The Real Reason Steak 'N Shake Is Struggling To Stay Open

It's no secret that the culinary landscape of America is changing, and that change is bringing along more than a few difficulties for longtime staples in the restaurant industry. We're seeing chains that used to be incredibly popular — restaurants like Chili's, The Cheesecake Factory, and Applebee's — closing doors across the country. They're not the only ones having difficulties, and also on the list? Steak 'n Shake.

Steak 'n Shake — and their famous Steakburgers — have been around for a long, long time — since 1934, to be precise. According to Restaurant News, the business was originally going to be a gas station that served beer and chicken, but that had been done before. Instead, founder Gus Belt decided to treat customers to something they hadn't already seen, and he promoted it by grinding steaks into burgers right in front of his guests. Their growth was fairly slow compared to other chains, but they still expanded into hundreds of locations. Unfortunately, those Steak 'n Shake restaurants — in spite of their solid and enthusiastic fan base — are struggling. Why? It's more complicated than you'd think.

How bad is it? In May 2019, Steak 'n Shake announced they had closed 44 restaurants "temporarily," according to QSR Magazine. At the time of the announcement, there were 367 corporate locations and 213 franchise stores in operations. Understandably, those numbers were down quite a bit from the previous year, when they had 415 corporate-run locations and 201 franchise stores.

Even more telling are the other numbers. Customer traffic fell 7.7 percent in the first quarter of 2019, and same-store sales fell 5.1 percent over the course of 2018. That followed two previous years of sales losses, and that's not good for anyone involved. All in all, 2018 ended with a $10.7 million loss, according to IBJ, and in the first quarter of 2019, they had a loss of a whopping $18.9 million.

Steak 'n Shake is part of Biglari Holdings, and when Sardar Biglari addressed the shareholders in their annual April meeting, he made it very, very clear that a turnaround was going to take time. Does Steak 'n Shake have that kind of time? It's hard to tell, but no business can sustain those kind of losses and that kind of downward momentum for long.

Strange things are afoot at the Steak 'n Shake. When QSR Magazine announced they had closed the doors on 44 locations, they also noted that the company said the closures were only temporary, and would only last "until such time that a franchise partner is identified."

And it gets stranger. The previous August, the company had announced they were going to be selling off some of their corporate-run locations for a shockingly low price: just a $10,000 initial franchise fee. (Compare that to the initial franchise fee of a Taco Bell, which is $45,000.)

Head honcho Sardar Biglari announced he was making the shift for almost philanthropic reasons: "I want to provide an opportunity to other entrepreneurs who are highly motivated to excel but lack the financial means." Those entrepreneurs would have to complete a six-month training program, and would get 50 percent of their restaurant's profits, which doesn't sound like a bad deal. A month later, they announced the response had been "amazing," but that it would be a while before any location made it into franchisee hands.

But by May 2019, IBJ reported that they had only signed four of these new franchisees, making it look likely that the majority of the locations are going to remain closed for some time.

There's a lot going on behind the scenes of Steak 'n Shake, and there's no doubt that only a small portion of the drama has gone public. But according to Fortune, there's one person in the heart of it all: Sardar Biglari, the CEO of Steak 'n Shake owner Biglari Holdings.

It's all very complicated, but it boils down to this: in 2015, a Minneapolis investor group made a push to grab control of Biglari Holdings and, in turn, Steak 'n Shake. It was incredibly messy, too, with accusations flying from both sides. According to the IndyStar, the investor group was led by Nick Swenson, and Biglari Holdings was quick to play up his connection to a man who was convicted of running a Ponzi scheme in 2010. Swenson, on the other hand, condemned Biglari as being overpaid and using his position to hire his family members into positions that — Biglari Holdings stresses — they're paid "less than $120,000 a year" for doing.

Weirdly, it's not the first time Steak 'n Shake has had such a, well, shake-up. Biglari himself took over in 2008 and kicked prior management to the curb. While Biglari Holdings lauded what they saw as "one of the great brand turnarounds in the history of the restaurant industry," all their numbers continue to slide in the present day. Biglari remained in control in spite of the unrest.

In 2015, Biglari Holdings was perhaps unsurprisingly singing the praises of Sardar Biglari, saying he was responsible for the re-elevation of Steak 'n Shake into something sublime (via Fortune). But just a few years later, Biglari was apologizing and saying just where they had gone wrong.

