Shake Shack 2016 Annual Report Download - page 26

Table of Contents
Rising labor costs and difficulties recruiting and retaining the right team members could adversely affect our business.
We believe that our culture is the single most important factor to our success. Therefore, our success depends, in part, on our ability to attract, motivate and retain a
sufficient number of qualified managers and team members to meet the needs of our existing Shacks and to staff new Shacks. We aim to hire people who have
integrity, who are warm, friendly, motivated, caring, self-aware and intellectually curious—what we call "51%'ers." 51%'ers are excited and committed to
championship performance, remarkable and enriching hospitality, embodying our culture, and actively growing themselves and the brand. In many markets,
competition for qualified individuals is intense and we may be unable to identify and attract a sufficient number of individuals to meet our growing needs,
especially in markets where our brand is less established. As a result, because we aim to hire the best people, we may be required to pay higher wages and provide
greater benefits. We currently start all team members above minimum wage and this commitment to taking care of our team may cause us to incur higher labor
costs compared to other restaurant companies. Additionally, several states in which we operate have enacted minimum wage increases and it is possible that other
states or the federal government could also enact minimum wage increases. In response, we implemented a company-wide increase in the starting wage of all our
hourly team members, effective January 1, 2016, which will cause an increase to our labor and related expenses and could cause Shack-level operating profit
margins to decline. As more minimum wage increases or other legislation relating to employee benefits are enacted, such as the Affordable Care Act, we may be
required implement additional pay increases or offer additional benefits in the future in order to continue to attract and retain the most qualified people, which may
put further pressure on our operating margins by increasing costs.
We place a heavy emphasis on the qualification and training of our team members and spend a significant amount of time and money training our employees. Any
inability to recruit and retain qualified individuals may result in higher turnover and increased labor costs, and could compromise the quality of our service, all of
which could adversely affect our business. Any such inability could also delay the planned openings of new Shacks and could adversely impact our existing
Shacks. Any such inability to retain or recruit qualified employees, increased costs of attracting qualified employees or delays in Shack openings could adversely
affect our business and results of operations.
Increased food commodity and energy costs could decrease our Shack-level operating profit margins or cause us to limit or otherwise modify our menu, which
could adversely affect our business.
Our profitability depends, in part, on our ability to anticipate and react to changes in the price and availability of food commodities, including among other things
beef, poultry, grains, dairy and produce. Prices may be affected due to market changes, increased competition, the general risk of inflation, shortages or
interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. For example, in 2015 an avian flu outbreak decimated the
laying hen population in certain regions of the United States, which significantly increased the price of eggs, a significant ingredient in our custard base. Other
events could increase commodity prices or cause shortages that could affect the cost and quality of the items we buy or require us to further raise prices or limit our
menu options. These events, combined with other more general economic and demographic conditions, could impact our pricing and negatively affect our Shack
sales and Shack-level operating profit margins. While we have been able to partially offset inflation and other changes in the costs of core operating resources by
gradually increasing menu prices, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no
assurance that we will be able to continue to do so in the future. From time to time, competitive conditions could limit our menu pricing flexibility. In addition,
macroeconomic conditions could make additional menu price increases imprudent. There can be no assurance that future cost increases can be offset by increased
menu prices or that increased menu prices will be fully absorbed by our guests without any resulting change to their visit frequencies or purchasing patterns. In
addition, there can be no assurance that we will generate same-Shack sales growth in an amount sufficient to offset inflationary or other cost pressures.
We do not currently hedge our commodity risks. We may decide to enter into certain forward pricing arrangements with our suppliers, which could result in fixed
or formula-based pricing with respect to certain food products. However, these arrangements generally are relatively short in duration and may provide only
limited protection from price changes. In addition, the use of these arrangements may limit our ability to benefit from favorable price movements.
Our profitability also is adversely affected by increases in the price of utilities, such as natural gas, electric, and water, whether as a result of inflation, shortages or
interruptions in supply, or otherwise. Our ability to respond to increased costs by increasing prices or by implementing alternative processes or products will
depend on our ability to anticipate and react to such increases and other
Shake Shack Inc. Form 10-K | 24