Dive Brief:

• Shake Shack's total digital sales during Q2 represented 75% of overall sales, doubling Q1 digital sales, according to its earnings report released on Thursday. 
• The restaurant's same-store sales slipped by 49% and revenue by nearly 40%, and the company reported an operating loss of $24.1 million for the period.
• The company has experienced gradual improvement throughout the quarter and into Q3. Recovery has varied by location, with urban locations down 57% versus suburban locations, which were down 38%. 

Dive Insight:

Though Shake Shack was hit harder than some its burger peers (McDonald’s U.S. comp sales were down 8.7%), its digital growth during the quarter provides some reason for optimism. As this latest round of earnings reports flow in, the industry is getting a clear picture of just how well digital-savvy companies are positioned in an environment shaped by stay-at-home orders and dining room shutdowns.

Digital heavyweight Wingstop, for example, reported a digital sales increase to nearly 64% of its domestic sales, which drove the company to a same-store sales increase of 32%.

Still, much work remains for Shake Shack. By comparison, Chipotle’s digital sales represented about 61% of sales during the quarter, while Yum Brands’ digital sales represented 30% of its total sales mix during Q2, and both companies' financial performance fared much better than Shake Shack. This in part speaks to the former brands’ heavy drive-thru presence, a thorn in Shake Shack’s side during this crisis while almost 90% of McDonald’s business has come from the drive-thru channel alone during COVID-19. While a growing digital footprint is no doubt good news for Shake Shack, it is heavily challenged by its non-drive-thru real estate. 

Drive-thru has become a priority for the company. During its earnings call, CEO Randy Garutti said the company has started designing its first drive-thru location, which it plans to build in 2021. While the initial locations weren't announced, Garutti said they will be in a traditional suburban area with high-traffic quarters. 

The company is also adding Shack Tracks to new and existing restaurants, which will create a way for customers to order digitally and pick up orders via curbside, a walk-up window or drive-up window, Garutti said. He added that Shake Shack expects to add at least eight Shack Track pickup walkup windows and its first drive-up Shack Track by the end of the year. In 2021, it expects to have half of its Shacks feature either a drive-up or walk-up window, and the other half will have a combination of curbside pickup and/or dedicated delivery pickup areas, he said. 

"So why are we doing all this? The answer is simple," Garutti said. "As we look ahead, our goal is to increase the addressable market opportunity for Shake Shack, while driving strong AUVs and returns on capital. ... We're bullish about the potential white space opportunity these formats could create while meeting the evolving needs of our fans."

With these new formats, Shake Shack should be in a much better position thanks to its strong digital channels, particularly as it gains digital orders through its native channels. The company notes that it has retained 90% of those digital sales for fiscal July, and has generated more than 800,000 first time purchases through its own channels since March. This is nearly four times higher than last year. 

The company also reported that its native web and app channels more than tripled compared to the same period last year, and are the fastest growing channels into July. Because of this rapid growth, the company plans to enhance its website and app with additional features such as personalization and feedback, and also provide real-time order status, Garutti said during the earnings call. 

"But the most important feature will be the ability to offer delivery directly through our own channels for the first time, targeted at keeping guests within our native infrastructure and deepening our ability to connect directly with them over time," Garutti said. 

Keeping customers on its native channels will provide the company with their data, which could enable the company to better target its promotions and create stronger loyalty.