How Shake Shack Balanced Digitalization with Its Hospitality Ethos

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0:21Brian Kenny:Welcome to HBR on Leadership. I'm HBR Executive Editor, Alison Beard. On this show, we share case studies and conversations with the world's top business and management experts, hand-selected to help you unlock the best in those around you. We carefully curate this feed from across the HBR portfolio, aiming to help you unlock your next level of leadership. I hope you enjoy the episode.

0:47Steph So:Welcome to Cold Call, the podcast where we discuss real-world business challenges through the lens of Harvard Business School case studies. How long would you stand in line for a hot dog? Well, in 2001, you might have been among the thousands of people who waited an hour or more to experience the phenomenon that began as a humble hot dog cart in Madison Square Park and evolved into a digitally savvy, globally scaled brand, Shake Shack. At the heart of this transformation is a powerful question. How can a company known for hospitality embrace digital innovation without losing its soul? The case takes us inside the company's journey as it grapples with digital tools like self-service kiosks, mobile ordering, and AI, all while navigating labor changes, personalization, and preserving its signature guest experience.

1:33Steph So:We'll talk about how Shake Shack is redefining fast, casual dining in the digital age, what works, what doesn't, and what other brands might learn from its second-most strategy. Today on Cold Call, we welcome Professor Christopher Stanton and case protagonist Stephanie So to discuss the case, Shake Shack's Playbook for the Digital Era. I'm your host, Brian Kenney, and you're listening to Cold Call on the HPR Podcast Network. Chris Stanton's research features personal economics, organizational economics, labor markets, and entrepreneurship. Stephanie So is chief growth officer of Shake Shack, and she is one of the protagonists in today's case.

2:10Steph So:She's also a graduate of Harvard Business School. Welcome, both of you, to Cold Call. Thanks so much for having us. Thanks, Brian. Great to have you both here. And I'm going to guess 90 % of our listeners have been to Shake Shack because everybody's been to Shake Shack for the most part. So they probably all experienced a lot of what we're going to talk about today. But taking people inside kind of the history and the decisions that the company has made over the years, I think, will be really interesting. So really looking forward to discussing this. Chris, I'm going to start with you. Can you tell us what drew you to Shake Shack as a subject of study for digital transformation in the restaurant industry?

2:44Steph So:And what's your cold call when you start the discussion in class?

2:47Chris Stanton:Let me give you a little bit of background before the cold call. I had a phenomenal student a number of years ago who was the co-founder of a company that was trying to sell robots into restaurants.

2:58Steph So:Okay.

2:58Chris Stanton:So I've been very interested in digitization in this space for a long time. I have taught a class at HBS called Managing the Future of Work since 2019. And if you look at labor and labor productivity across different sectors, you can kind of ascertain that restaurants are very labor intensive and restaurant operators want to do anything that they can to automate subject to the difficulties with automation. And so when I heard about Steph's efforts to drive digitization at Shake Shack, I was very intrigued by what they had done. And I also knew that kiosks had been rolled out in a number of other restaurants before.

3:36Chris Stanton:And so I thought that this was a very interesting venue to sort of think about how Shake Shack has potentially learned from other competitors and their digital strategy. Let me give you the cold call. How would you grade Shake Shack's leadership of digitization and automation? And I ask an opening student to give me a grade, but obviously that's not really the point of the exercise. The point is to expose what the rubric is and to understand what elements go into the potential grade that they assign. And I think that's a reasonable opener to then think about what it takes to lead automation and digitization effectively in such a labor-intensive industry.

4:12Chris Stanton:Yeah.

4:12Steph So:And I'm sure you ask how many people have been to Shake Shack in the class. Has anybody not raised their hand?

4:17Chris Stanton:Well, the one time that this case has been taught, we had Shake Shack food on demand. And so that wasn't a fair question. We need sure.

4:23Steph So:Yeah.

4:24Chris Stanton:Yeah. I'll need to keep it in mind for the next time this goes out.

4:27Steph So:That must have been a happy class. Steph, let me turn to you for a minute. Like many HBS cases, this one opens with a little drama where it's a winter morning at the West Village Shake Shack. And you're there with your colleague, Jay Livingston, and you're watching what people are doing. Can you tell us what you were seeing? What led you to the deeper questions about the company's digital experience there?

4:47Brian Kenny:Yeah, that cold winter morning actually did happen. So it was dramatized in the case. But Jay and I would often be sitting in a shack looking and kind of observing guest flows, the digital traffic and how folks are interacting. And what was really going through our minds when we were doing one of those observations was, wow, we see a lot, almost a majority of our traffic now going to these kiosks. How do we feel about it? We had just been through a rapid digital transformation during COVID where all of this had really been rolled out and really transformed the way guests interact with our channels.

