Shake Shack Inc. (SHAK) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining us. I'm Jared Garber, the restaurant analyst here at Goldman Sachs. Today, we are joined by Randy Garutti, Shake Shack's CEO; and Katie Fogertey, Shake Shack's CFO. Randy and Katie, thank you guys so much for being with us today, and a special welcome to Katie. I think this might be your first conference in front of investors as the CFO. Certainly, interesting to be on the other side of the desk from you this time around.

Thank you, Jared. Nice to be on the other side of a conversation with you as well.

Obviously, have a lot of questions about the business or trajectory of the recovery, the cost environment. But I wanted to start off, Katie, you've been there a couple of months now. You've looked at the business for a couple of years on our side of the desk, and now you've got that inside look. What is -- I want to start there. What has surprised you the most about being on the inside now at Shake Shack and being able to kind of open the hood and look at things from that perspective?

Great. Thank you for the opportunity to speak to everybody today. I mean, really, I have to say, I've always been a believer, and I've always been very bullish on the opportunity at Shake Shack. I've admired the company. I've admired the brand. I've admired the returns that the restaurants were able to generate in the culture as well for the employees. And I can say, sitting here today, I'm just ever more confident of that opportunity that lays ahead for the company. And that's basically the bottom line. The love, the demand, the desire for when we put Shake Shack in different locations in the U.S. and also internationally, it just the fact that they're able to rise up and [ ground ] support for the company and for the restaurant is just really amazing. So that's pretty much the answer.

Great. Obviously, the last 1.5 years has been quite volatile for you guys and for the industry and the world more broadly to say the least. You shut down your restaurant dining rooms. You shifted to an off-premise model early in 2020 and for much of the remainder of the year, and you saw a pretty significant surge in the digital side of your business. The world now is largely normalizing and admittedly, with some fits and starts, especially more recently, the industry though has recovered broadly and in many cases, past sales volumes that we saw in 2019 given some stimulus benefits and pent-up demand. I think Shake Shack's unique urban-focused footprint makes that recovery a little bit different for you guys. And I wanted to start there. Can you help frame for investors what that recovery looks like at this point? Obviously, I'm not asking anything quarter-to-date about what you've put out there. But just help frame for us, what the difference is between the urban recovery and the suburban recovery? Because that's where a lot of the questions we've been getting start from.

Yes. Thanks, Jared. Look, it's been a couple of years. Every day, it feels a little bit better. Especially now, there's this moment of coming back after Labor Day, New York City, there's energy here. We're sitting here in New York, our hometown and the hardest hit place within our company. Not the only hard hit place, right? There's a lot of urban Shacks. When you build a company like ours that is based around community gathering and high energy, high traffic, both urban and suburban spots, we're going to have more of an impact, right? Our recovery, as we've said for 1.5 years, has lagged and will lag, other people who are much more geographically dispersed around the country. And we're not right -- roughly half of our Shacks are urban centers. I can tell you, even today, as we talk about where we're at, I want to walk you through certain neighborhoods in either Midtown Manhattan. They're still pretty far down, right? You saw that -- and we will talk about numbers today through P7, our July numbers that we've shared in our previous earnings and not any mid-quarter guidance, okay? But you can just -- you can see that there are just certain places in the world that aren't moving how they used to. How do we feel about that? Well, it makes our recovery tougher, both on the top line and the bottom. It drags down. These are some of our most profitable Shacks as well and even places like Las Vegas or high tourist places are still down and down significantly. And when you see that and you compare that our numbers that we've shared, suburban Shacks have basically, on average in the comp base, recovered past 2019, right? Urban Shacks are down significantly, better every single quarter since the pandemic began. Every single region that we've shown on breakouts has gotten better since the pandemic began, and that's the march we're on. Now I think we're in this moment of, as you've heard a lot this week I'm sure, what's the new uncertainty caused by delta, right? I -- if you told me 3 months ago that we'd be wondering if offices were coming back in Manhattan, I would have said that's crazy. We'll all be back in September. Well, that's not the case. The majority of offices don't expect to be back until the new year, if not longer, in places like Manhattan. That will impact us. That will stall our recovery, and that's unfortunate. It's annoying and it hurts us. But do we believe in the end that these locations are going to be great again, you bet. And more importantly, and I'm sure we'll get to this, I'll just tee it up broadly, how do we think about how we're going to make a better company coming out of this. And that's really a few ways, right? We're focused on improving our guest experience, transforming the digital infrastructure of the company and building new formats to build a better Shack. The majority of our growth moving forward will be in suburban and that's a big word. So let's define that a little bit as we go, but we're going to keep doing great urban Shacks. We have lots of Shacks in New York, in the boroughs, in urban centers around the world that we're going to keep doing, and we're excited about those. But we also now have this new excitement about a drive-thru opportunity. In the coming weeks, we'll open our third drive-up Shack, which requires either preorder on our channels, pick up at a window around. Lots of Shack Track windows and other formats. So we believe we're going to come out of this stronger with a much wider opportunity. This whole 1.5 years has accelerated and amplified the work we were already doing that we need to do more of. And at the same time, yes, we're frustrated. We want to get going and everywhere and macro conditions continue to hold our particular makeup of a company back more than we'd like. But again, trends continue through July, as we've shared, to be in the upward trajectory, and we'll get out of it. It's just going to take some continued time.

