Shake Shack 2016 Annual Report Download - page 28

Table of Contents
If our international licensed Shacks are unable to obtain our proprietary ingredients in the necessary amounts in a timely fashion as a result of logistics issues,
sanctions or other challenges, it could harm its business and adversely affect the licensing fees we receive from Alshaya, adversely impacting our business and
results of operations.
We face significant competition for guests, and if we are unable to compete effectively, our business could be adversely affected.
The restaurant industry is intensely competitive with many well-established companies that compete directly and indirectly with us with respect to taste, price, food
quality, service, and value, design and location. We compete in the restaurant industry with multi-unit national, regional and locally-owned and/or operated
limited-service restaurants and full-service restaurants. We compete with (i) "better burger" restaurants, (ii) fast casual restaurants, (iii) quick service restaurants
and (iv) casual dining restaurants. Our competitors may operate company-owned restaurants, franchised restaurants or some combination. Many of our competitors
offer breakfast, lunch and dinner, as well as dine-in, carry-out and delivery services. We may also compete with companies outside of the traditional restaurant
industry, such as grocery store chains and delicatessens, especially those that target customers who seek high-quality food, as well as convenience food stores,
cafeterias and other dining outlets. Many of our competitors have existed longer than we have and may have a more established market presence, better locations
and greater name recognition nationally or in some of the local markets in which we operate or plan to open Shacks. Some of our competitors may also have
significantly greater financial, marketing, personnel and other resources than we do. They may also operate more restaurants than we do and be able to take
advantage of greater economies of scale than we can given our current size.
Our competition continues to intensify as new competitors enter both the burger and fast casual segments. Many of our competitors emphasize low cost "value
meal" menu options or other programs that provide price discounts on their menu offerings, a strategy we do not pursue. We also face increasing competitive
pressures from some of our competitors who have recently announced initiatives to offer better quality ingredients, such as antibiotic-free meat.
Additionally, changes in consumer tastes, nutritional and dietary trends, traffic patterns and the type, number, and location of competing restaurants often affect the
restaurant business. Our sales could be impacted by changes in consumer preferences in response to dietary concerns, including preferences regarding items such
as calories, sodium, carbohydrates or fat. Our competitors may react more efficiently and effectively to these changes than we can. We cannot make any assurances
regarding our ability to effectively respond to changes in consumer health perceptions or our ability to adapt our menu offerings to trends in eating habits.
Our continued success depends, in part, on the continued popularity of our menu and the experience we offer guests at our Shacks. If we are unable to continue to
compete effectively on any of the factors mentioned above, our traffic, Shack sales and Shack-level operating profit margins could decline and our business,
financial condition and results of operations would be adversely affected.
We are subject to risks associated with leasing property subject to long-term non-cancelable leases.
We do not own any real property and all of our domestic company-operated Shacks are located on leased premises. The leases for our Shacks generally have initial
terms ranging from 10 to 20 years and typically provide for two five-year renewal options as well as for rent escalations. However, the license agreement for our
Madison Square Park Shack can be terminated by the New York City Commissioner of Parks for any reason on 25 days' written notice.
Generally, our leases are net leases that require us to pay our share of the costs of real estate taxes, utilities, building operating expenses, insurance and other
charges in addition to rent. We generally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable
leases. If we close a Shack, we may still be obligated to perform our monetary obligations under the applicable lease, including, among other things, payment of
the base rent for the remaining lease term. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or
at all, which could cause us to close Shacks in desirable locations. We depend on cash flows from operations to pay our lease expenses and to fulfill our other cash
needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings or
other sources, we may not be able to service our lease obligations or fund our other liquidity and capital needs, which would materially affect our business.
Shake Shack Inc. Form 10-K | 26