For a time, had you asked me to recommend the best steakhouse in New York City I would have said without hesitation Strip House in Manhattan’s Union Square area. The restaurant with its bordello-like décor is where I imagined Frank, Dean, and Sammy would have hung out, and the steaks and sides were to die for. Then there was the restaurant’s 24-layer chocolate cake, the best chocolate cake I ever savored, bar none.
Whenever I’d visit Strip House, I’d always arrive about 30 minutes before my reservation to savor a martini. What made my martini experience especially delightful was the restaurant offered fresh and free pistachios at the bar, and I love to munch on nuts when I drink. Strip House bartenders were friendly and served an honest pour, meaning the martini was deftly filled to the glass’s brim creating what is known among martini aficionados as surface tension. At Strip House, everything was once to the king’s taste.
But one night I visited Strip House and immediately sensed something was amiss. It didn’t have its warm clubby vibe, the bartender wasn’t his usual engaging self, the martini pour was stingy, and there were no pistachios on the bar counter. When I asked about the pistachios the changed atmosphere immediately made sense.
“The restaurant was sold, and the new owner didn’t want to pay for the cost of the pistachios,” I recall the bartender telling me.
In its glory days, Strip House was owned by a family of experienced restauranteurs. But in December 2011 it was sold to a company called B R Guest Hospitality, a local group whose New York City concept restaurants I despised. B R Guest’s restaurants appealed to folks attracted to the latest trends and cuisines, and I regarded them as polar opposites to those operated by Danny Meyer, a famed restauranteur I much admire and wrote about three years ago.
I have no doubt B R Guest dramatically increased Strip House’s profitability, but it came at a cost. Although the restaurant denies the recipe was altered, the chocolate cake didn’t taste the same, as it had a sweeter aftertaste than I remembered. I visited Strip House a few times under B R Guest’s ownership, and each experience was a bigger disappointment. The once great restaurant became Five-Star Starkman Unapproved.
I immediately recalled Strip House’s decline reading this Wall Street Journal story that an “activist” investment firm called Engaged Capital is planning a proxy fight for three seats on Shake Shack’s board and has sent a proposal to the upscale burger chain detailing changes it claims will boost the company’s stock price.
Kevin Reddy, a restaurant-industry veteran who previously served as chief executive of Noodles & Co., is the only Engaged board nominee with real-world experience running an actual restaurant. The other nominees are Joel Bines, a retail turnaround expert who led the global retail practice at consulting firm AlixPartners; and Christopher Hetrick, co-founder of Engaged and the firm’s director of research.
Shake Shack was founded by Danny Meyer, and he serves as the company’s chairman. An investment firm telling an upscale restaurant chain overseen by Meyer how to run its business reflects a degree of arrogance that even by Wall Street standards is beyond the pale. It’s akin to someone buying a stake in Berkshire Hathaway and telling Warren Buffett and Charlie Munger how they can improve their stock picking.
I’m somewhat of an authority on Shake Shack, which was founded by Meyer in 2004 as a seasonal kiosk in Manhattan’s Madison Square Park. I lived across the street from that park and had a bird’s eye view of the long lines that formed during the restaurant’s business hours. Meyer eventually expanded the kiosk into a semi-regional chain with locations in about a dozen states. In 2015, the company went public with great fanfare, and the stock soared in the first months of trading.
Shake Shack has some serious quality control issues, particularly at its Los Angeles area locations. Except for the company’s training store in West Hollywood, Shake Shack’s Southern California restaurants aren’t up to snuff, and one area manager a year ago told me the company was aware of the issue. I’m confident that if Meyer would have sampled the burger I was recently served at Shake Shack’s Santa Monica location, he would have been outraged and possibly have ordered the place shuttered until urgently needed improvements were made.
This is why I’m never surprised when native Californians tell me they prefer an indigenous In-N-Out burger to Shake Shack, particularly given the latter is considerably more affordable. It so pains me to admit this, but a Shake Shack burger done right is the better product.
The Journal didn’t provide much background about Engaged Capital, but the few details the publication provided are cause for alarm. Although the Newport Beach, Calif.-based firm was founded in 2012, it manages only $1 billion, which possibly suggests investors aren’t stampeding to have their money managed by the organization.
The Journal said Engaged pushed Jamba Juice’s parent to slash costs, which maybe contributed to the chain’s decline. I thought the chain, since rebranded as Jamba, had closed but it is still kicking. Jamba no doubt also declined because the public increasingly became aware that its smoothies and other beverages were laden with sugar and not very healthy.
Bloomberg reported that Engaged was responsible for changes at Del Frisco’s Restaurant Group, whose midtown Manhattan steakhouse was also once one of my favorites but went into serious decline. It’s not clear whether the decline began before or after Engaged’s involvement.
Shake Shack’s stock has suffered in recent years because of the pandemic and a decline of customers around its mostly urban stores. Still, analysts are in near universal agreement the chain is on the rebound as first quarter sales exceeded their expectations.
What I don’t understand is how activist investors can exert control over a company’s management accumulating paltry stakes. Engaged reportedly only holds a 6.6 percent interest in Shake Shack, a far cry from a majority holding.
Moreover, activist investors aren’t nearly as brilliant as the business media makes them out to be. Some of their success is derived from their unmitigated chutzpa.
Activist investors targeted tech giant Salesforce due to a failed 12-month succession plan that resulted in the return of founder Marc Benioff to assume full command amid a drop in stock price. The firms included: Third Point, Elliott Investment Management, Starboard Value, Value Act, and Inclusive Capital.
As noted by academics Jeffrey Sonnenfeld and Steven Tian, Benioff created more long-term shareholder value than any of the activist funds that targeted him. Indeed, Sonnenfeld and Tian said the activists “dramatically underperformed” benchmark indices.
Third Point’s Dan Loeb was responsible for installing Marissa Mayer as Yahoo’s CEO, but he fast learned that the former Google executive was way over her head. As reported by Bethany McClean in this December 2013 Vanity Fair article, Loeb was prepared to fire Mayer. Instead, Mayer bought out most of Loeb’s shares at a premium that he possibly couldn’t get in the open market, allowing his fund to net a profit of about $1 billion in less than two years.
Then there’s Carl Icahn, who I will always remember for destroying TWA and making a killing on his investment. Federal prosecutors are reportedly probing Icahn Enterprises after a short seller publicly accused Icahn’s firm of “Ponzi-like” behavior. Icahn denies any wrongdoing.
What’s galling is that activist investors typically profit handsomely just disclosing they’ve targeted a company. Shake Shack closed today at $70.30, netting Engaged nearly an 8% gain.
Shake Shack’s management has the confidence of Wall Street analysts, so hopefully they won’t succumb to short-term pressures to boost the stock price.
Truist analyst Jake Bartlett said in a note to investors that Shake Shack’s “rapidly improving” margins and “strong” 2023 guidance suggest the company was already on a promising trajectory even before Engaged showed up.
“We believe (Shake Shack) is in a strong position in a proxy fight, given recent strong operating performance,” Bartlett wrote in an investor note cited by Bloomberg.
Still, this seems like an opportune time to give public thanks to billionaire In-N-Out CEO and controlling shareholder Lynsi Snyder for resisting Wall Street pressure to go public and expand California’s beloved chain at a more rapid clip. In-N-Out’s success is no doubt predicated on management not having to waste their time on Wall Street activist clowns telling them how to run their business.