Yes. Makes a lot of sense. And you certainly hit a lot of points that we'll certainly want to touch on a little bit further. But I wanted to get a sense, obviously, I think everyone kind of recognizes that largely urban and tourism sort of based footprint that you have. But if I think about a city like New York, which is a big piece of your footprint, there are some varied neighborhoods that you operate in, right? So there's Times Square. There's Penn Station. And there's also the Upper East Side in the Upper West Side that are much more residential. Can you comment on any of the different trends that you're seeing in some of those real urban tourism-based locations versus where people are living? We've heard from some other folks who also operate in a similar sort of urban environment that the trends in those sort of 2 different cohorts are quite different.

That's consistent, and that's right. We have had many Shacks. Certain Shacks throughout this whole time that have been doing really strong, some are down a little bit still, but it's right to say as you did that the more residential neighborhoods are more recovered than those that require events, business, offices, tourism. One of our busiest Shake Shack in the world is the Theater District on 44th Street. It continues today to be one of the hardest hit highest percentage town anywhere, and it was one of our most profitable and one of our highest sales. We have a number in Midtown. We had to close the Penn Station Shack that you noted. That was because of construction of the Farley Building, but we just reopened the Grand Central Terminal Shack. I don't expect that to look anything like it used to look for some bit of time to come, right? We don't know when people will be on trains again. So there's this group of hard, hard hit Shacks and you see it in our Manhattan numbers that are the laggards. And then there's others that continue to strengthen, get better, and it will be a city within a city, which is why the urban, suburban breakdown is only part of the story. And again, we make it a lot about New York because we're a New York brand, and we're all sitting here in New York. But it's not just about New York, right? It's downtown Chicago. We have 2 Shacks that are high volume right outside of Millennium Park and right in River North. These Shacks have not fully recovered, and they won't until tourism, business events and things are back. Las Vegas, as I mentioned, one of our busiest Shacks in the world on the strip, continues to be down. There's no multi-thousand people conferences happening in Las Vegas, like there was. Now they'll come, but in the meantime, it's still going to be at some lower level. So a lot of optimism and reasons to -- and signs that we've shown and shared that continue to see that upward trend, but still not where it needs to be just yet.

Yes. Makes sense. I've got 1 or 2 more questions on sort of this urban suburban divide because again, this is where a lot of the questions that we've been fielding are coming from. One of the things that I've heard a lot recently is and we were just talking about it and you mentioned it a little bit, but is this whole idea of return to office and return to work. If there is sort of the structural shift of people only, let's say, coming to the office 3 times a week going forward, as an example, how do you think about that through the lens of your full recovery for some of those urban Shacks? Is there something you'll need to do to incentivize higher levels of frequency? Or...

