Dive Brief:
- Shake Shack is returning all of the $10 million it received from its Paycheck Protection Program loan after landing outside funding on Friday, according to a letter founder Danny Meyer and CEO Randy Garutti posted on LinkedIn Sunday night. “Our people would benefit from a $10 million [Paycheck Protection Program] loan but we’re fortunate to now have access to capital that others do not,” the letter states. “Until every restaurant that needs it has had the same opportunity to receive assistance, we’re returning ours.”
- Shake Shack applied for PPP because it was eligible for federal aid despite its 189-store footprint, and did not expect the program to run out of cash in just two weeks. The loans can be applied to any restaurant location with no more than 500 employees, and each Shake Shack restaurant has about 45 people on payroll, Meyer and Garutti wrote.
- Meyer and Garutti added that the PPP “came with no user manual and it was extremely confusing” and pushed Congress to improve funding, assign a local bank to each applicant and change the June loan forgiveness date to six months after a restaurant’s state or city has authorized restaurants to fully reopen.
Dive Insight:
Shake Shack’s decision to return its $10 million in federal aid follows outcry that so many major chains, including Potbelly and Ruth’s Chris Steakhouse, received funding while the mom-and-pop restaurants the program was designed for were left out to dry. As Bloomberg reported, more than a dozen public companies with revenue of more than $100 million received these relief loans intended to help small businesses.
Though the industry was angered that PPP funding ran out in just two weeks, the program's terms cast a broad net of eligibility in the restaurant market. As Garutti and Meyer pointed out in their letter, “few, if any restaurants in America employ more than 500 people per location.” The New York Times reports that as many as 75% of independent restaurants may not make it through the crisis.
Of the major restaurant brands to score a PPP safety net, Shake Shack is the first to give up its loan. The move could inspire other chains to do the same if they are lucky enough to score additional funding, especially given the criticism that has followed their funding disclosures.
Shake Shack did not share what it would use its Friday funding for, though the bulk is likely to funnel toward payroll as the loan would have. Last week, the company announced that it had laid off our furloughed more than 1,000 employees due to the impact of the novel coronavirus crisis, and preliminary results for Q1 show that same-store sales in Q1 decreased by 12.8%, including a decrease of 28.5% in March. Corporate employees and executive teams have taken a reduced pay for an indefinite amount of time. Shake Shack has, however, committed to providing full pay for general managers regardless of whether their restaurant remains open. Shake Shack is also paying out PTO and covering 100% of medical benefits through July 1 for all furloughed managers and corporate employees, according to a company press release.
In the meantime, the chain’s sales declines have eased a bit in recent weeks. CEO Randy Garutti said in the press release that Shake Shack has seen “strong sequential sales increases on a weekly basis since the last week in March.” Driving that improvement is the chain’s shift to focus on digital sales and delivery. That includes expanding beyond an exclusive delivery partnership with Grubhub to also include DoorDash, Uber Eats, Caviar and Postmates, he said.
With these pivots — and the company’s improved brand positioning now that it has returned its PPP funding — Shake Shack could very well be past its deepest sales declines and the pieces it has put into place could better position the chain once this crisis is over. Shake Shack said its own channels represent the largest proportion of current sales, for example, which is a positive sign as it doesn’t require third-party commission fees and it enables the company to keep that customer data.
It seems likely that Shake Shack will be able to retain its progressive halo after this PPP dust up, especially since Meyer and Garutti are gunning for changes that will better support independents. Then again, critics could bemoan the fact that the chain's solidarity with small restaurants follows a cash infusion that can replace its PPP benefits.
“It’s inexcusable to leave restaurants out because no one told them to get in line by the time the funding dried up,” the letter reads. “With adequate funding and some necessary tweaks, the PPP program can provide the economic spark the entire industry needs to get back in business.”
Correction: In a previous version of this article, the Cheesecake Factory's PPP loan status was misidentified. The chain has not received PPP funding.
