the drive-through mix. What are some of the more recent, I guess, what are some of the stronger new markets? How has new unit performance been?
All of Rob's markets are our strong markets.
They are. So Rochester, where we opened, where I went to college this year, and Pittsburgh, where I grew up. And I mean.
You got the magic cut.
They are like the two best shacks we've opened this year. But it is. It's pure coincidence.
Just facts.
But, you know, our 2024 class has been exceptionally strong in terms of their performance out of the gate. I think our teams are getting much better at optimizing how we open shacks, you know, training people, getting the right management in place early. And even the shack designs, like, you know, the original drive-throughs, which we opened in like 2022, 2023, like we didn't know how to build a drive-through. And so you didn't have good throughput in the drive-through. And once people came in and they didn't have a good experience, and they didn't come back as frequently. And so I think we're a lot better at opening shacks. I think we're a lot better at designing shacks. I think we're a lot better at managing these new openings. And so they're performing and exceeding our expectations.
I think we can get even better, especially at the drive-throughs. As I mentioned, a lot of our drive-throughs don't even end at the drive-through window. That is changing with the drive-throughs we're building right now. So, I think it's only gonna continue to get better.
Yeah. What has sort of you have been delivering build cost reductions? I mean, what's actually changed? What more could change from just like a design and build perspective?
I mean, everything, you know. I mean, we've always gone and built these big flagship restaurants in every market, and we're still gonna do that. There's still a lot of opportunity and a lot of space for us to go in and open new markets with big flagships and even put more flagships into places that we already exist. But we also are working really hard to develop new formats that will open up access to a lot of different types of real estate. So, you know, those are gonna be smaller footprints. Those are gonna be different models where we may do more delivery that, you know, maybe more drive-throughs, smaller dining rooms. Like we're exploring all of that. And, you know, that's gonna have an impact on a lot of things, but it'll also have an impact on build costs.
If we don't have to build kind of Shangri-La and we can kind of still deliver a great, great, beautiful shack in a different footprint. The materials we use, where we source our equipment, we've kind of had one best way to do it forever. And some of us, including me, are challenging those kind of longstanding, you know, here's our equipment. Here's the people who make our equipment. Well, why can't we explore other potential equipment makers or vendors? Here are the people that make our ingredients. Why can't we explore new vendors for that? So we're really challenging kind of like how we've always done things. And I think there's a lot of opportunity for us to continue to decrease the cost.
Mm-hmm. Okay.
As Katie mentioned, like on a rate basis, we're one of the fastest growing brands out there. As we continue to scale, it's only gonna give us more leverage to decrease our costs even further and make us even more productive. You know, building more shacks is kind of my number one priority. Now, doing it the right way, but you know, getting more shacks open faster is only gonna help like every other component of our business model.
Mm-hmm. What was the driver of the closures? What was it? Did the trade area shift? Was it sort of like a competitively difficult area?
Yeah. I think it was a function of a lot of things, a bunch of things. You know, the reality is that there's just a mindset we were never gonna close a restaurant, and that's not how any other scaled restaurant company operates. On average, like an established, developed, scaled restaurant concept closes 2% of their system every year.
Mm-hmm.
because leases are expiring or some other, you know, franchisees have decided they don't wanna do it anymore. Like we'd never closed a Shake Shack in 20 years.
Mm-hmm.
So when I got here, you know, Katie and her team came and said, "Hey, here's a list of Shack restaurants that, you know, aren't necessarily making money." Some of the, you know, some of them are in bad trade areas. Some we've had crime issues at some of them. And so we went through all of them and, you know, this has probably been the question I've been asked more about in six months than any other question. And it's the least material thing on our P&L. But the reality is, is like we just went in and said, "Look, it's profit accretive to close these shacks.
It's, you know, we're spending incremental resources on marketing and operations to try to fix them when in fact they're in a situation that they're not gonna be fixed. So we just said, "Let's like give the water to the plants that are gonna grow, and, you know, put." And it's never easy to close a restaurant. You know, obviously you impact people's lives when you do that, both communities as well as the employees. But we did it in a way where every single manager in those shacks was offered another management job at an adjacent Shake Shack. And every team member and every employee had the opportunity to go and work at Shake Shack, a different Shake Shack. So, you know, we felt good that we were doing right by our employees and doing right by our P&L and our shareholders.
Something to add on there too is that these were not restaurants that were just run with poor operations, and that's what, in fact, in a lot of these locations, we had some really great talent there to help turn it around, and so one of the things I really, really liked about the way that we went about this whole process was the fact that we were offering these great manager opportunities at other shacks so that we could, as Rob said, kind of, you know, make sure that we're pruning the trees and letting the plants grow and flourish.
I mean, the good news is that we reviewed every single shack.
Yeah.
So of 330 shacks, we closed nine. That means 321 are doing pretty good.
Mm-hmm. Maybe in just the two minutes we have left, talk about licensing real quickly. I'm sure we can't cover all of it, but so 30 to 40 next year. I mean, are some regions on pause here given the conditions? So maybe, you know, where are those focused? Do you sort of aspire to grow faster there? And do you think that's sort of, you know, an untapped? It's certainly not untapped, but is it a little bit underappreciated for your?
Yeah. So I just spent eight days in Asia. I went and visited Korea, China, Hong Kong, Japan. And some of those markets are gonna accelerate and some of those markets are, you know, slowing down a bit. And some of that's macro and some of that is our situation. You know, we've been a little bit, let's say, you know, structured in how we've allowed our licensed partners to operate and how we've allowed them to source different equipment and materials, the kind of shacks we've allowed them to build. And my challenge to our licensing team is that we need to approach this part of our business the same way we're approaching our company operations. Like we need to explore new formats. We need to look at new suppliers and vendors.
We need to look at new operating models and labor scheduling and all those types of things. We need to look at the innovation. We need to allow for maybe a little bit more local flavor localization and allow some of these folks to do things that are a little bit different than how we do them in the States, and that really hasn't been the model in the past, so we're gonna open up and get rid of some of these guardrails and let these guys do what they do in their markets, but there are, you know, so that's gonna improve. That's gonna help. We're also looking at like reducing the cost of their buildouts and all those types of things, so that's gonna help accelerate growth, but that's gonna take a little bit of time.
We are seeing strength in a lot of markets. You know, the Middle East obviously was a challenge for everybody in 2024. We're seeing the Middle East, you know, get stronger and improve. China, I was just there. I was in China and Hong Kong for four or five days. You know, China, I think is a challenge from a macro standpoint, but we're actually performing really well, and so I think that, you know, we're gonna continue to grow in every one of those markets I just mentioned. And, you know, we're bullish on the future. I should say, 2025 will be a bit of an optimization of the model to propel us in for the next 10 years.
Yeah. Okay. I'll leave it there. Rob and Katie, thanks.
Thank you.
Thanks for joining us.
Thank you very much.
Thanks.