QSR 50 | August 2011 | By Jordan Melnick

The Runaway Hit

In just one year, Five Guys catapulted 12 spots on the QSR 50, from No. 42 in 2010 to No. 30 this year.

Five Guys has used a consistent business strategy to grow quickly.
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Between its 1986 founding and 2002, the year it started franchising, Five Guys Burgers and Fries opened six locations, all in the Washington, D.C.-metro area near its home base in Arlington, Virginia.

Since 2002, Five Guys has opened more than 750 locations and is now mentioned in the same breath as chain-restaurant titans McDonald’s, Burger King, and Subway.

The obvious question: How did these guys do it?

“The only thing we did right was stick to our guns,” says Jerry Murrell, founder and patriarch, whose five sons—the Five Guys—all help run the company.

By way of example, Murrell once refused to deliver 15 burgers—or any burgers, for that matter—to the Pentagon. Never mind that the U.S. military industrial complex operates out of the building, that it is the symbol of American might, or, more to the point, that the collective appetite of its 26,000 employees keeps many Beltway restaurants afloat.

Five Guys doesn’t deliver. To anyone. Not even to the biggest office building in the world.

“We’ve never had a delivery service,” Murrell says. “We don’t believe in it. We think it cheapens the product.”

After a Pentagon employee told Murrell Five Guys would never make it if it didn’t deliver, he put up a big banner outside of his Arlington location that said “Absolutely No Delivery.”

The outcome? Five Guys’ strict no-delivery policy has paid off in spades. Pentagon business went up 20 percent after posting the banner, Murrell says, and in 2009 President Obama picked up a cheeseburger in person, a visit that made headlines around the country.

“When the President of the United States wanted to get Five Guys, he had to go get it himself,” Murrell says. “We really lucked out there.”

Indeed, it was a dream marketing coup for a company that does not spend a single penny on marketing or advertising. Instead of pouring money into commercials, Five Guys pays for two third-party audits every week at each of its locations and gives monetary bonuses to the crews that get the highest marks.

“We believe the best salesperson we’ve got is the customer standing right in front of us,” Murrell says. “If we treat him right, then he’ll go out and tell everybody about it. That’s marketing to us.”

Restaurant marketing analyst Joel Cohen calls it “secret marketing.”

“I think they do spend money on marketing,” says Cohen, who lists Five Guys’ prime locations, huge portions, and in-store “Best of” posters as part of the company’s marketing strategy. “You just don’t see it.”

It may be an unorthodox approach, but it would be hard to argue that it’s hindering Five Guys’ success. In 2010, the company had $625 million in sales, a 38 percent increase over the previous year, making it the fastest-growing chain with sales over $200 million, according to a report by Chicago-based consultancy Technomic. No. 2 on the list was Jimmy John’s Gourmet Sandwich Shop, which had higher absolute sales figures but trailed Five Guys in percent change by 16 points.

Then there’s Five Guys’ expansion from six to more than 750 stores in the last decade. The chain grew by about five stores per week over the last three years—including 2008, the nadir of the Great Recession—and is growing by almost six stores per week now. Within eight months, Murrell says, Five Guys will celebrate the big 1,000.

“They likely have more people who would like to be a franchisee than they have franchises available,” Technomic executive vice president Darren Tristano says.

The numbers suggest Murrell did more right in the company’s early years than just stick to his guns. The decision to franchise, in fact, was made by ignoring his gut instinct.

“Most franchises that I see have a tendency to have that goal right from the beginning,” Murrell says. “We had no intention to be a franchise company. We just wanted to be a good hamburger company.

“People were asking us to franchise years and years before we did, and we kept saying no,” he says. “We didn’t think we could transfer the culture.”

The culture of Five Guys comes down to meat and potatoes and loyalty. The company has been getting its beef from the same supplier for more years than Murrell can remember (literally), and it chooses to use Idaho potatoes for its fries rather than faster-growing, cheaper crops in Florida and California for the simple reason that, in Murrell’s opinion, “they taste better.”

Five Guys’ loyalty extends to its identity as a burger joint as much as to its suppliers. In an age of expanding menus, when even so iconic a brand as McDonald’s is as well known for its salads, coffee, and wraps as for its Quarter Pounder, Five Guys’ menu reads like one of Gertrude Stein’s minimalistic poems: Hamburger/ Cheeseburger/ Bacon Burger/ Bacon Cheeseburger.

While the chain also serves hotdogs, it has ignored steady customer demand for milkshakes, the historic Ying to the hamburger’s Yang. The reason, Murrell says, is that Five Guys would have to make its own ice cream. “Nothing Frozen” accompanies “No Delivery” on the chain’s list of incontrovertible policies.

While not giving customers everything they want would seem a recipe for spectacular failure, it has served Five Guys well since the early days.

“What we all decided in the beginning was that if we were going to make it, we were going to do it the way we wanted to do it,” Murrell says. “If we just cooked hamburgers and fries and could make it doing that, we’d be alright.

“There was a lot of temptation along the way to do milkshakes and to advertise and to do a lot of things that we did not want to do,” he says. “Our philosophy was to stick within our own four walls and have the food do the talking for us.”

And for 16 years, that’s how the Murrell family ran Five Guys, overseeing their small cluster of stores and personally making sure everything went according to plan. Then, in 2002, the desire to expand and the inability to fund expansion internally combined to overcome Murrell’s trepidation about the franchise model.

“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.