5:20Brian Kenny:And on that particular winter morning, we had just announced a new CEO to the company. After many, many years of being our CEO, Randy Garudi announced his retirement and was getting replaced by Rob Lynch, who was coming from Papa John's, big franchise organization with 3000 stores. At the point at which he was coming to Shake Shack, I think we had about 300. So it was a really interesting time to ponder where in that roadmap should digital continue to be? How important is it? Had we built a model that should be scaled or did we have something that needed to be fixed?

5:55Steph So:Yeah. And actually, this is probably a good time to ask you, maybe give us a little bit of history of Shake Shack, because I had no idea until I read the case that it started out as a hot dog cart. But it would be great just to give our listeners a sense for how far the company had come to that point.

6:08Brian Kenny:When we first opened, we were a modest hot dog cart for a summer in Madison Square Park. The goal was to raise funds to help a park that was a little bit dilapidated at the time. So we had one of the first public-private partnerships, actually, where proceeds from the original cart went to go benefit the park. To this day, the actual shack that's now in Madison Square Park sells way more burgers than hot dogs. We still sell some hot dogs. The burgers really took off, as did the shakes. And we still have a little bit of a partnership with many of the parks we operate in and that we try to give back.

6:41Brian Kenny:But we've obviously scaled to a place where we consider ourselves anchored against a lot of the options that are available in the market. Shake Shack has better ingredients. We are antibiotic-free in all of the things that we source. And we are really proud of the fact that we cook everything to order. And that's a little bit unusual in a lot of quick service restaurants. And so we've found that really scaled. That concept really resonated with customers. And we had a lot of popularity as we expanded. So really, Randy Garuti, our prior CEO, grew us to that point of a little bit over 300 plus shacks that were company owned and a pretty robust licensed model that operates internationally in airports and ballparks.

7:24Brian Kenny:So we kind of have always thought of ourselves punching above our weight. But the real question that Jay and I were pondering at that moment was, can this model really scale to that 3 ,000 restaurant chain? And to this day, that remains our ambition to get to that scale.

7:39Steph So:Yeah. Chris, I'll come back to you for a minute because one of the things that the case really does a good job of defining is the importance of hospitality at Shake Shack. You can never say yes too many times to a customer, all those kinds of things. Can you talk about how that might either help or complicate the whole move towards digitalization?

7:57Chris Stanton:I think that's a great question. And it really brings up questions and concerns around the fear of automation in the sense that you might degrade both the potential customer experience because you take away a touch point where someone can say yes or can go out of their way when a digital experience is mostly standardized. It also might have the perverse effect of undermining an employee experience where a happy employee is one that is going to provide better hospitality. And if you sort of think of the employee experience linked back to the customer experience, having the ability to understand what an employee is going through with respect to a digital type of tool or a digital type of service provision where now, instead of taking an order, you might be troubleshooting a kiosk or troubleshooting something that goes wrong or a power outage.

8:49Chris Stanton:There's a risk that that potentially changes the experience for both parties and that that interacts negatively in some way. Or there's the possibility that, as you said, it might enrich things where you might take away something that a customer doesn't like, which might be waiting in line or a busy queue. And you might free an employee from doing a job that they don't necessarily like or want, which is rote and needs to be done in a short amount of time, which is moving customers through a line to then open up the possibility that that employee can do something else to provide hospitality. And so I learned a lot about the potential to drive hospitality with digital solutions here, because one of the things that I didn't appreciate going in is that many employees sort of thought that the cash register position or the position of interacting with customers and taking orders wasn't a very desirable one.

9:40Chris Stanton:And that was not consistent with what I believed going into this research process, where I thought the front of the house or the customer facing positions would be a lot easier than the positions at the back of the house where, you know, people are over hot fryers or over grills. Yeah. But it turns out those positions are kind of rote and it puts you in the face of the public's wrath when things go wrong. So the digital solution actually seems to drive better hospitality because people are more forgiving if they screw up their order compared to someone who's behind the point of sale system.

10:12Steph So:Steph, does that ring true to you? Because I'm wondering, like, how did you think the kiosk had quickly become sort of the number one way that people ordered? How did you think about that tradeoff between making it convenient for customers in the way that Chris described, but also making customers feel welcome and giving employees a chance to interact with customers in a meaningful way?

10:29Brian Kenny:At Shake Shack, hospitality has to really be at the lead in every channel. So whether it's a digital channel, even drive-through, we think about it. And, you know, at the point of sale, for sure. I think what Chris pointed out is really important, which is the hospitality you provide to the very first person you greet at the very beginning of the day, you're taking their order. It's probably different than the 16th person when there's a queue of 25 people behind that 16th person. So what we find is no matter how great of a person you are at that point of sale, it can be a pretty tiring and kind of taxing role.

