Almost any business executive will tell you that growth is good. A company that is standing still is on the way out, or, at the very least, losing ground to competitors.
But growth without the proper foundation is a recipe for failure.
Take Steak n Shake Co. for example.
In the mid-1990s, Steak n Shake opened 30 to 40 new restaurants every year. But trouble was brewing beneath the seeming success.
“The (previous management) had not put the infrastructure in place to support expansion, and as a result of that, the expansion was not profitable and the base business was starting to have issues,” says Peter M. Dunn, president and CEO of the company. “They cut back to less than 10 stores a year. When they did that, the stock price dropped from $20 to $7 in about a quarter.”
The infrastructure had too few people in critical areas such human resources, real estate and legal. And perhaps most critical was that the company had no way to provide those new restaurants with trained managers.
Dunn has spent the past three years devising a strategic plan that will allow Steak n Shake to aggressively grow the number of stores in its designated marketing areas, develop strong, sustained earnings growth and, most important, deliver on its desire to become the absolute best at one thing — creating delighted and loyal guests.
To accomplish that goal, Dunn revitalized the way the company prepares future managers, changed how and where it opens new stores and instituted a series of process improvements.
Improving management
Each Steak n Shake restaurant the company opens requires new managers and assistant managers. But its previous approach to growing managers was ill-conceived and even detrimental to patron loyalty.
“In the past, we would go to our managers and say, ‘We’re gearing up for expansion, and we’d like you to develop new parts of management (shift leaders, extra managers) in your restaurant to prepare for expansion,’” Dunn says. “They’d say, ‘Great, we’d be glad to do that.’ They’d hire the extra managers and put them on their staff.”
At the end of the year, the stores that had taken on the training of new managers had those trainees’ salaries and expenses counted against their store revenue, costing them bonuses.
“It didn’t take them very long to figure out that that wasn’t something they necessarily wanted to do,” says Dunn. “So we ended up not having extra parts of management.”
But stores continued to open, leaving Steak n Shake executives two options — install poorly trained or inexperienced management or rip quality managers from existing sites and leaving those depleted.
“Either one is a disaster,” Dunn says. “It caused enormous pain.”
Unhappy managers create unhappy associates, and unhappy associates provide a disappointing customer experience. In 2002, Steak n Shake experienced 220 percent turnover, which meant, on average, that for every position, 3.2 people had been in it in a the past 12 months. Manager turnover was also poor, at nearly 50 percent.
Dunn’s solution, implemented beginning in 2004, put the financial onus for training on the corporation. Steak n Shake’s corporate office would now front the cost of training managers in the restaurants.
“We are now hiring, six to 12 months in advance, new leaders for restaurants, putting them in place and getting them fully trained at the company’s expense, not the stores’ expense,” Dunn says. “The store is fully staffed; they get a free part of management, a free manager to be developed in their restaurant, as long as they’re willing to give one up for expansion.
“We did that knowing it was a new $3 million annual fixed expense,” he says. “In the first year, between $1 million and $1.5 million was the manager part. There was another $1 million of technology, real estate, (human resources) and all the other things that go with that. If you’re going to hire more managers, then you need more HR people to find more managers and more legal people to negotiate deals on more restaurants and all the things that go with expansion.”
That cost will continue to increase as the company expands. In 2005, it was about $4 million, and the amount will vary in direct proportion to the number of restaurants opened. The new strategy has had a positive effect on employee retention — associate turnover has dropped to 135 percent, and manager turnover is down to 26 percent.
“We need to continue to increase all of the resources associated with expansion at the rate we can do so successfully,” Dunn says. “So, for example, each year, we set a higher number for our expansion goals. We need more real estate people and more HR people and more managers. The benefit of that added expense will take a few years to be realized.
“The way in which we described it, in the last analyst call, is that there is a new level of cost in the infrastructure and that in the first couple of years, it costs you significantly more than the benefit that you get,” Dunn says. “Around 2007, it breaks even. And some time beyond 2007, it actually pays back very handsomely.”
Structured growth
While Steak n Shake is growing new managers, it is also reigniting the growth engine so those people will have a place to go. The company opened 19 stores in 2005 and plans to open at least 26 this year.
The brunt of that growth will come in what Dunn refers to as designated marketing areas, which is basically encompasses television markets.
“We are clear that a designated marketing area is probably our key economic engine,” says Dunn.
He cites author and teacher Jim Collins’ book, “Good to Great.”
“(Collins) talks about being clear about what your economic engines are — where is the money really made. For us, it’s obviously the restaurants to some extent; it’s obviously franchisees to some extent. In some ways, the most important economic unit is actually the designated marketing unit.”
The DMA’s importance ties into television advertising.
“If you have a high concentration of stores in a television market, then the cost of advertising per store is less,” Dunn says. “You actually spend more on television. People see more of your commercials. It costs less per store, and lastly, you have restaurants closer by so when they’ve seen the advertising, there is one to go to. That’s a synergistic equation. We know it works very well. We know, for example, our highest return on asset markets are those where we happen to have the highest level of concentration.”
Growth in the mid-1990s was aggressive but not focused in the DMAs.
