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Fatburger CEO: We'll Survive the Better-Burger Shakeout

Stocks in this article: DIN MCD WEN BK

They called it a Fatburger because it was genuinely giant in size, and it also was in the era when "fat cat" and "fat city" were cool and hip, and that translates to who our customers are today.

Who are you targeting as customers?

Wiederhorn: Half of our customers are the 18- to 40-year-old male category, but the other half is everyone else. It's families. It's women. We sold a million turkey burgers last year, and we have veggie burgers -- things to offer to everyone.

When we're trying to take market share, we're trying to pull up the consumer. If you remember when the recession was so bad, and the quick-service chains came out with dollar-value meals, and people flocked to those for a pretty short period of time. Then they came back in waves because they just said, "You know, I can't eat that stuff. I'll pay an extra $2 for a fresh custom-made burger than I will for a fast-food burger that's pre-made and high fat content and greasy and whatever." That's an easy one for us.

Then when you get into the casual-dining burger segment, where the really high-end gourmet burgers are, they've just priced themselves into a niche. Our average check is around $11, and our burgers are around $5 to $6 with toppings and such, and so when you look at a gourmet, sit-down burger place, you could end up with a $20 check, and that's a different experience.

In terms of domestic expansion, what does Fatburger have planned?

Wiederhorn: We're about 50% international, 50% domestic, so that's about 75 locations in the U.S., and we have another 30 to 40 locations planned right now domestically, including 10 for New York City -- the first one opening this spring.

Fatburger is your neighborhood burger joint so to differentiate ourselves, we're not looking to be in a tourist environment, where we're only looking for high-volume, high-traffic, high-rent experience. We want to be the local burger experience for the consumer.

In the U.S., we just went through a big recession, making it very tough for franchisees to open stores. What are you seeing right now?

Wiederhorn: We're seeing active development in California and, of course, in the New York area. We have a lot of interest in the East Coast. There's active development in the major cities where the economy has settled a little bit and while there's still gigantic challenges to navigate through it, those economies have a lot of different things going on, so there's opportunity to take advantage of and to develop locations. In the smaller cities, we still see more struggles.

In the restaurant industry, in particular, when you look at the Affordable Care Act, it's going to crush the small restaurant operator who owns more than one location, and ends up with more than 50 employees.

The larger operators who have hundreds of employees have to deal with it in more of a global way, and they really have to drive their top-line sales because everybody wants their employees to have insurance. But small businesses can't afford it in the same way that a larger organization can. If you own a restaurant -- a Fatburger has, let's say, 25 employees, right? You open a second one, boom, you're now subject to the law, and you've got to pay either a $2,000 per person fine or provide insurance for everybody, which is at least $5,000 or $6,000 a year per person.

Are you doing anything to help your franchisees with that?

Wiederhorn: Our solution really has been driving top-line sales because you're not going to be able to avoid your responsibility to give employees insurance. We've got to just grow sales and have additional menu offerings and things that will raise some additional revenue to cover that cost.

What's the appeal to going international?

Wiederhorn: When the economic crisis began to develop in 2007, we had already launched an international franchise development plan, but we really pushed full throttle on that plan as we saw the economy crumble in the U.S. Restaurant operators, franchisees, etc., were unable to find capital to develop stores and the real-estate market was unraveling in front of everyone, so leases were being renegotiated and so on. Our decision to go heavy into Asia and heavy into the Middle East really saved us as a brand and launched us ahead of everybody else.

We sold out the entire territory in the Middle East in a couple of years. We have approximately 40 units open in that region right now, and we'll open another two to three dozen this year just in that region. We've got commitments that total close to 100 in that region. We've got stores open in Beijing and Korea, and under development in a couple of other countries like Singapore.

We'll open in Cairo this year. We're already open in Iraq. We'll open in Libya this year. So it's interesting markets. We opened a store in Pakistan, which has a line out the door from the minute it opens to the minute it closes because the Pakistani culture, they like hamburgers, and they have no issue with it.

Why are the Middle East and Asian markets such hot expansion areas?

Wiederhorn: My belief is that there are certain types of foods that travel well internationally, such as pizza, coffee, burgers, ice cream, and there's certain foods that don't travel well, like Mexican food. So burgers are something that everybody likes around the world, and if you've got a really good burger, and you've got some brand recognition where people can identify with the quality and the freshness, then you stand out.

-- Written by Laurie Kulikowski in New York

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

>To submit a news tip, email: tips@thestreet.com.

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