Shake Shack 2016 Annual Report Download - page 27

Table of Contents
more general economic and demographic conditions, as well as the responses of our competitors and guests. All of these things may be difficult to predict and
beyond our control. In this manner, increased costs could adversely affect our results of operations.
Shortages or interruptions in the supply or delivery of food products could adversely affect our operating results.
We are dependent on frequent deliveries of food products that meet our exact specifications. Shortages or interruptions in the supply of food products caused by
problems in production or distribution, inclement weather, unanticipated demand or other conditions could adversely affect the availability, quality and cost of
ingredients, which would adversely affect our operating results.
Our burgers depend on the availability of our proprietary ground beef blend. Availability of our blend depends on two different components; raw material supplied
by the slaughterhouses and ground and formed beef patties supplied by regional grinders who further process and convert whole muscle purchased from the
slaughterhouses. The primary risk we face is with our regional grinders. If there is an interruption of operation at any one of our regional grinder's facilities, we
face an immediate risk because each Shack typically has less than three days of beef patty inventory on hand. However, we have agreements with our regional
grinders to provide an alternate back-up supply in the event of a disruption in their operations. In addition, our largest supplier of raw material has agreed to an
emergency plan to supply us in the event of a disruption of operations at one of our beef grinders through our broadline distributor's distribution network, but it
would not be able to do so immediately.
We currently have five approved sources of raw beef in the United States. If there is a supply issue with all U.S. raw beef, we have 17 approved suppliers in other
countries. The risks to using international suppliers are shipping lead time, shipping costs, potential import duties and U.S. customs. It is unknown at this time how
long it would take and at what cost the raw material would be to import from any such other country, but the delay and cost would likely be adverse to our
business.
Our international licensed Shacks import most of our proprietary and other core ingredients from the United States and the European Union. If this
international supply chain is interrupted, our international licensed operations could encounter supply shortages and incur higher costs.
Our international licensed Shacks import most of our proprietary ingredients from the United States and the European Union ("EU"). For example, our proprietary
blend of beef patties and/or raw materials for beef patties originate from the United States and the EU as well as Australia. In addition, our potato buns are
exclusively from the United States, and other key items such as crinkle cut fries and American cheese originate within the United States or the EU. While we have
established secondary supply solutions for some of these ingredients, we have not acquired secondary supplies for all of them.
Due to the long lead time and general volatility in the supply chain, the third-party logistic providers for our international licensed Shacks in the Middle East carry
one to three months of inventory to allow for delays or interruptions in the supply chain. Specifically, we have had past and ongoing issues ensuring that timely and
adequate supplies reach our Middle East Shacks. In the Middle East, our licensee, Alshaya Trading Company W.L.L. ("Alshaya"), delegates the supply function to
its own third-party logistics providers in each country in which Alshaya operates, with which we have limited and restricted communication, preventing us from
exercising control or instruction over such entities.
The recent sanctions enacted by the Russian Federation on many imported ingredients from the United States, the EU and Australia have affected our Russian
licensee's ability to import such ingredients to our Russian Shacks. As a result of the changing and uncertain nature of such sanctions, and although our Russian
licensee has identified a back-up supplier, we are unable to guarantee that the licensee will be able to import our proprietary ingredients to supply these Shacks. We
have given our licensee in Russia approval to utilize alternative ingredients not affected by the sanctions, but there is a risk that these substitute ingredients may be
inferior in taste and quality or come from suppliers that have not been vetted for food safety and quality assurance.
Our U.K. Shack faces challenges in obtaining potato buns and custard, which originate from our U.S. suppliers. While these ingredients have no trade restrictions,
they must be shipped from the United States, which poses an ongoing risk of delay in supply deliveries.
Our Turkish Shacks currently import many key ingredients from both the EU and the United States. As is common in many developing markets, regulations are
always subject to change which could potentially give rise to import risks should current importation legislation change. We are currently working on local Turkish
alternatives to alleviate these risks in the future.
25 | Shake Shack Inc. Form 10-K