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

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NEW YORK ( TheStreet) -- For those of us on the East Coast, Fatburger may not ring a bell, given the dozens of burger chains including Five Guys Burgers and Fries, Smashburger, Jake's Wayback Burgers and others furiously opening stores.

But, come this spring, that will change. The 60-year-old Los Angeles-based burger chain will open the first of 10 locations set for New York City through a partnership with Riese Organization, one of the largest restaurant-management companies in the area.

So-called better-burger restaurants are taking the fast-casual segment by storm. (Fast-casual sits between limited-service chains like McDonald's ( MCD) and full-service restaurants such as DineEquity's ( DIN) Applebee's.)

>>>How Five Guys Got Us Eating Its Burgers

While the name Fatburger seems to be a nod toward its calorie-rich menu offerings like the XXXL Fatburger, the Fat Salad or the Fat Fries (Skinny Fries are also available), the restaurant's name is actually derived from Hollywood's Golden Age when terms like "fat cat" and "fat city" were the rage. Today, that feeling has remained with the brand. Fatburger is popular among Hollywood celebrities and has even been cited in songs by several iconic hip-hop stars.

While Fatburger reached its 60th anniversary last year, the company went through a rough patch. Ten years ago, Fog Cutter Capital Group acquired Fatburger. CEO Andy Wiederhorn came on in 2006 and has been aggressively turning the once-struggling chain around by expanding internationally. In 2003, there were just 40 Fatburgers, mostly on the West Coast. Today there are 150 stores across the world, with about 300 either under construction or in development in 27 countries. Last year the company brought in $100 million in system-wide sales, up 22% from 2011.

Fatburger and other better-burger chains have nowhere near the number of outlets as their fast-food competitors, but the opportunity is immense. Consumers are looking for value-driven meals, but at the same time are more conscious of how their food is prepared and where it comes from.

"Consumers definitely are challenging the quick-service brands to step it up, and it's very hard when you're serving a fast-food product to try to declare that all of a sudden you're serving a fast-casual, gourmet product," Wiederhorn told TheStreet this week.

The question is: Will there be room for all of these burger competitors?

Wiederhorn says no.

"There'll be a shakeout in the better-burger and gourmet-burger segment like there always is in an industry where you have new or a lot of competition that comes in at once," he says.

"The players who have been long-standing participants, like Fatburger, Five Guys or In-N-Out, will always command a customer following and loyalty, because those customers know what the original burger experience was like, and they'll continue to follow it," Wiederhorn says. " Of the new ideas that come into play, a lot of those ideas don't have a financial model that really supports it, so they can't scale it. It might work in a big city in a high-profile location, but it doesn't work in average locations or in Middle America."

Smashburger CEO Dave Prokupek agrees.

"I don't know that everyone can survive, but I do see two to three national players and, of course, there's going to be a lot of chains that have nice regional businesses along the way as well," Prokupek says.

Fatburger's Wiederhorn spoke with TheStreet earlier this week to share how the burger chain is staking its ground in the fiercely competitive better-burger category.

What does Fatburger stand for?

Wiederhorn: Fatburger started here in L.A., and it's a brand that's been frequented by celebrities for years and years, both because of the availability of a Fatburger around L.A. and also because of the burger experience. Think of it as the original Hollywood homemade hamburger and that translates into real authenticity and simplicity. We're serving the same burger, the same recipe from meat, the same bun, the same toppings and things that we've been serving for 60 years, and that really in itself differentiates us from everybody else because you have all the competitors that have come into the "better burger" sector. We're fast-casual, so it's not fast food.

As we've expanded both domestically and internationally, people want the burger that started here in L.A. that celebrities eat often, that the Angelenos' and the Hollywood crowd has eaten forever. Celebrities are eating it because they like it. It's their burger. It's not because there's some other cache to eating a Fatburger. This is the place you go late at night, middle of the day, whenever, when you really want a good hamburger.

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.

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