And here's the thing — he originally did right by them. According to QSR Magazine, when he took over in 2008, they were losing around $100,000 a day. After a year, he had turned things around so the chain was making $100,000 a day, and that's wildly impressive. But the downward slide kicked in again after several years of heading in the right direction. Why?

Because, Biglari wrote, "We failed customers by not being fast and friendly."

Essentially, Steak 'n Shake banked on being able to make money by selling a high number of items at a low price. But they didn't put updated equipment and processesin place to keep up with the market or the demand, and what they ended up with was putting out a product that was slow, high-cost, and massively labor-intensive. Not only does that mean each steakburger ended up costing them more to produce than it should have, but it also means that customers aren't likely to come back when they know they've got to plan on waiting, hanging around, and waiting some more for that burger. As of February 2019, Biglari says they were in the process of increasing efficiency and speed.

Owning a franchise over an independent restaurant has advantages and disadvantages, and in 2018, Steak 'n Shake franchisees sued corporate over what they saw as a huge problem.

According to Restaurant Business, a nine-location franchisee in Virginia filed a lawsuit after corporate refused to let them raise their prices. While Steak 'n Shake CFO of franchise operations Tom Murray said that not raising prices was an important part of keeping the brand uniform, the Virginia franchisee said they were being forced to sustain "substantial financial losses" because of the locked-in prices and overcharges from vendors.

More than that, they also alleged that corporate declined to provide the agreed-upon support services, like fixing errors on menus and the website, and not notifying franchisees of customer complaints. They also claimed they were charged with random fees without any explanation of what they were paying for, and worst of all, it's not the first time franchisees have gone head-to-head with corporate over pricing.

While 2019 might be your year, it's definitely not Steak 'n Shake's year. It is, however, the year that they were hit with a massive $7.7 million judgement after being taken to court by a group of their managers.

The 286 managers claimed that Steak 'n Shake had unlawfully labeled them as exempt from receiving overtime pay, and regularly demanded they work 50+ hour work weeks. Part of that work, the suit claimed, was non-managerial work that someone needed to do because the restaurants were understaffed. According to Restaurant Business, that lawsuit covers mainly the area of St. Louis — which was, incidentally, the same area where those 44 locations were closed pending transfer to franchisee hands.

It gets worse for them, too. That was just one class action lawsuit over unpaid overtime, and there's a similar lawsuit that covers more than 1,000 managers working in other parts of the country, and that one is still waiting to be settled. 

In early 2019, Sardar Biglari was warning his shareholders that turning Steak 'n Shake's fortunes around was going to take time (via IBJ).

But time is one thing that Steak 'n Shake doesn't have... along with a way to pay off the massive loan that's coming due in March 2021. It's no small loan, either — it's for $184 million.

Let's put that in perspective. At the time Biglari was trying to unruffle investor feathers, the entire company was only worth $211 million. And some of the lenders who have a very, very real stake in the firm (pun not intended) have gone as far as hiring legal counsel to find out what their options are if things continue to head deeper into their downward spiral.

There is — sort of — the potential for a way out. In theory, Biglari Holdings could guarantee they would cover Steak 'n Shake's debts if the whole thing goes sideways, but Biglari has refused — even though they would be paying a much lower interest rate on those debts.

In 2019, Sardar Biglari told investors that in spite of all the difficulties, he had a plan to fix the company. Unfortunately, it was not a plan that inspired confidence.

According to CBS News, part of the plan was cutting costs. Legit, sure, but Biglari wanted to cut costs — around $1 million a year, he claimed — by getting rid of the cherries that have been on the top of Steak 'n Shake's trademark milkshakes for more than eight decades. How well is that going to go over with longtime fans?

There's more to the plans, too, says IBJ. In addition to saving money by removing the cherries, Biglari offered up plans to reinvent (and patent) the milkshake-making process. The theory was that it was going to help them speed up their service, which was one of the big things they identified as a problem with the company. But when Biglari added that it was going to cost $40 million to update their equipment and put the plan into action, investors were doubtful.

Quick, take a guess: who's one of the highest-paid CEOs around? If you guessed it's Sardar Biglari, you're absolutely right.

