QSR 50 | August 2011 | By Jordan Melnick

The Runaway Hit

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Five Guys has used a consistent business strategy to grow quickly.
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“It was always a struggle for us because it was always hard to get money,” Murrell says. “We were competing with McDonald’s and Wendy’s. We couldn’t bank loans. Franchising gave us the opportunity to finance our growth.”

Early on, Five Guys teamed up with Fransmart to get its franchise business off the ground. The partnership helped the company “create the story,” Tristano says, on the way to selling out its U.S. franchise markets.

“It’s definitely not a typical story,” he says.

But that doesn’t mean other restaurants aren’t trying to build their chains in a similar way. Tristano says Denver-based Smashburger, which was founded in 2007 and already has more than 100 units, has taken a page out of the Five Guys playbook by catering to America’s enduring love of the burger, albeit with a more elaborate menu that includes chicken sandwiches, salads, and, yes, milkshakes.

With Smashburger set to open hundreds of new locations in the coming 12 months, you might think the Better Burger niche is getting crowded. But Tristano says there are still lots of burgers to grill before the market reaches a saturation point.

“It’s a nice niche—not bigger than $2 billion at the moment, with the major chains accounting for most of it—but it’s a niche that’s going to have some growth potential because the $65 billion in annual sales for burger chains is very much broken up by beverage, chicken, and other things,” he says.

Which is to say chains like Five Guys that focus almost exclusively on the burger have a chance to grab even more of the burger market than they already have.

“It’s far from saturation,” Tristano says. “If you’re looking where this market share is going to come from, it’s going to come from burger chains like Burger King, who have not performed as well as others, like McDonald’s. They are exposed and will likely lose share.

“It’s going to come from full service, chains like Applebee’s and Chili’s, which traditionally sell burgers,” he says. “It’s going to come from bars and taverns that all have burgers on their menus.”

According to Tristano, those lost sales will shift to the Better Burger segment and represent a lot of the growth opportunity. “We know Americans are going out to eat less often and spending less money,” Tristano says. “So it’s going to be more a shift of share.”

He explains that if history repeats itself, the so-called Better Burger segment will shake out so that there are three companies atop the market, much as McDonald’s, Burger King, and Wendy’s have dominated fast food for decades now. Five Guys and Smashburger have likely already secured their position in the triumvirate.

“History tells us that generally the ones that are first to market are likely to be the most successful,” Tristano says.

As for Five Guys, Tristano says, “they’re going to have a lot of capital to evaluate, improve, and become, ideally, a global brand that is up there with Starbucks, Subway, McDonald’s.”

It’s amazing that a company that had only six stores less than a decade ago, and has fewer than 1,000 now, appears destined to join the ranks of those iconic brands, which tally their units in the tens of thousands. More amazing still, Tristano expects Five Guys to get there soon, even factoring the Murrell clan’s customary heel dragging.

“I think it could be a couple of years away, though I suspect this company will take a slower approach to global expansion,” he says.

Indeed, Murrell describes interest in Five Guys from overseas as “being pulled heavily into the international market,” as if the prospect of success on a global scale were somehow painful. As in 2002, when he resisted the franchising model altogether, Murrell is now grappling with how to maintain the Five Guys brand—its meat and potatoes and loyalty culture—in places as far away from Virginia as Tokyo.

And international expansion isn’t the only enviable “problem” on Murrell’s plate. He seems even more worried about something else people won’t stop bothering him about: taking the private company public.

“I don’t see how we can control it,” he says. “I worry about people wanting to come in and cut corners, cut costs, increase the bottom line.

“You know, there’s a lot of ways we can increase our bottom line really quickly,” says Murrell, before explaining (again) why Five Guys opts for slow-growing, relatively expensive Idaho potatoes over their speedier, cheaper southern cousins in Florida and California.

“Those are the kinds of things that might happen if we went public,” he says. “We’d have stockholders trying to push us to cut costs and push us into advertising. We worry about those kinds of things.”

Worries aside, Murrell says he and his family are not writing off the possibility of going public.

“Money is tempting to everybody,” he says. “I imagine one day, if someone comes along that can show us how we can keep control, we’ll probably definitely consider it.”

“Probably definitely” —the use of the inherently contradictory phrase says a lot about a man who, after growing a burger joint from six stores to 750 in less than a decade, says his only good decision along the way was sticking to his guns.

Whether he truly believes that, or whether being modest is part of Murrell’s “secret marketing” strategy, one thing is for sure: Should a Five Guys open in Moscow in the next few years, it won’t deliver burgers to the Kremlin.

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