How Shake Shack Balanced Digitalization with Its Hospitality Ethos

Deal's not just another payroll. It's when you're teaching. HR, IT, and payroll together finally. Built in-house, built for peace of mind. E E L. slash HBR podcast. Welcome to HBR on Leadership. I'm HBR Executive Editor Allison 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 enjoyed the episode.

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 two thousand one, you might have been among the thousands of people who waited an hour or more to experience the phenomenon that began as a humble

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 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.

We'll talk about how Shake Shack is redefining fast casual dining in the digital What works, what doesn't, and what other brands might learn from its second mouse strategy. Today on Cold Call, we welcome Professor Christopher Stanton and case protagonist Stephanie So to discuss. Shake Shack's playbook for the digital era. I'm your host, Brian Kenny, and you're listening to on the HPR podcast.

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. She's also a graduate of Harvard Business School. Welcome both of you to cold call. Thanks so much for having us. Brian.

Great to have you both here. And I'm gonna guess ninety percent of our listeners have been to Shake Shack because everybody's been to Shake Shack for the most part. So they've probably all experienced a lot of what we're gonna 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 uh really looking forward to discussing this.

Chris, I'm gonna 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? And what's your cold call when you start the discussion in class? 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.

Okay. 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 twenty nineteen. 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 kiosk had been rolled out in a number of other restaurants before. And so I 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. Yeah. 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. Mm-hmm. And I think that that's a reasonable opener to then think about what it takes to lead automation and digitization effectively in such a labor intensive industry. Yeah.

Uh and I'm sure you ask how many people have been to Shake Shack on the class. Does anybody not raise their hand? 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 made sure. Yeah. I'll need to keep it in mind for the next time this goes out.

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 Jake Livingston and you're watching what people are doing. Can you tell us what you were seeing, what led to the deeper questions about the company's digital experience there?

Yeah, that cold winter morning actually did happen, so it was dramatized in McCase, but Jay and I would often be sitting in a shack looking and kind of observing guests. flows, the digital traffic and 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? Yeah. We had just been through a rapid digital transformation during COVID where all of this had really been rolled out and had really transformed the way guests interact with our channels. 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 3,000 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?

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. When we first opened we wore 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 a 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 shake.

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. But we've obviously scaled to a place where, you know, we consider ourselves anchored against a lot of the options that are available in the market. You know, 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 Garudi, our prior CEO, grew us to that point of, you know, a little bit over 300 Plus shacks that were company-owned and a pretty robust licensed model that operates internationally in airports and ballparks.

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 you know, to this day that remains our ambition to get to that scale. Yeah.

Uh 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 h how that might either help or complicate the whole move towards digitalization?

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 it 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, you know, troubleshooting a kiosk or troubleshooting something that goes wrong or a power outage.

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 wrote 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. 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. And so the digital solution actually seems to drive better hospitality because people are more forgiving if they screw up their order uh compared to someone who's behind the point of sale

Steph, does that ring true to you?'Cause I'm wondering like how did you think that the kiosk had quickly become sort of the number one way that people ordered? How did you think about that trade off between, you know, 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?

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 and you're taking their order is probably different than the sixteenth person when there's a queue of twenty five people behind that sixteenth 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. 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 it's not too much of a leap now for the guests. 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 rogue you know, making sure I got everything within your order um and I got it quickly and I upsold the right amount of things.

Uh Chris, you mentioned the course that you teach Managing the Future of Work. I know that the the research that the initiative here at the school has done has looked a lot at the impact. of automation uh 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.

my reading of many of the studies outside 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. Mm-hmm. 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 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. Was that a surprise to you, Steph, as as you started to break down the numbers you're so were you expecting, I guess, to save money on labor? Was was that one of the catalysts behind this?

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 in the road. And we always chose the fork that said, you know what, we're gonna go to the other end, which is to deliver more value to the customer in the rest.

