Wall Street is gobbling up Shake Shack's initial public offering.
The company announced the pricing of its shares on Thursday at $21, and by time trading began today, the stock hit $47 per share. That's more than double an IPO price that had already exceeded expectations.
Given all the hype, you'd be forgiven for thinking the chain is bigger than it is or that it spends millions on advertising.
In fact, Shake Shack itself is a very small chain in the grand scheme of the fast-food industry. It has just over 60 restaurants globally and nearly half, 27 of them, are overseas. In the U.S., they are concentrated mainly in the northeast, though there is one in Chicago and one in Las Vegas. By comparison, McDonald's has around 35,000 restaurants globally, with more than 14,000 in the U.S. alone.
Shake Shack has spent very little on advertising. In a filing, it said that advertising costs in 2013 were about $794,000, and $564,000 in 2012. The chain doesn't work exclusively with an agency; all its creative is done by in-house designers and marketers. It's not yet clear whether Shake Shack will seek a long-term agency relationship as it grows, but for now the focus is on low-cost marketing like social media.
The brand was founded in 2004 in New York's Madison Square Park by Danny Meyer and positioned as a "modern-day roadside" burger joint. The chain until 2008 remained a one-location operation. "We've had a real connection with our guests and fans since our beginning days in 2004," said Edwin Bragg, director-marketing and communications at Shake Shack, in an email to Ad Age. "We began at the time when social media really took off. We focus on fun and engaging social media, in-Shack messaging, PR and selective advertising."
That Shake Shack spends so little on marketing isn't surprising given its size. It's "not a brand that needs to advertise," said Darren Tristano, exec VP at restaurant-industry research firm Technomic. "Chains like Starbucks, Panera and Chipotle have grown strong through word-of-mouth, and social media plays a big role. At this stage, they don't need advertising. Social has become the way to go to become more relevant."
Shake Shack indicated in a filing, though, that may change as the brand's footprint grows. "As the number of Shacks increases, and as we expand into new markets, we expect to increase our investment in advertising and consider additional promotional activities. Accordingly, in the future, we will incur greater marketing expenditures, resulting in greater financial risk and a greater impact on our company."
Shake Shack doesn't have ambitions to be the next McDonald's, or advertise like it. The company has said that it will open about 10 stores in the U.S. per year. At that rate, Mr. Tristano said, "it would take them 100 years to be as big as Five Guys." The chain is setting its sights on growing to about 450 U.S. locations total.
Mr. Tristano said that Shake Shack is on the right track growing outside the U.S.. Already more than 40% of its locations are overseas. "They're expanding at a time when this segment of the U.S. market is matured," said Mr. Tristano, adding that the $78 billion burger segment in the U.S. is relatively flat on a nominal basis, largely due to McDonald's struggles and its sheer size. Adjusting for inflation, the segment is contracting in the U.S., and any growth from one restaurant will be at the expense of another, he said.