11:04Brian Kenny:And often they're pressured with different things. Like I've always felt that I don't want to put pressure on a team member to you have to deliver this upsell or these are the products I want you to deliver. Because true hospitality is meeting a guest where they are. And a guest might be a vegetarian or may not want that shake. And I never want to put that awkward interaction in place. So I actually found kiosks to be a really self-driven approach that a lot of customers, frankly, preferred. We're all really good at online shopping now, so I actually think it's not too much of a leap now for the guest.

11:37Brian Kenny:And then the high-value interaction or the really hospitable interaction that our team member can have is something like running your food to the table, getting you a drink refill, advising you if you're wondering, hey, what's better? What do you suggest or which is the best shake on the menu? And kind of allowing them to have that kind of conversation as opposed to a really rote, you know, making sure I got everything within your order. And I got it quickly and I upsold the right amount of things.

12:02Steph So:Yeah. Chris, you mentioned the course that you teach, Managing the Future of Work. I know that the research that the initiative here at the school has done has looked a lot at the impact of automation on the labor market and on the economics of labor. I'm wondering if you delved into that at all as you wrote about the case, thinking about that in the context of Shake Shack and what the implications of automation and digitization would be on their labor.

12:25Chris Stanton:My reading of many of the studies outside of Shake Shack sort of suggests that there's a puzzle around automation, that you see lots of investment in automation technologies, but you don't necessarily see big productivity improvements or lots of immediate labor savings. In Shake Shack's case, you don't see any labor savings, really. Basically, restaurant staffing looks to be sort of what restaurant staffing was prior to the rollout of the kiosks and the rollout of mobile apps for ordering. But you do see something that would show up in the productivity numbers where it looks like they're getting a little bit more out of people on the revenue side.

12:58Chris Stanton:because one of the things that happens with the kiosks is that people are maybe free to add a little bacon or to add an extra patty or to upsize a shake. So as a result, this is the most profitable channel, as I understand it, for orders that ticket sizes are larger. And so you would sort of see a revenue impact, but you don't necessarily see any impact on labor costs. Staffing is basically the same. They are getting more, but it's because the customer behavior is different rather than the way that their operations happen with respect to labor on the income statement.

13:33Steph So:Was that a surprise to you, Steph, as you started to break down the numbers? So were you expecting, I guess, to save money on labor? Was that one of the catalysts behind this?

13:41Brian Kenny:We actually weren't. And I think there was some hypotheses out there that said, well, maybe we'll get to a phase of automation where this will save labor. And I think we had that option at a lot of different forks on the road. And we always chose the fork that said, you know what, we're going to go to the other end, which is to deliver more value to the customer in the restaurant. So whether it's bringing your food to tables, we actually used to not do that. We actually used to scream your name from the counter, say, Brian. And, you know, that's fine. It's kind of cute and kitschy, but ultimately we felt there was a higher value to letting all the guests go take your seat, find a spot in the dining room, relax, you know, chat with the group that you came with or scroll on your phone in peace.

14:24Brian Kenny:And then we bring the food to you. So we looked for ways to deploy that hospitality, that higher touch. So the guests at the end of the day, we knew they were gonna be paying a little bit more for food at the kiosk because they were gonna add to those checks. So the way we looked at it was, we have to make sure we're giving you and earning that upsell. Because if you ordered all that food and we're still screaming Ryan from the counter, you may not feel as great about that because you spent$35 on your order and you're thinking, why can't they just bring it to me?

14:53Steph So:Especially if they say, Brian, your double bacon cheeseburger is ready with the extra patty.

14:58Brian Kenny:Right. Keep that to yourselves.

15:01Steph So:You probably learned a lot, I'm going to guess, about digital interfaces. It may not be one of the things that you would think you would have to know in the food industry, but I would imagine that the way the kiosks were first introduced is not what they look like today. What are some of What are the insights that you've gathered over time about how people interact with these devices?

15:19Brian Kenny:So the visual design of all of our digital tooling is done by a team that's hired in-house and sits alongside our creative team. So we really think about these two things as married. The person who leads digital experience design on my team one day asked me for a GoPro camera, which he mounted on a bike helmet, which seems odd. He's a biker. I thought this was for recreation. It wasn't. It was for research. and he went to every concept that has a kiosk and he behaved just like a customer with the GoPro on and tried to see, okay, what's the experience like from the guest side of ordering at this kiosk, of experiencing the restaurant?