“In the past, we opened multiple new markets without achieving an up-penetration in each market that we opened,” Dunn says. “The restaurants did not get the benefit of television and therefore, ultimately, were subject to slower same-store sales trends and even erosion over time because people didn’t understand what the concept was. One of things you have to do, you have to focus your expansion in order to be successful and have a clear plan for each DMA.”
When Steak n Shake advertises in a DMA, sales increase, on average, 15 percent, Dunn says, and they remain strong after that.
“Our expansion plan for the next five years is focused mostly on deepening the penetration of our current television markets,” he says.
The DMA is key, but so is finding the right site — something that’s more of a focus now that the corporate infrastructure has been expanded to handle the demands of expansion.
‘The second thing you need to do is have high-quality real estate,” Dunn says. “You have to have enough real estate people, enough sophistication in real estate site selection tools and other processes in place to ensure, when you pick a site, it’s going to be a good one.”
Process improvement
Dunn’s strategy also involves improving the processes to squeeze as much profit as possible from each of its 400-plus restaurants. In other words, happy guests are more willing to come back, and they more easily part with their money.
“We have both labor and margin improvement measures,” Dunn says. “And with margin expansion, we obviously have successful store growth and return on assets.”
Those margin improvements will come with increasing customer satisfaction. Steak n Shake completes a minimum of 50 guest satisfaction surveys per store per month and uses that information to make changes in the way it serves guests.
“We know, for example, in the dining room, the quality of the greeting is a very important component of things that drives overall satisfaction — that first impression when you walk in the door,” Dunn says. “We’ve actually changed our practice. We took the menus off the tables and put them up front so that a greeter meets people at the door. As a result of our greeting, scores have gone up substantially.”
The company’s overall satisfaction scores have gone up, as well. The percentage of guests who gave the company a five on a five-point scale rose from 53 percent to 61 percent in the second half of last year.
The company also surveys employees.
“We know that the first 30 days’ experience of an associate is very important,” Dunn says. “There are a number of things about the interview process and the first week of employment. By keeping a very close eye on them and providing them with support and management interaction, we know that increases their loyalty.”
Finally, the company is working to improve the product pipeline.
“We have added significantly in that, but it does take awhile to build a new product pipeline,” Dunn says. “The intent, over time, is that it will be consistently strong.
“You need to develop a series of new products involving consumer research, product development, test marketing. All those things typically take nine to 12 months for any new product, minimum.
The company’s goal is to have three or four significant product introductions each year.
“If you want to have several ideas competing, then you need several ideas being developed at the same time,” says Dunn. “Each requires teams and production equipment, training materials and all the things that go with it. It takes a little while to build up the infrastructure to support multiple new product initiatives.”
The result
Over time, Dunn has stated the goal of the company is to create strong, sustained earnings growth. But it was only recently that he was willing to clarify exactly what that meant.
“The good news is, after having avoided that question for a long time, as a result of finishing our strategic plan, we have indicated within our five-year strategic plan that it is our aspiration to deliver strong, sustainable earnings growth approaching 15 percent,” Dunn says. “It is our intent, within that five-year window, to achieve that rate.
“We’re putting in the building blocks to have significantly higher odds of achieving those kinds of numbers. Without putting those building blocks in place, we wouldn’t be able to do that.”
Last year, the company posted $30.2 million in net earnings on $606.9 million in revenue.
Dunn’s target for 15 percent growth breaks down as follows.
“The primary contributor is first having a healthy core franchise,” Dunn says. “That means that you are able to achieve a respectable same-store sales growth rate because your guests are delighted and they come back more often, (you have the right) product mix and some of those kinds of things. There’s a 2 (percent) to 3 percent same store sales number that you can achieve.”
New restaurants will add 7 percent to 10 percent, and margin expansion will add another 2 percent to 3 percent.
“As you gain economies of scale through both expansion and same-store sales growth and become a little more efficient, you ought to be able to find two to three more margin points there as well — buying commodities, sharing the fixed costs of the corporate overhead — some of those kinds of things,” says Dunn.
And while 15 percent is the ultimate goal, Dunn expects to achieve 7 percent or 8 percent earnings growth this year.
“One of the reasons the earnings growth are 7 (percent) or 8 percent is we’re actually putting more back into the infrastructure and we’re not getting those economies of scale (now) because we’re setting ourselves up for the future,” he says.
So far, investors agree with Dunn’s plan — after hitting a high of nearly $22 a share last summer, Steak n Shake’s stock price has been hovering in the $18 range.
The future as Dunn sees it will have the company achieve its goal of becoming world class at what he calls the defining moment.
“The driving force of our strategic plan is based on the idea that if you’re going to become world class, you become world class at one thing,” Dunn says. “It can’t be 100 things or even three things. When you pick the thing you’re going to be best in the world at, you need to pick the right thing, the thing that will make the most impact on your business, allow you to succeed and differentiate yourself from your competition.
“And what we have chosen as our driving force is what we call the defining moment — having inspired, loyal associates creating delighted and loyal guests. We have said that, over time, we will become the best in the world at providing that experience.”
HOW TO REACH: Steak n Shake Co., (317) 633-4100 or www.steaknshake.com
