Shake Shack 2016 Annual Report Download - page 23

Table of Contents
Our failure to manage our growth effectively could harm our business and operating results.
Our growth plan includes opening a significant number of new Shacks. Our existing personnel, management systems, financial and management controls and
information systems may not be adequate to support our planned expansion. Our ability to manage our growth effectively will require us to continue to enhance
these systems, procedures and controls and to locate, hire, train and retain management and operating personnel, particularly in new markets. We may not be able
to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and on our existing infrastructure, or be able to
hire or retain the necessary management and operating personnel, which could harm our business, financial condition or results of operations. These demands
could cause us to operate our existing business less effectively, which in turn could cause a deterioration in the financial performance of our existing Shacks. If we
experience a decline in financial performance, we may decrease the number of or discontinue Shack openings, or we may decide to close Shacks that we are unable
to operate in a profitable manner.
We have a limited number of suppliers for our major products and rely on one distribution company for the majority of our domestic distribution needs. If our
suppliers or distributor are unable to fulfill their obligations under our arrangements with them, we could encounter supply shortages and incur higher costs.
We have a limited number of suppliers for our major ingredients, including beef patties, potato buns, custard, portobello mushrooms and cheese sauce. In fiscal
2015 , we purchased all of our (i) ground beef patties from five suppliers, with approximately 76% of our ground beef patties supplied by one supplier; (ii) potato
buns directly from one supplier, which operates two facilities; (iii) custard base from one supplier; (iv) 'Shroom Burgers from two suppliers, with approximately
67% of our 'Shroom Burgers supplied by one supplier; and (v) ShackSauce from two suppliers, with approximately 92% of our ShackSauce supplied by one
supplier. Due to this concentration of suppliers, the cancellation of our supply arrangements with any one of these suppliers or the disruption, delay or inability of
these suppliers to deliver these major products to our Shacks may materially and adversely affect our results of operations while we establish alternate distribution
channels. In addition, if our suppliers fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be
disrupted. We cannot assure you that we would be able to find replacement suppliers on commercially reasonable terms or a timely basis, if at all.
We contract with one distributor, which we refer to as our "broadline" distributor, to provide virtually all of our food distribution services in the United States. As
of December 30, 2015 , approximately 88% of our core food and beverage ingredients and 100% of our paper goods and chemicals, collectively representing 45%
of our purchases, were processed through our broadline distributor for distribution and delivery to each Shack. As of December 30, 2015 , we were utilizing ten
affiliated distribution centers and each distribution center carries two to three weeks of inventory for our core ingredients. In the event of a catastrophe, such as a
fire, our broadline distributor can supply the Shacks affected by their respective distribution center from another affiliated distribution center. If a catastrophe, such
as a fire, were to occur at the distribution center that services the Shacks located in New York and New Jersey, we would be at immediate risk of product shortages
because that distribution center supplies 39% of our domestic company-operated Shacks as of December 30, 2015 , which collectively represented 49% of our
Shack sales for fiscal 2015. The other nine distribution centers collectively supply the other approximately 61% of our domestic company-operated Shacks which
represented the remaining 51% of our Shack sales.
Accordingly, although we believe that alternative supply and distribution sources are available, there can be no assurance that we will continue to be able to
identify or negotiate with such sources on terms that are commercially reasonable to us. If our suppliers or distributors are unable to fulfill their obligations under
their contracts or we are unable to identify alternative sources, we could encounter supply shortages and incur higher costs, each of which could have a material
adverse effect on our results of operations.
Our plans to open new Shacks, and the ongoing need for capital expenditures at our existing Shacks, require us to spend capital.
Our growth strategy depends on opening new Shacks, which will require us to use cash flows from operations and a portion of the net proceeds from our initial
public offering. We cannot assure you that cash flows from operations and the net proceeds from our initial public offering will be sufficient to allow us to
implement our growth strategy. If these funds are not allocated efficiently among our various projects, or if any of these initiatives prove to be unsuccessful, we
may experience reduced profitability and we could be required to delay, significantly curtail or eliminate planned Shack openings, which could have a material
adverse effect on our business, financial condition and results of operations.
21 | Shake Shack Inc. Form 10-K