How Five Guys Got Us Eating Its Burgers

LORTON, VA. ( TheStreet) -- Jerry Murrell, CEO and founder of Five Guys Burgers and Fries, loves eating burgers from his West Coast competitor, In-N-Out Burger.

That might seem strange, but Murrell doesn't see it.

"We love In-N-Out Burger. We love it," Murrell said in an interview with TheStreet last week. "In-N-Out Burger just opened up in Dallas and when they opened up our business almost doubled. We help them and they help us. We just love the way they run their business."

Murrell adds: "The more In-N-Out grows, the better it is for us. It creates a better image for the industry. The more better-burger establishments around, the better it is for everybody."
Five Guys' founder Jerry Murrell estimates the burger franchise can open 5,000 establishments in the U.S. alone.

Five Guys, started in 1986 and named after Murrell's five sons, created what some refer to as a "cultlike following" despite minimal advertising. Consumers have flocked to the burger chain, and franchisees can't seem to get stores open fast enough.

Five Guys began franchising in 2002, but growth exploded in recent years as franchisees scooped up territories. The company has more than 800 stores in the U.S. and Canada and another 1,500 in development (with 300 expected to open this year). The company says all of its U.S. territories are sold out.

According to industry consultant Technomic, Five Guys sales rose by 37.8% last year, to $625 million, as unit counts rose by 34.7%, according to the 2011 Technomic Top 100 Fast Casual Chain Restaurant Report.

While Murrell seems just as amazed by the company's cult following as outsiders, he can give reasons for it: Five Guys is "fanatical" about their food. Meat is never frozen and buns are made by select bakeries with Five Guys specs, he says.

"We don't ever shop around for prices on our food. If we have a pickle for us that's costing us 10 times as much as it costs McDonalds ( MCD), we're still going to pay for that pickle because that's what we want," Murrell says. "If the price goes up we'll just pay it. We don't shop around. Some of our suppliers have been with us since we started in 1986."

The ability of Five Guys to offer a simple and consistent menu throughout their stores, engage customers as they wait for their order (think of all those shells to clean up from the complimentary while-you-wait peanuts) and "play into the trend of people wanting to know where their food comes from" adds to the company's success, says Valerie Killifer, senior editor of FastCasual.com.

Murrell's perspective exemplifies the demand for more offerings in the fast-casual restaurant industry, specifically the so-called better burger.

"As customers traded down to the fast-casual from casual, the recession really opened the door to the gourmet better burger" in restaurant categories, Killifer says.

Typical fast-casual establishments include bakery cafes such as Panera Bread ( PNRA) and so-called Fresh-Mex places such as Chipotle ( CMG) and Qdoba Mexican Grill.

The better burger segment particularly plays to the baby boomer consumer "who grew up at diners with burgers and milkshakes. They were looking and asking for that experience, but just in a higher-quality menu item" and with more control over their dining experience, Killifer says.

"That part of the fast-casual restaurant category is not saturated -- not yet. But time will tell. It will take a couple of years to see who the big players really are," she says.

Annual sales last year for fast-casual burger chains jumped 16%, while unit growth totaled 17%, as opposed to 1.6% growth by burger chains in the so-called limited-service category and a 0.2% unit decline, according to Killifer and the Technomic report.

Hudson Riehle, senior vice president of research at the National Restaurant Association, agrees that the recession contributed to the rise of the better burger.

"In an environment where consumer confidence remains fragile and there is less cash on hand, the ability for a fast-casual hamburger operator to deliver a good price-value experience taps into that consumer pent-up demand for restaurant usage," Riehle says. "Americans have always had a love affair with hamburgers."

Another important aspect Murrell believes contributes to Five Guy's success is the decision to stick to what it knows best -- making hamburgers and fries.

"We're fortunate in the fact that we don't have to keep remaking ourselves. We've got the same menu since 1986," he says. That keeps it simple. "We're not doing any vertical integration. We don't have our own trucking company or our own meat companies. We're using big national companies that can do that for us."

There are plenty of players looking to make their mark in the better burger segment. Besides Five Guys and In-N-Out Burger, small establishments such as Smashburger, Elevation Burger and Mooyah are growing exponentially.

"We think there is room on a national level for two or three major players in the better burger category," Smashburger CEO Dave Prokupek says.

Smashburger has opened more than 100 units in 30 states in four years. The company plans to open another 80 stores this year. Prokupek says product aside (the company also emphasizes its freshness), the ability to open franchises efficiently will fuel the company's growth.

"There's not that many fast-casual food concepts whose build-out cost is $400,000 to $450,000," which includes smaller-square-footage stores and cost-effective marketing that incorporates a social media strategy, he says.

Investors are looking for ways to place bets on the segment, but at least one observer worries about the sustainability of growth at franchised companies such as Five Guys.

"Sometimes when you're getting in on a concept that is rapid growth, you're buying because other people are buying. It's kind of like the stock market. Franchisees should make sure they didn't just have some good stuff in the beginning," says Doug Schadle, a veteran to the franchise industry and CEO of Rhino 7 Franchise Development.

According to Murrell, Five Guys' stores average nearly $1.3 million in annual revenue, with some of the newer stores hitting more than $2.5 million per year.

Outside investors are encouraging the company to expand internationally, but they are also looking to back franchisees.

To expand in Europe or Asia, "we're not sure if we want to do it with another investor or if we want to do it on our own," Murrell says. "The nice thing about it is, we don't have to go. We've got enough room to expand in the U.S. for quite a while. We've only sold 3,000 franchised stores, and I think we can sell another 2,000."

Chatter around whether the company should go public is heating up. The idea, while not on the table, is not completely off, Murrell says.

"I would consider it if I could figure out a way to protect the franchisees and the brand," Murrell says.

-- Written by Laurie Kulikowski in New York.

To follow Laurie Kulikowski on Twitter, go to: http://twitter.com/#!/LKulikowski

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