I don't think we're -- I think the early signs for us are, as urban has come back, there hasn't been this kind of, "Oh my god, nobody is working on Friday, and it's different than Thursday was." Nobody knows where that will go, okay? But our expectation is so far is that those days haven't looked very different. So that's good news, I think. As we think about what it means for people to work 2, 3 days a week, we just believe this is a competitive busy city and cities, and as people come back, we think we can recapture those sales. We're not too worried about that. And I think there's going to be different reasons, right? You're already hearing things like, hey, those of you in the office on Fridays, we're going to order 50 burgers for the trading floor, right? Or these things, I think, co-exist, come back and be what it is. Nobody knows what the future is. I'm not going to try to tell you what it's going to be, and we're certainly not guiding towards it, but we are absolutely confident in the return of an urban lifestyle that will help Shake Shack ultimately return. And the balance that it's going to lead to suburbs where people might work from home on Friday as well.

Yes. Good segue. I want to ask one more on the suburban side. And you noted it, Randy, and kind of your go-forward strategy is to be much more focused on the suburban side of the suburban opportunity within the business. One of the things we get -- comments we get from investors frequently is, especially over the last couple of quarters, that suburban recovery has sort of lagged a lot of what we would -- at a very high level, your fast food peers, right? And you've noted that that's not necessarily a fair comparison to compare Shake Shack versus the McDonald's, the Wendy's, the Burger Kings, they have a wider footprint, a broader footprint. Can you help frame for us maybe why the Shake Shack suburban stores? Is there something about that geographic footprint still even in suburbia that would suggest that traffic might still be down because of the macro reasons. So I'm trying to dissect why that suburban side is only just sort of barely positive versus 2019 when a lot of the industry is up high single digits?

Yes. I think there's a couple of parts of that to unpack. So first of all, simply put, and you touched on this a little bit, our suburban mix is going to skew more urban than kind of the broad set of fast food compares. So that's one of it. And then the second part and this is not a new and not meaningful part of it, we don't have drive-thru yet. We're going to be putting in our first drive-thru at the end of the year. I think that, that could do great things for the company. But certainly, as people are driving around and they're not wanting to get out of their cars and they're seeking that most convenient option. We're currently, largely a few pickup windows, which just opened, are not really playing in that lane very much. So by evolving our footprint and meeting our guests kind of where they are wanting to dine and greater convenient concepts and formats that I think will be additive over time and will help it be more of a compare. I mean you just know so much of the traffic goes through the drive-thru. We're currently just not even in that lane. So that's why I think it's not really a fair compare for those two reasons.

Yes. And two things that we noted in the last earnings, which I'll repeat is, when we looked at a couple of specific regions such as the Southeast or Texas that you might say other brands you follow might have a high geographic representation in those places, we are doing considerably well in those places versus 2019. We shared that in the last earnings. So I think that just gives you like a little microcosm of what it looks like. And look, we have not -- Shake Shack is and will always be focused on the experience. We're not trying to compete in fast food. We're not trying to compete on the lowest common denominator of quality and price. We're trying to compete on the experience and premium brand and ingredients that we have. That historically has come with sitting down, staying for the most part, right? So it's definitely a continued shift, and as Katie mentioned, as we add convenient ways, whether through drive-thru, digital or otherwise, to experience the Shack brand, that's what's so exciting about. I think this pivotal moment in the company's history of looking ahead towards how big the opportunity can be.

That's great. And a good segue into the next kind of topic that I wanted to hit on, which is broadly, which is the digital business, but I think because you brought it up, the drive-thrus, I think we'll start there. I think traditionally, the drive-thru hasn't really been part of the playbook for Shake Shack as you noted, right? You don't even have one open yet. We're all looking forward to that yet. Yes, we're all looking forward to that later this year. Randy, maybe you can give us some perspective on this, obviously, with the history that you have in the company. Why was the drive-thru not -- I mean -- and maybe you touched on it a little bit about that experience that you talked about a little bit before. But we know that the real key to this business, really, from my perspective, is two things: it's value and convenience. And I think you guys provide that good value for the money and maybe the convenience factor was what was potentially missing as you look towards that next leg of growth. Why do you think the drive-thru wasn't a piece of the business before? And why is it right now?

