How Shake Shack Balanced Digitalization with Its Hospitality Ethos

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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. 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 mouse 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 HBR 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. 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. 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've 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 I'm 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? 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. 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. 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. 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. 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. Yeah. And I'm sure you ask how many people have been to Shake Shack in 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, Jay 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 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 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 Garruti 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? 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 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. 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 Garutti, 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 3000 restaurant chain? And, you know, to this day, that remains our ambition to get to that scale. 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? 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. There's the 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 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 XD 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 kiosks that we didn't want to stand in the way of that almost transparency that we like to give to guests. That's 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. Chris, I teased in the intro about the second mouse strategy. I'm wondering if you could talk about that and talk about why you think it's compelling or is it risky when you're trying to apply digital transformation strategy? For listeners, Steph has to give you the quip about what the second mouse strategy is and then I'll chime in. 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. And you know, I think 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 get it. So that's fast follower. You want to be a fast follower and not necessarily the lead mover. 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 R&D 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 a company with 300 stores, you probably don't want to be funding those early R&D expenditures, but that leaves the question of who should do it. And 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, the hamburger or the hot dog or the 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 compared to what I think Steph and team did really well, which is learn from others and then refine rather than putting R&D dollars into some very early deployments that probably they would have wanted to revise later on. Steph, does that ring true to you? This is a two-part question. How would you 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 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 kiosks 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. We were happy we were able to do it at the pace we did it and coming in relatively quickly as the second. We've found so much rich data in how consumers interact with kiosks. 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 find that, you know, kind of a refreshing thing. And it was something that we learned from the data that when we removed any forced choice and 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 going to 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-ups, 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 because they would have to interrupt the flow of conversation to say, and also would you like. Right, right. And the kiosks, 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 going to do as a value add. So that when I come in, it would know that I want a double and it maybe would default to that. Is that sort of part of the program? Yeah. One of the things we find is people use our app and web ordering programs frequently because we have personalized offers within them. So, you know, right now we're running a burger challenge where if you purchase twice within 30 days, we'll give you a $10 coupon. And folks are really wanting to make sure 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, I 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 your, you know, research and sort of the broader industry and the sector itself, are we sort of in an arms race here where the technology and the infrastructure investments are going to be 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