So whether it's m bringing your food to tables, we actually used to not do that. We actually used to scream your name for from the counter, say Brian. And you know, that's fine. It's kinda 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 in your phone in peace. And then we bring the food to you. So

We looked for ways to deploy that hospitality, that higher touch, so that guests at the end of the day, you know, 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 an 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? Especially if they say, Brian, your double bacon cheeseburger is ready you with the extra patty. Right. Keep that to yourselves.

You probably learned a lot, I'm gonna guess, about digital interfaces. But may may not be one of the things that you would think you would have to know in the in the food industry, but uh I would imagine that the way the kiosks were first introduced uh is not what they look like today. What are some of the insights that you've gathered over time about how people interact with these devices? So the visual design of all of our digital tooling is done by a team that's hired and housed.

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? So we watched hours and hours of footage. And what I think we learned is that interface and how visually obtrusive a kiosk is actually has an impact on that guest experience.

You know, my X D designer when he came back after his like many missions out there with the GoPro, he said, Steph, if it's as big as a human, then it looks like it's trying to replace a human. And it almost feels imposing as you walk into a restaurant as if we don't want you to talk to us. And so we made a really purposeful decision at Shake Shack that it cannot be visually obtrusive. And it's aligned to a little bit of how we think about our restaurants at the beginning.

The big thing about Madison Square Park that was really catchy at the time was there was a window where you could see all of the operations of the kitchen in the back and people thought that was cool. And, you know, we weren't hiding anything from you. We're showing you exactly how our food is made.

And I think we really were thoughtful around kiosk that we didn't want to stand in the way of that almost transparency that we like to give to guests that like there's no funny business back here as we're preparing your food. You can see exactly how it's made. And we really thought about that being as big as a human means we're really trying to replace a human.

Yeah, that's very interesting. Uh Chris the I I teased in the intro about the second most strategy. Uh I'm wondering if you could talk about that and talk about why you think it's uh compelling or or is it risky when you're trying to apply uh digital transformation strategy. For listeners, Steph has to give you the quip about what the second mouse strategy is and then I'll Okay. I'll try my

This is my favorite. A second mouse strategy is the first mouse likely won't get the cheese because the first mouse in the mouse trap typically loses its life. But if you're the second mouse, actually you can get the cheese out of there without any risk to your life. So I've thought about that a lot in especially with digital things like

I don't typically like us to be the first ones out the gate. We might lose our heads or we might just spend a ton of money. Yeah. And, you know, I think um the second mouse strategy has served us in a lot of ways where there are multiple areas we are trying to keep our lives together and also, you know, learn from those who might take a path that we shouldn't go down. Okay. I I get it. So that's fast follower. You want to be a fast follower and not necessarily the the the lead move.

Yeah. I had never heard the second mouse saying before, but when Steph told me originally, I said, Oh, that's brilliant. What a great analogy. You know, in the context of kiosks, if you look at the early kiosk designs, what Steph just mentioned about learning from the obtrusiveness of those designs

is one reason why the second mouse approach is so powerful because you can learn from early deployments. You could imagine that if you were spending RD dollars on getting these early kiosk deployments right, there are a lot of questions that you need to answer. Should these things have a menu that's displayed? Should they be an avatar that's talking to you? Should they be a search type of user interface where

you can query something. None of those things would have been obvious up front and you don't have the customer data to do it. So then you need to fund pilots. Then you need to fund back and forth with design. You need to have multiple iterations. the third or fourth generation of these technologies allows you to skip all of the learning and deploy something that kind of works immediately. That seems like at least for company with three hundred stores, you probably don't want to be funding

those early R and D expenditures, but at least the question of who should do it. It's probably a player that has enormous scale and that's kind of the way that things shook out. But I suspect if you asked some of the early deployers of kiosks whether they would want to update that piece of equipment.

Surely the generation that they have in place isn't what they would have deployed if they were doing it today and had all of the learnings that they have currently about customer experience and customer behavior with these things. And so there's a risk. in being second in some industries where you might fall behind, but in this case there's probably not a ton of risk because it's not a tech play that the customer is coming for. Yeah. It's a hamburger or the hot dog or a chicken tender.