So if you look at -- so I've been at this company 21 years, okay? I've seen every hot dog burger that's ever been sold here, and we never say never, first of all. At the beginning though, we asked the question, whoever wrote the rule that it needs to be this way. And our belief was that traditional fast food turned the experience into a commodity, low quality, low price, and the best thing you could do for us would be don't come inside, drive around the back. And that was not our ethos at the start of this company. Our experience was to say, whoever wrote the rule, it needs to be that way. Let's bring you in and experience our team, our ingredients and hang out with us, and that's how we built the company. As we've grown, as we've learned, and this is not a reaction to COVID or even in the last couple of years, it's an evolution of whoever wrote the rule, the drive-thru experience has to be that way. And when you look at what we're building in the initial group of drive-thrus, which we think we'll get about 10 through next year, it's going to be a great experience, both if you choose to drive around and take off. But you're going to drive around and you're going to look at a patio and a restaurant in a beautiful design and a cool experience. And you're going to say like, oh, it's pretty cool place. I think next time the Little League team's out, we're going to hang out here. Next time the family wants to go out, we're going to do that. And our hope -- and again, we have a lot to prove. We have a lot to prove about drive-thru, and how we're going to do it. And by the way, we're going to get so much wrong. We're going to get a lot wrong about this. We've never done it before. Great drive-thru companies have taken 50, 60, 70 years to figure this out. We're going to do our first. We're going to stub our tail a little bit, I'm sure. We're going to learn, we'll pivot and we're going to continue to make it great. But we're going to focus on the experience and not just the convenience. And when you choose to put the power in your hands and just preorder on your app or go drive-thru, we got you. And that's a new avenue and it's a new exciting thing, and we're going to continue to give you the great Shake Shack product within that environment. And it's going to be fun. It's going to be challenging, and we'll see at the end of this year and in many drive-thrus next year. We've got a little countdown clicker here to the days before the first drive-thru. It would be fun.

I know a Little League coach who might be looking to take their team to a Shake Shack and maybe in somewhere in Connecticut, if you need her number.

I think we have a standing table.

With the drive-thrus coming into the business, obviously, you've guided to several of those in the next couple of years. Does this change how you're thinking about real estate opportunities or the overall TAM in the business? I mean, I'm going to ask you this later, but maybe we'll get to it now. But the [ 450 ] number that we still have hanging around out, there is a question that not only I asked you several times, but I think investors continue to ask you, how does the drive-thru change how you potentially think about this business longer term?

It's really exciting. We're not changing our TAM today. Obviously, we do and that's a number that we've talked about for many years. And what excites us is that the opportunity, not just for drive-thru, but every other format that we've built over these last few years that has encouraged our opportunity. We think we can continue to grow and reach a lot of places. Look, next year, we expect to have 45 to 50 new Shack domestic company operated, and about 10 of those will be drive-thrus. What it allows us, Jared, is to say, okay, let's look at this market now that we were going to go to. And if before, we would have said, let's go at the premium urban or shopping center suburban or place where everybody hangs out, that's our first plan and then we go from there. Now we can look at it as one of the options, and it's really exciting. Our real estate committee meetings and signing off of sites has really evolved in the last few, I'd say, quarters, where we're now saying, okay, let's look at name your favorite city, and we could go to that same area, try it out in a drive-thru, figure out how that model is going to work and do the premium shopping center and do the food court at that type of location and do the outlet and do the urban. So I think that's part of what we're so excited about, and again, I'll keep saying and we have so much to prove. And we're going to make a big commitment there financially through the capital we're going to go for. And our goal is to drive that TAM, drive AUVs in and Shack level our profit over time. It's going to be a learning curve that we're excited about.