And here's the thing. According to Nation's Restaurant News, Biglari technically earns "just" $900,000 as CEO of Steak 'n Shake parent company Biglari Holdings. But, Biglari Holdings also pays a massive amount of incentives to Biglari Capital, and if you guessed Sardar Biglari is the only owner of that company, you'd be right again. When all is said and done, Biglari took home $32.5 million in 2016 — more than the CEOs of Chipotle and McDonald's make... combined.

It's incredibly complicated, and Steak 'n Shake isn't the only restaurant in the mix here — he's also making money off his investments in Cracker Barrel.

And it gets stranger. Even as Steak 'n Shake hemorrhaged money, Restaurant Business reported that in March 2019, Biglari Holdings removed the cap on the pay package its CEO — ie. Sardar Biglari —  can receive. Previously, the CEO pay package was capped at $10 million, but no more. The pay cap removal came after a series of changes that put Biglari himself firmly in control of the firm's holdings, and he also owns enough stock that he has controlling voting rights, too. What's going on? You'd probably need a PhD in business to figure it all out.

People are becoming more and more aware of where their food comes from, and even the most die-hard carnivores are beginning to admit animal welfare and ethically raised meat is hugely important. The trend to press chain restaurants into sourcing their meat and other animal products from responsible, humane farms really started in 2007 with Burger King, Carl's Jr., and Hardee's changing their policies (via QSR Magazine), and many others were quick to follow. Some have lagged behind the times, though, and it hasn't sat well with consumers.

Steak 'n Shake has been one of those lagging behind, and they've been called out for it. In 2016, Cruelty Free Investing reported that they still had no plans to even begin the switch to cage free eggs. A year later, nothing had changed.

It's a big deal, too, for investors as well as customers. In 2017, Folio Institutional issued a press release on their partnership with the Humane Society. The goal was to create a list of corporations that were sorely lacking in their commitment to animal welfare standards, in order to better guide investors who wanted to steer clear of companies that hadn't bothered to update their policies regarding the treatment of farm animals. Topping the list was Biglari Holdings and Steak 'n Shake.  

Sure, everyone loves a milkshake once in a while, but that's the thing — it's usually just once in a while. There's a ton of health-conscious consumers out there, and even if you're not looking for an ultra-healthy, super-delicious meal that's still affordable, it's safe to say you're also not looking for a heart attack on a plate. And if you hit Steak 'n Shake, well, there aren't that many options there that aren't horrible for you.

They've gotten some attention for their horribly unhealthy meals, too, named in the Center for Science in the Public Interest's Xtreme Eating Awards. In 2015, their completely unnecessary 7x7 Steakburger 'n Fries (that's seven steakburgers and seven slices of cheese, for anyone who's unfamiliar) and Chocolate Fudge Brownie milkshake made it onto the list, coming in at a whopping 2,530 calories and 68 grams of saturated fat combined. That's enough to make your arteries start to clog just thinking about it.

And when SFGate looked at what you had to choose from when it came to healthy options there, there wasn't a heck of a lot. They recommended just the mini Steakburger Shooter (yes, just one of the mini burgers), and noted that even the healthier-sounding turkey club came with your entire day's worth of sodium. That's unfortunate, because in the 21st century restaurants just need to have decently healthy choices to keep all their customers happy and coming back through those doors.

Is this the end for Steak 'n Shake? It's impossible to tell, but it is worth mentioning that the chain has recovered from the brink before. Sardar Biglari turned it around in 2008, and a complete overhaul of the business model helped keep it relevant before they headed into this downward spiral they're now caught in.

As of 2019, Steak 'n Shake is looking at a shakeup that QSR Magazine says will take a minimum of three years to complete. They need to be faster, and they've overhauled before. For the first 78 years Steak 'n Shake was around, they were only sit-down restaurants. The quick service format is something that's still pretty new, and it opened up a whole host of new possibilities for them, not the least of which involves catering to a younger university crowd. 

Unfortunately, it also opened up a huge number of problems, and that's what they're going to need to rectify, especially now that a large portion of franchise units are counter service only. That's a far cry from what they used to be, and while that isn't necessarily a bad thing, they still have a long way to go to streamline their processes from start to finish. Can they keep up with the demands of their customers? Only time will tell.