But in other markets and in other settings where the tech is forefront, you might risk falling behind if you're the second mouse. For students and for instructors, it's a very useful type of framing to think about whether you always want to be the second mouse and under what conditions you would want to move first.

just compared to what I think Steph and team did really well, which is learn from others and then refine rather than putting R and D dollars into some very early deployments that probably they would have wanted to revise later on. Mm-hmm.

Steph, does that ring true to you? And I this is a two part question. How would you um build on that comment? But also What are the kinds of data that you're capturing through all these thousands and thousands of transactions that are happening? And how does that affect the way that you think about the product and and has it really changed the way that you deliver the service?

I mean in terms of second mouse, I think it's absolutely true that we were able to scale kiosk to all of the restaurants very quickly, which is surprising given that you know, in many ways we were second or even third, fourth, fifth in many cases to the game. There were big franchises that were already doing it. Um, we were happy we were able to do it at the pace we did it and and coming in relatively quickly as the second. We've found so much rich data in how consumers interact with kiosk and

It's led to some interesting things. We learned through a lot of user testing and from the data is that when we don't give you a default and we prompt you just to make an active choice, single, double, triple. We actually sold a lot more doubles. Maybe that's part of the judgment free zone. But I actually think it was interesting that changing from a single to a double is something that a guest actually really doesn't do. It's just inertia.

But if you ask them actually, would you like a double? It's almost the equivalent of someone asking you to just make an active choice. we found that naturally we got a nice lift in doubles. And the same proved true for premium modifications like avocado and bacon and things like that. Because we're just asking you to consider the purchase.

you know, nothing's pre built for you when you go into an Amazon cart. And I I find that, you know, kind of a refreshing thing. And and it was something that we learned from the data that when we removed any force choice. then we were just asking the guest make a choice. And when they did that, they often chose maybe based on

you know, amount of money they want to spend today or where do I want to put more of my spend? Is it gonna be more in my burger or more in whipped cream on my shake? And I think those are things we saw through the data that people actually naturally upsold themselves. We didn't have to

prompt that or put pop up flyover messaging constantly to say, please buy these things. I actually felt it ended up being much more natural than the way Frankly, even a human would have to ask you'cause they would have to interrupt flow of conversation to say and also would you like? Right, right.

And and the kiosks, um I don't know if they do it at this point, but I'm wondering if at some point you're looking at personalization as one of the things that you're gonna do as a value add so that when I come in it would know that I want to double and it would maybe would default to that. Is that sort of part of the the program?

Yeah, one of the things we find is people use our app and web ordering programs uh frequently because we have personalized offers with So You know, right now we're running a burger challenge where if you

purchase twice within thirty days we'll give you a ten dollar coupon. And folks are really wanting to make sure their their orders count towards whatever the challenge is or we're running a special right now on summer barbecue products and people are like, oh, I'm getting my two barbecue products and I want my third. We are trying to first bridge that to the kiosk to ensure any sort of like gamification that we've been able to add to our pre-order channels can make it to the on premise channel.

And then eventually, yeah, would love to be able to greet guests who, you know, have accounts with Shake Shack by name, know their favorites and kind of default to some of their favorite items. Chris, I'm wondering in in your, you know, uh research and sort of the broader industry and and the sector itself.

Are we sort of in an arms race here where the technology and the infrastructure investments are gonna becoming increasingly more important as everybody tries to outdo each other with the experience? The thing that I observed with Shake Shack, which really allows them to

potentially have some of this, you know, data infrastructure, ability to analyze and ability to serve personalization that works really well is that they made decisions to really centralize a lot of that. What really surprised me doing the interviews for this case with the Shake Shack team was that I interviewed Jay Livingston, who was the former CMO.

And I asked Jay about his job and he said, Well, it's everything that touches a customer from restaurant operations to digital to design to brand positioning and that level of contextual engagement going up into one person really I think creates sort of a flywheel where you get data, you understand what it means, it allows you to have some personalization, it allows you to to adjust restaurant operations as a result.

