BUSINESS

Beloved New York eatery Shake Shack is coming to Southern California, but will it survive?

Beloved New York eatery Shake Shack is planting its buns on the West Coast for the first time, opening Tuesday on a busy block in West Hollywood.

But in picking Southern California for its westward expansion, Shake Shack may be facing its biggest challenge yet: whether a Big Apple burger joint can survive in the birthplace of America's burger culture.

This is the place, after all, where McDonald's opened its first restaurant. The Southland is the locus of the cult of In-N-Out. Many gourmet burger purveyors — the Habit, the Counter and Umami Burger, among them — earned their greasy stripes here.

The outcome could have a huge effect on Shake Shack, which went public last year. Its stock price fell this week after the company issued a 2016 growth forecast that disappointed Wall Street, even though fourth-quarter sales and profit beat expectations. After hitting a high of $92.86 in May, it closed at $34.58 on Friday.

"Los Angeles is one of the biggest tests for them," said Aaron Allen, a restaurant consultant. There's "a desire to disprove the notion that they won't work outside of New York."

Shake Shack is expanding at a time when so-called better burger brands have generated excitement in an otherwise lackluster sector.

The $76-billion burger industry has been stagnant in recent years as giants such as McDonald's Corp. have struggled with falling sales. Over the last five years, traffic dropped 3% for hamburger chains overall, according to NPD Group.

Diners increasingly are looking for healthier fare, flocking to chains such as Chipotle and Sweetgreen that tout their fresh ingredients.

Consumers now have more options: prepared meals at supermarkets, delivery services for high-quality local restaurants, and ingredient-shipping companies, including Blue Apron and Plated, that reduce prep time for home cooking.

In this competitive eating contest, better burger chains are growing. This niche sector, known for using higher-quality ingredients than typical fast-food spots, is expected to expand to sales of $5 billion in 2018, up from $3 billion in 2013, Allen said.

Shake Shack was among the fastest-growing chains in 2014, with domestic sales jumping 42%, according to food research firm Technomic Inc. Shake Shack trailed only three rivals, including the Habit Burger Grill of Irvine.

Danny Meyer, who founded Shake Shack in 2004, said he wanted to get some expansion experience before attempting to come west. Before braving L.A.'s spotlight, Shake Shack expanded to cities including Miami, Chicago and Washington, as well as Tokyo, Moscow and London.

"L.A. is the Broadway for burgers," Meyer said. "You want to have plenty of opportunities to play off Broadway" before opening on the big stage.

Shake Shack hired an architect from Austin, Texas, to design the West Hollywood spot, which fronts busy Santa Monica Boulevard.

The exterior mixes large expanses of glass with wood and features a patio where diners can sit at picnic tables surrounded by succulents in planters. Inside are park benches and a splash of black and white tile.

"It's the modern version of the old-school burger stand," said Randy Garutti, Shake Shack's chief executive.

A second spot in Glendale is coming later this year, and a downtown L.A. outpost is slated for 2017.

The seed for Shake Shack was a 2001 art installation in Madison Square Park, when an artist wanted a working hot dog stand as part of his piece. Meyer, who owned the nearby restaurant Eleven Madison Park, offered to supply the servers and cook the food.

The cart proved so popular that it was brought back the next two years, even pulling in a profit of $7,500 in 2003. That was when Meyer decided to turn the cart into something permanent. The next year, Shake Shack officially opened in the park.

Meyer's previous experience had been with upscale eateries such as Gramercy Tavern and Union Square Cafe. He said Shake Shack's start in haute cuisine sets it apart from the competition.

"There weren't too many hot dog carts in New York City cooking hot dogs in beef bullion, and Rice Krispies treats made with homemade marshmallow," he said.

The management team's fine dining background can be seen in Shake Shack's emphasis on quality ingredients, such as the use of Angus beef that is free of hormones and antibiotics, Garutti said.

The chain often partners with well-known local food purveyors to bring a neighborhood feel to the menu.

The West Hollywood spot, for example, is using jam from Sqirl, brownies from the Larder Baking Co. and chocolate from Compartes in its frozen custards, which are called "concretes." The Roadside Double burger, a double cheeseburger with mustard and onions simmered in bacon and beer, is a hat tip to the French dip sandwich pioneered in Los Angeles.

That kind of localization will help Shake Shack maintain its buzz as it expands from 88 domestic eateries to a target of 450 in the U.S., analysts said.

"They want to emphasize that they are not just a chain by adding these local flavors and ingredients," said Lauren Hallow, concepts analyst at Technomic.

But some analysts say the company may not live up to all its hype — at least for Wall Street.

Allen, the restaurant consultant, said Shake Shack benefited from often laudatory media coverage. Many investors who bought into the excitement of its public offering, which exploded from the initial price of $21 a share, have realized that the stock may be overpriced.

"The fundamentals of the stock versus the fame of the stock has created a gap," said Allen, who thinks many investors are young consumers who like Shake Shack's food.

Garutti said the chain is focused on the long term, instead of "managing to the quarter."

Investor pressure is inevitable for a public company, and some analysts said Shake Shack has already catered to that by boosting its expansion plans from 10 to 14 new U.S. locations a year. More than a quarter of its restaurants were added since the beginning of 2015.

Then there's the limited menu, which Shake Shack recently expanded by adding a chicken sandwich called the Chick'n Shack.

"A lot of chains fall into the habit of launching more and more menu items," Allen said. "It works in the short term, but long term it deteriorates" speed, economies of scale and quality.

Industry watchers say Garutti and Mayer are skilled operators, and the chain should hit 450 locations domestically. That will in turn bring different challenges, including expanding the cult-like status it won in New York and fighting for diners with other better burger chains.

"The overall market is not growing, so the growth they are getting is coming from stealing visits from somewhere else," said Bonnie Riggs, restaurant industry analyst at NPD. "Not every chain is going to do well."

Local burger flippers say they aren't worried about the new kid in town.

Adam Fleischman, founder of Umami Burger, said Los Angeles is "the pickiest city" when it comes to burgers. He doesn't think Angelenos will greet Shake Shack with the same enthusiasm as in New York.

"We are a much more mature burger culture," he said. "The burger culture on the East Coast is 10 years old at most."

He said Shake Shack will face the most intense rivalry from In-N-Out, which has a similar "roadside nostalgia burger" vibe but hasn't undertaken the same massive and costly expansion.

Shake Shack's burgers are priced higher than those at In-N-Out, with a double ShackBurger at $8.09 compared with an In-N-Out Double-Double at $3.40, although prices vary by location. Umami's two-patty Throwback burger costs about $8.

Julie Charvat, chief marketing officer at Culver City-based chain the Counter, said Shake Shack will add to the already abundant choices in the Southland.

But Charvat added that the Counter probably caters to "a more discerning customer," one that likes the build-it-yourself aspect.

For now, Meyer and Garutti have struck a humble tone about the westward expansion. Both said they know Shake Shack will be one option among many in the Southland.

Meyer, who is a fan of In-N-Out and the Apple Pan, said diners like to try all kinds of burgers.

"I don't know too many burger lovers that say 'I am going to forswear all other burgers for the rest of my life,'" he quipped. Shake Shack will succeed, he said, when it is "added to your rotation as you eat around."

shan.li@latimes.com

Twitter: @ByShanLi

Copyright © 2016, Los Angeles Times
A version of this article appeared in print on March 13, 2016, in the Business section of the Los Angeles Times with the headline "Shaking up the burger scene - Shake Shack, a beloved New York chain, expands into the Southland - birthplace of America's hamburger culture" — Today's paperToday's paper | Subscribe
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