Dive Brief:

• Steak 'n Shake plans to convert its full-service restaurants into quick-service restaurants with a self-service model that will allow guests to place their orders at a kiosk and pick up their own meals, according to an annual letter from Sardar Biglari, chairman of the board at parent company Biglari Holdings.
• During the pandemic, Steak 'n Shake had to close down its dining rooms and only use its drive-thru, delivery and takeout channels. Comparable sales for off-premise increased by 14.3%, according to the letter.
• The company planned to convert its units to QSRs before the pandemic, but the public health crisis sped up its process, which was expected to take several years. The capital expenditures for these remodels will cost around $100,000 to $200,000, which means Steak 'n Shake's earnings won't likely be available for the holding company this year, Biglari said.

Dive Insight:

Steak 'n Shake has been a drain on Biglari Holdings for about three years, with operating earnings reaching into negative territory after a decade of profitability. Earnings improved last year, reaching negative $4 million compared to negative $18 million in 2019. 

The company decided to convert to a QSR model after realizing that its "labor-intensive, slow production and high-cost table service was a faulty business model," Biglari said. Prior to the pandemic, labor costs were running at 38.5% of sales, which put it at a 6- to 8-percentage point disadvantage compared to other competitors, Biglari said. 

Steak 'n Shake is now debt free as well after using capital provided by Biglari Holdings to settle up in February, according to the letter. Having $153 million in debt was stunting the company's ability to fund remodels, but now it has more financial flexibility to go forward with its plans. 

The company is also shifting its system to a franchise partnership model, with a single-store owner running each restaurant, Biglari said. By the end of 2020, Steak 'n Shake converted 86 company-owned units to single-unit franchise partnerships, an increase of 57 partners from the previous year, according to the letter. Steak 'n Shake is also offering a traditional franchise system arrangement, which will allow for unit growth without company investment. 

Each of these franchise partners are on their own timelines to reopen dining rooms with self-service, and Biglari expects these partners to post "another banner year of earnings" in 2021. For example, franchise revenue increased to $17.7 million in 2020 compared to $10.8 million in 2010, he wrote. 

"The combination of building a franchise network of enterprising operators and completing our conversion to a quick-service restaurant model will, we expect, transform the company and augment its value," Biglari wrote.