Great. The digital acceleration of the business, obviously, for you guys and for the industry has been really accelerated by COVID. And I think as you said, kind of maybe accelerated several years maybe before -- where you were thinking about putting a lot of these initiatives in place before. The brand is obviously sustaining pretty high levels of off-premise sales. I think you noted last quarter that your July off-premise sales were about equal to January, or retaining about 80% from where you were at that peak in January. How are you guys thinking about that retention going forward? And what does it mean to have so much of the business at that off-premise level?

I mean, certainly, when markets recover from COVID, we want to see the in-Shack dining numbers go up, but at the same time, we do want to keep people driving into our ecosystem and really kind of generate that omnichannel experience. And so we are really excited about what we've been able to do so far in that business and a lot of our investments are geared at growing that omnichannel guests. We just recently launched Milk Bar shakes as an app exclusive and saw some good momentum around that from the digital side. We're just going to continue to learn and see ways that we can both drive our recovery, but then also continuing to kind of keep the pedal on the gas in the digital business. Those are our highest AUV guest. Like those are the ones that we want to be coming in. They come in more frequently. They spend more when they come in. We have a better opportunity to connect with them and to drive frequency. And that's really kind of where we would like to continue to evolve the business.

That's great. And it leads me kind of the next kind of question I had was, what -- as you learn more and more about the customers as you're gathering the data on your own channels, what are some of the key differences in that off-premise order versus your in-store customers? Maybe whether that's currently or what you're seeing now versus pre-COVID? Any sort of quantifiable data you can share in terms of how much more frequently do those guests order? How much higher are the average checks? Anything to help investors would be great.

Yes. Part of this will kind of goes back to what we talked about on earnings. Our digital guests, we know that they also tend to be a little bit more on the batch side. So you're going to see a higher check in general. But the great thing about our digital ecosystem is that we do think that when they see the visual, when they see this kind of idea of the product placement, if that does drive additional either upsell or items per check. We're not going to get into great numbers right here. The business is still growing, and we're still investing behind it. But that is kind of what I would think about when you're talking about our digital business and what it can be.

Yes. And I think you'll see when you think about, Jared, where we're going to invest and why we strengthened to really fortress our balance sheet over the next coming years, it's really in 3 main places. The first will be building Shacks because we want. We have a huge opportunity. We're going to spend nearly all of our capital there. But the second will be investing in people to grow the company. And third is that technology investment. You're going to see significant and continued investment for us. Look, when you think about it on a relative basis to some of the larger digital players you follow, we have a fraction of their sales, right? I mean we're much smaller. It's harder for us to per capita do the investments that others do in their digital infrastructure. So we've had to be more scrappy. We've had to be building these things, and we got to invest more and more capital in that and we're excited to do that. That's why we built up this balance sheet that we did, and you will see us make significant and continued tech investments in that digital infrastructure because that's where it's going. Not to mention the numbers we talk about, which are -- first of all, high percentage of total sales. Secondly, high retention of that digital sales as in-Shack grows. But the numbers we don't even talk about are in our Shacks, the kiosks, right? A significant part of people who order in-Shack are doing it on a digital kiosk. As we smarten those over time and connect that omnichannel guests, it's a massive part of our digital infrastructure that we don't even talk about as a percentage of sales because it's an in-Shack guest, but digital. And very few guests today and moving forward will happen in a cashier transaction, which allows us why we like that, it's all of the data connection omnichannel that we're headed towards. This is a multiyear journey. We're not even begun to scratch the surface on our investments and the necessary infrastructure needed, but that's where we're headed, that's where we're going, and that's going to be super exciting for our ability to know our guests, market to them and drive the profitable channels and what Katie mentioned earlier.

