It Became Necessary to Destroy the Business to Save It

Someone told me over the weekend that Steak and Shake was closing its restaurants.  This didn't surprise me, because two of the three local Steak and Shakes have closed this year.  One was supposedly closed for remodeling, but the building now sports a banner inviting people to take over the franchise.  The other is gone, all brand markings removed, with a realtor's information for the building.

I've never been an S&S regular, but lately a friend and I have gone there for lunch now and then.  My curiosity was piqued, so I poked around online.  Yes, Steak and Shake has closed sixty of its four-hundred-plus locations -- supposedly only temporarily -- since the beginning of the year.  The chain has been losing both traffic and money for a couple of years now.  Shareholders were notified in February:

“Despite our unwavering dedication to product quality and low prices, we erroneously stayed with equipment and kitchen design that was ill-suited for volume production ... We failed customers by not being fast and friendly.”

This rang false to me.  The basic model of the company has evidently not changed much over the years, so I can't see why the equipment and kitchen design should suddenly have failed to cope with the necessity of "volume production."  The service at all three Bloomington locations has been "fast and friendly" every time my friend and I have gone to them for the past couple of years, even when things were quite busy.  I smelled a rat in the business-consultant blather of that newsletter: it's typical to try to blame the underlings for everything that goes wrong.

It turns out that Steak and Shake was acquired by Biglari Holdings Inc. in 2008, joining "a collection of assets that includes First Guard Insurance Co., steak restaurant chain Western Fizzlin and Maxim, a men's magazine."  Maybe there's no connection between the takeover and the slowly declining fortunes of the chain.  But Sardar Biglari, the CEO, makes me suspicious with his assertion at a shareholders' meeting that Steak and Shake could save $1 million a year by getting rid of the maraschino cherries that top the chain's hand-dipped milkshakes, and that:

"He is literally inventing a new milkshake making process — he said at the meeting that this was going to be a patented process — and that is going to speed up service," one shareholder told [Indianapolis Business Journal] . "The shareholders seemed to think this was ridiculous — and I would tend to agree — to think that Sardar, with all his free time, is going to be able to invent a milkshake process to turn the whole chain around." 

One notable aspect of the coverage I found was that it was not only skeptical of Biglari's management, it was hostile. I wondered right away where he got the million-dollar figure; I suspect that like other embattled execs, he probably pulled it out of his ass.  Maybe a patented milkshake machine would cut labor costs a tiny bit, but enough to compensate for a $19 million loss this year alone?

I think he was bullshitting the shareholders, even taunting them with their inability to stop him from doing whatever he wants.  Unlike the CEO of the United States, private executives' power isn't limited by the Constitution.  And the more I read, the more I think that's what he was doing.

According to the Indianapolis Business Journal, drawing on a report by a blogger who attended the shareholders' meeting:

A sore point at the meeting was the $8.4 million that Biglari Holdings paid a Sardar Biglari-owned company last year to manage its investment arm. Repeated questions seeking an explanation of the expense and a justification for it yielded non-answers from Biglari, such as, “The board has perfect visibility into this.”

The Seeking Alpha poster highlighted a range of other dubious expenses, including paying his brother and father as consultants, maintaining an office in Monaco and opening a one-off Biglari Cafe in the Port of Saint-Tropez on the French Riviera, a destination Biglari enjoys visiting.

Biglari's compensation package is also excessive for the head of a company that is hemorrhaging money.  Coincidentally (?), the company was just assessed $7.7 million in total damages for unpaid overtime owed to restaurant managers -- and that was just in the St. Louis area.  But according to the blogger, Biglari mocked shareholders who complained about the falling price of the stock: if you think I'm overpaid and you're unhappy because the share prices dropped, just sell your shares.

Steak and Shake was founded eighty-odd years ago.  In general I bear in mind that businesses, even chains, are not immortal.  But it's one thing for a business to die because of its own inadequacies, and another for it to be killed off by a venture capitalist who has no interest in making it survive, and tosses out absurd and unfounded reasons why things are bad as he loots it to pay his relatives and support his jetsetting.