Shake Shack 2016 Annual Report Download - page 24

Table of Contents
In addition, as our Shacks mature, our business will require capital expenditures for the maintenance, renovation and improvement of existing Shacks to remain
competitive and maintain the value of our brand standard. This creates an ongoing need for cash, and, to the extent we cannot fund capital expenditures from cash
flows from operations, funds will need to be borrowed or otherwise obtained.
If the costs of funding new Shacks or renovations or enhancements to existing Shacks exceed budgeted amounts, and/or the time for building or renovation is
longer than anticipated, our profits could be reduced. Additionally, recent inflation of material and labor costs have resulted in higher construction costs. If we
cannot access the capital we need, we may not be able to execute our growth strategy, take advantage of future opportunities or respond to competitive pressures.
Our marketing strategies and channels will evolve and our programs may or may not be successful.
Shake Shack is a small, but growing brand. We incur costs and expend other resources in our marketing efforts to attract and retain guests. The brand's promotion
includes public relations, digital and social media, promotions, and in-store messaging, which require less marketing spend as compared to traditional marketing
programs. Currently, the amount of discounted promotions and advertising we do is nominal. As the number of Shacks increases, and as we expand into new
markets, we expect to increase our investment in advertising and consider additional promotional activities. Accordingly, in the future, we will incur greater
marketing expenditures, resulting in greater financial risk and a greater impact on our Company.
We rely heavily on social media for many of our marketing efforts. If consumer sentiment towards social media changes or a new medium of communication
becomes more mainstream, we may be required to fundamentally change our current marketing strategies which could require us to incur significantly more costs.
Some of marketing initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. Additionally, some of our competitors
have greater financial resources, which enable them to spend significantly more on marketing and advertising than we are able to at this time. Should our
competitors increase spending on marketing and advertising or our marketing funds decrease for any reason, or should our advertising and promotions be less
effective than those of our competitors, there could be a material adverse effect on our results of operations and financial condition.
We rely on a limited number of licensees for the operation of our licensed Shacks, and we have limited control with respect to the operations of our licensed
Shacks, which could have a negative impact on our reputation and business.
We rely, in part, on our licensees and the manner in which they operate their Shacks to develop and promote our business. As of December 30, 2015 , two licensees
operated all of our domestic licensed Shacks and two licensees operated all of our international licensed Shacks, including Alshaya, which, through affiliated and
unaffiliated third party sub-licensees, operated all of our international licensed Shacks with the exception of our Tokyo Shack. Our licensees are required to operate
their Shacks according to the specific guidelines we set forth that are essential to maintaining brand integrity and reputation as well as in accordance with all laws
and regulations applicable to Shake Shack and its subsidiaries, and all laws and regulations applicable in the countries in which we operate. We provide training to
these licensees to integrate them into our operating strategy and culture. However, since we do not have day-to-day control over all of these Shacks, we cannot give
assurance that there will not be differences in product and service quality, operations, marketing or profitably or that there will be adherence to all of our guidelines
and applicable laws at these Shacks. In addition, if our licensees fail to make investments necessary to maintain or improve their Shacks, guest preference for the
Shake Shack brand could suffer. Failure of these Shacks to operate effectively could adversely affect our cash flows from those operations or have a negative
impact on our reputation or our business.
Given the relatively small number of licensees with which we do business, the success of our licensed operations depends on our ability to establish and maintain
good relationships with our licensees. In particular, our relationship with Alshaya, who operates the majority of our international licensed Shacks and has an
exclusive right to open new Shacks in certain markets. The value of our brand and the rapport that we maintain with our licensees are important factors for
potential licensees considering doing business with us. If we are unable to maintain good relationships with licensees, we may be unable to renew license
agreements and opportunities for developing new relationships with additional licensees may be adversely affected. This, in turn, could have an adverse effect on
our results of operations.
Shake Shack Inc. Form 10-K | 22