Yes. Makes a lot of sense. And that's exactly kind of where I wanted to go next. And you touched on some tech investments. I know the business has been investing a lot in that tech stack over the last couple of years. You've launched your own web channels over the last few years. You added in-house or white label delivery earlier this year. Can you talk about a little bit what are those specific investments going towards on the tech side? You talked a little bit about those in-store kiosks as well. Did you have those rolled out in all stores? How do you think about -- are they currently connected to the app? Can I log in on my app or on that in-store iPad and link it to myself or is that something that you're still iterating on and still need to connect?

Yes, all -- great question. Let's start with in the Shack and kiosks. They're really kind of their own separate thing. We know you and we can connect that Jared ate here in the kiosk and then on the app and then on our delivery on our app. However, it's not as smart as it needs to be, right? And as we grow, a lot of the investment will be in connecting that person. So you know -- and you walk in and it can be, "Hey, Jared, welcome back. I know you like Bacon Cheeseburger, let's go, right?" And those are the -- personalized marketing is ultimately the answer. Ability to connect and the investments we'll be building are really in updating and strengthening the basic infrastructure, which is just necessary as we do thousands and thousands of thousands of orders more every day, right? But then it's in getting smarter. It's offers. It's rewards. It's the ability to be a part of our Shack ecosystem and be our guest in the way you want to, by the way. That's a huge part of it. It's the ability to build out more and better things that these tools will do. It's drive-thru tech. It's all of the preorder and app tech. So it's really a huge part of everything we're going to be doing. I would say, as I said earlier, really 1 of the top 3 strategic initiatives of the company has been, and now it's really leading. And this is not a onetime investment, this will be an ongoing continued part of our company that we got to keep strengthening. If you look at where most of our people have been and will be added, it will be in tech, digital marketing, and that infrastructure that we look to build over this next few years.

You mentioned a lot about consumer data there, and I think that really is the key for a lot of players in the industry now, whether you're launching apps or loyalty programs. Really -- I mean at the end of the day, I think for the corporate side, it really is all about getting that data in-house and then obviously, utilizing that data to know your customers a lot better. Your business right now, you're using your own channels. You also have partnerships with third-party operators to fulfill delivery orders and off-premise orders. Can you help frame for us how much of the business is going through the third-party versus your own channels just so we can get a better understanding of what that split looks like, and how much of your customer you're actually getting that data on right now?

Well, so we haven't broken out the delivery third-party data yet. We talk about digital as a whole, and that's really just because it's continued to be an up and down metric for us. Obviously, it's radically changed since 2 years ago when we began this journey, and we're not separating that just yet. But needless to say, third-party delivery is a significant and really important part of our business, and we expect it's going to continue to be that. We're excited to have great relationships with our third-party delivery partners, and we want to do more of that. At the same time, as you know, we've built delivery through our own app, fulfilled by Uber, but those are our guests. So yes, you don't get the same data when you have third-party guests, and that's a significant group of people for us every day. And we'll keep working with our third-party providers to build what makes sense there for everybody in that, but we're also going to focus on bringing you to our channels. And that's -- again, that too is a multiyear journey of building that up, giving you reasons and more. I know you'll probably ask, I teed it up before, but we're not planning at the moment any traditional loyalty type programs. But what we have done and will continue to do and a lot of our investments in the next year or two will be about creating digital infrastructure that can personalize, can offer significant rewards and not a loyalty program, per se, like you might think of, but ways to really connect and make it more valuable for me to be in our channels.

Yes, certainly was a question of mind. So thanks for kind of hitting it off there. But really, I think a key is to incentivize consumers to come through that Shack channel, whether it's the app or the website. What are some of the things -- I mean you touched a little bit upon them, things that you're kind of planning for, but what are some of the things you're doing now to incentivize consumers to go directly to your own channels?