But that probably comes because of the centralization where you don't have a fragmented network of teams who are working on different pieces. It all rolls up into one person. So it's not like a franchise or has to do something with respect to a franchisee to get them to use the data or to personalize it. It all happens sort of centrally in that ability to gather insight, to have customer empathy and employee empathy.

from one team that really understands what's happening in the restaurant environment, I think has enabled Shake Shack's ability to do this well relative to others in making similar decisions and making similar investments. Yeah. I've got just one question left for each of you and I'll start with you, Steph, which is you know, as you think about the ambitious plans for growth that your new CEO has, we know that scaling to many locations is one of those things.

What are some of the digital things that you're looking at as ways to sort of enable that kind of scaling, which we know can be really, really disruptive to our organi an organization? I'm thankful that we made the investments we did in the last few years because I think it's even allowed us to consider what a TAM is for Shake Shack, what a an addressable market is for us. And I think we've publicly stated now that we'd like to get to fifteen hundred company stores.

And some of the digital things that are gonna have to come into play as we do that. 1500 stores and kind of robs our new CEO's ambition for what that looks like. is we gotta be a place where there's something really new and exciting happening kind of all the time. So culinary innovation is a huge focus of ours this year. And one of the things that's been really challenging is

Getting all that culinary innovation to have the right weighting within the digital space. Because now all of a sudden, when you come to our digital channels, we've got new stuff more often. And I need to kind of call attention to it in the right way without detracting from rest of menu. We have a very unique product right now that we've created called the Dubai Chocolate Shake.

It is a very complex shake to make. It probably has 17 components. We coat cups with a chocolate shell that has to be frozen and then the shake is put into it and then it cracks when you pick it up as a customer. So there's all kinds of steps in there. It's so complex and it has been so popular that we've had to limit the number that we sell each day. One of the things I think about a lot is

How can I allow a guest to pre-order that on digital channels and still count that against the number I know I have available in the shack? So there's a lot of that omnichannel inventory that is still very difficult for us to do across channel. And as we increase the pace of innovation in culinary, we're gonna have to figure that out. So that's the kind of thing that I think will be really interesting in the next couple of years is.

how can we integrate digital channels even further and let you get some of these really wildly creative things that we're doing at very limited quantities in like a digital way. Yeah, that's super interesting. And I really want to try that shake because it sounds very delicious. Chris, let me give you the last word here. I'm wondering as you think about the broader lessons that this case might have that apply to other firms that are trying to digitize

But without losing the sort of core value that they've always had and their interaction with the customer. How do you balance those two things? Let me take it back to the cold call, which is the rubric. And I think one of my students probably put it best that leadership requires balancing tools and technical products with empathy and

the Shake Shack approach really kind of highlights that for me in that every corporate employee goes to work at a shack for at least three days. Uh, I think they are also in the shack. frequently and kind of understand the anthropology of what customers and what employees in particular are going through.

And so my main message for other companies who are thinking about digitizing without affecting their customer experience negatively is that they need some of that empathy from the leadership team who are making these decisions. And Shake Shack culturally has kind of gotten that empathy right by pushing leaders to go do some of the frontline tasks and to interact with customers.

In a way that allows Steph and her team and others on the corporate side to kind of understand what the choices that they're going to be making will mean for both the customer and experience and how that kind of feeds back into one another. HBR on Leadership will be back next Wednesday with another handpicked conversation from Harvard Business Review. This episode was produced by Mary Dew. On Leadership's team includes Maureen Hoke, Rob Eckhart, Erica Truxler, and Ian Fox.

If this episode helped you, please share it with your friends and colleagues and follow the show on Apple Podcasts, Spotify, or wherever you listen. While you're there, consider leaving us a review. When you're ready for more podcasts, articles, case studies, books, and videos with the world's top business and management experts, find it all at hbr.org.