Well, Katie just mentioned as an example here, we just teamed up with our good friend, Christina Tosi and Milk Bar. She's a national phenomenon, and we collab with them to create 2 shakes of their flavors and ours combined. And it was app exclusive for the first week. That's a great opportunity for us to launch there, do it for a week, high acquisition opportunity for people to come into our ecosystem. You can only get it on our app and delivery channels. And then we put it in the rest of the Shacks and benefit from all channels, things like that, things like -- we're not a big promo discount company, we don't expect we will be. But from time to time, when we can do it in a way that feels like us. Over time, we'll build things that could expand daypart could expand a BOGO type offer. That feels like Shake Shack, that doesn't feel discounting that makes it all about, hey, I'm here, I want to get more and bring my friends and hang out. Those are the type of things that we've got to invest more in so that we have more opportunity to do that. And you've seen us do some of those things from time to time, even e-mail. I mean people forget, email is actually a pretty powerful channel, right? An e-mail connection and being able to link people into the right spots, in app, in web order for them to use that. We're also going to be redoing our entire website, both -- mostly for the ordering function, but the entire thing in the coming quarter. Before the end of the year, we'll launch a brand-new website that will make our ordering on web and mobile app, most importantly, right? And Android even better, smarter than it's ever been, and those are many months, many quarter projects that have been embarked upon. And we're, just one at a time, improving them, improving our kiosk experience, improving all of those things. It's just -- you can't understate how important the investment and the structure is, and how much we believe it's going to take time, but that will help drive the connection and frequency and ultimately, sales that we get.

Awesome. We've got about 10 minutes left or so, maybe a little under. I want to switch a little bit from the top line to the cost side, a little bit more bottom line discussion. We all know that labor and commodities for that matter have been pretty challenging across the industry, in particular. I think the labor side is really the piece that we're most focused on, although I think the cost side is certainly important, and I want to touch there. Can you give us an update or a sense of what the staffing environment looks like right now, especially maybe in some of your more urban locations? I think you guys might have a great gauge of how that headwind is kind of smoothing itself out. And maybe if you've seen any recent traction over the last couple of weeks as those unemployment benefits have lapsed, which I think many were looking at as an inflection point?

Well, I'll take the broad thing. I'll let Katie go into the numbers. I think broadly, it's tough, and that is a fact across our entire industry. It doesn't matter what city, state, some easier than others. The punchline we always say is, where it was hard to hire before it's hard, and where it was easy, it's not that easy. And that's just what it is. There's a different availability of workers. And I think the way we've thought about that is, at the same time, while that's hard for us and everyone else, we're going to invest. And we noted last quarter that we're investing at least new $10 million in raises, bonuses and other programs for leadership development. We've never been doing more than we're doing today for attracting, retaining and bringing it on, bringing great leaders on. But that doesn't mean it's easy, it's tough out there. And I think it's going to remain tough for some period of time. I think questions about school, about the rolling off of various benefits about how people are just moving around the country, Jared, will be telling in these coming quarters to really see how the workforce changes and returns. And we -- the fact is, we're just continuing to pay people more and that will have impact on our margin, but we also think it's near-term impact that will build back to the sales and the strength we need.

Yes. I mean, really, not a lot more to add on that point, $10 million over the next year that we announced, most of that was going into wage increases. And of course, we've got about $1 million went into hiring bonuses and also retention bonuses. That is going to be targeted more in markets where we're finding it hard to hire. And really not much else to add there, except for it's helping to make a difference. We're definitely not out of the woods yet, but we're in a much better place than we probably would have been, making those investments. So go back to having a strong culture, having a strong work environment, offering good benefits for team members as well. This is just one of the [indiscernible] for something good, metrics that we have out there is paying our people well.

And talking about offsets to that, right, before we run out of time, obviously, we noted we'll be taking about 3% to 3.5% price. We generally take it in December. We'll take that a little bit earlier, but mid-fourth quarter probably. So as we guided, there will be some near-term impact on margins. We guided on that in the third quarter. We expect that. And later with that 3% to 3.5%, that will help offset some of that as we get into '22 and beyond. And we're going to keep looking at price, right? COGS, other things, things are expensive, right? There isn't a supply chain in the world that isn't talking about the same subject, whether it's beef, chicken or computer chips. It is easy right now. We'll see how near term it is, and we're absolutely going to be building the smart big stuff for the long term as margin will we expect to recover over the long term, but it's going to take time.

Yes. And I wanted to hit on -- I know we only have a couple of minutes. I wanted to hit on the COGS, and I wanted to hit on pricing a little bit more. Can you give us a sense of how far out you're contracted on some of your major commodity buckets, whether that's beef or chicken? And what you're seeing in those markets? And also Randy, you mentioned that 3% to 3.5% price and you're still sort of looking at that, do you think you have pricing power to take more? And do you think that's the right decision to potentially take more than that as you think about maybe the demand elasticity?

I'll take price quickly and let Katie take the COGS. So we have generally in the history of this company for 15 years taken about 2% a year, roughly a CPI increase for time. We're going to take a little bit more than that, not a lot. We believe in long-term pricing strategy, long-term pricing power, and we're not going to take every bit of every penny. We need to see how transitory different things are. There's a lot of our inputs that are up right now across the line and Katie to talk about that, and that will lead to near-term margin pressure that we've shared and talked about already. But we're just -- we want to be here decades from now, not quarters from now, and that means we take our time on price, we're not going to overdo it. We're going to make Shack the best possible value for the premium ingredients you get, and we're doing that. But with COGS, you can take the beef...

Yes. So on the other side, no change to what we talked about last quarter with 3Q COGS being at a similarly elevated level to 2Q. The puts and takes of that where we rolled off some beneficial chicken pricing and that was going to take a step up. And then on the beef side, we feel very good about our supply, but we do not contract on price.

So when it's up, we're up, right? And things remain up right now.

We still feel good about our ability to get no hormone, full muscle, that premium ingredient that we think creates a big difference and gives us that value proposition that you talked about earlier.

Great. And I want to hit last question. We'll go through just -- we already talked a little bit about the unit growth, the long-term TAM, and it was unsuccessful at hooking Randy on upgrading that TAM for us today. But one thing I wanted to ask on the new unit algorithm. Traditionally, how we think about that? And I think you've kind of guided us this way is sort of a $3 million box, a $2 million build cost and that 20% op profit. With all the changes that you've gone through over the last year or so, and I use that 20% as average, I know it's 18% to 22%. But with all the changes and the drive-thru and the Shack Tracks and all these other sort of initiatives you have, is that still the right way to think about new units for Shake Shack?

It's how we think about it for the long term, and we haven't changed that. And why haven't we changed it? Look, there's near-term pressures on our margins. You've seen in previous quarters and even the last quarter, strengthening of margin with various things. There will be some balancing of that as we've guided towards for this quarter with investments in people and time. We believe absolutely that we can build strong returns on those basic metrics for the long term as we've talked about. What are we doing to improve that? Well, that's where we're hopeful for drive-thru and the other formats that overtime, we can increase the AUV opportunity and the Shack level op profit and ultimately, the returns. And that's the work we're doing. That's work we're working on. It's a pretty great company we've built so far, and we've obviously overachieved those metrics for many years. Now we're in a recovery period, and that recovery period continues and will take time. So we don't expect to change any of that. When we look at building our biggest class ever, we mentioned last time, we expect to spend a little bit more on the investments of that class, both for the increase in construction and commodity costs, but also for the commitment to new models. And we've got to invest in drive-thru and make it work. That's going to cost some money. We'll balance that out with some core Shacks and food court types, some less expensive builds. But we believe we are still targeting those averages, and we're really excited about how many of those there can be in this world.

And so just to remind you again, by the end of next year, we should have 10 drive-thrus. It will give us a much better sense of what that track can look like for us and versus standing here today with 0.

Awesome. We'll pencil you in for next year's consumer conference this time next year so we can get an update on the drive-thru strategy there. Thank you, guys, both so much. I know we're up on time. So thank you for the time today. I really appreciate it. Katie, great to see you again. Randy, always great to talk. Thanks so much for your time.

Take care.

Thanks, Jared. Bye-bye.