Better Burger Market Heating Up
ARLINGTON, Va. - The “better burger” market is heating up with a number of newcomers. Leading the pack is novice Five Guys Burgers and Fries, a chain that started franchising in 2002. It now has some 500 franchises. Last year when the big restaurant chains were by and large stalling in sales, Five Guys Burgers and Fries was number one in unit and sales growth by double the growth of the number two guy, Jimmy John's Gourmet Sandwich, according to restaurant research firm Technomic Inc. Adding more heat to the fire, U.S. President Barack Obama recently visited a Five Guys near the White House. The visit was broadcast on NBC's nightly news for the whole country to see and talk about. (The video appeared on Blue MauMau within minutes of the event.)
Other better burger brands are also heating up. The newest being Smashburger, a Denver-based chain affiliated with Quiznos. The chain is seeded by private equity firm Consumer Capital Partners. Its first franchise store opened in Grand Junction, Colorado this week. In the last few weeks it has signed area deals for Iowa, Nebraska, New Mexico and Texas.
The big guys are coming in too. Rumor abounds of McDonald's offering premium Angus beef burgers this year.
Darren Tristano, executive vice president for Technomic, observes, “The opportunity for 'better burgers' is heating up. With fast casual players expanding both regionally (Smashburger) and nationally (Five Guys Burgers and Fries), consumers will get more choices. Add in McDonald's, Burger King and Wendy's gourmet burger offerings, Burger Shots and the Big Mac Snack Wrap and we see increasing innovation. Even Rubio's Fresh Mexican Grill on the West Coast is offering a new $1.99 All-American Taco that includes a beef patty topped with cheese in a tortilla and promoted as 'the burger with a Beach Mex twist.' Arby's is also getting in on the action with their 'better burger' made with roast beef. With greater variety, consumers will have their mouths full!”
Some industry observers wonder if consumers are driving a long-term change for gourmet burgers or if chains are pushing themselves to create a bandwagon effect, a sort of short-lived gourmet burger bubble.
“Fast casual success and competitiveness is pushing the niche,” says Tristano.
The problem is that the big chains are joining in. “I think we will see a shakeout in the years to come as some of the fast casual brands go head to head regionally, but for the next few years, there seems to be ample opportunity to grow.”
Tristano emphasizes that the upside in this sector is very good. “I think there is no limit to the demand for 'better' when it comes to food,” he states.
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If few meet those targets then it suggests operating with very tight controls considering no one has turned a light on, had the rubbish removed, made a phone call, bought a magazine or paid insurance and accounting or bank charges; as yet. A percent shaved here and there is the difference between failure, survival and success. That is a balancing act.
You mention Quiznoes opting for lower grade meats and that is exactly the problem when the financial model is a challenge. Although it can be worse as you mention where the lower grade product is sold to franchisees at a premium rate.
Cutting costs does not necessarily produce a healthy net if customers are lost and where staff turnover becomes a financial pit. When business is tight standards are typically the first to be sacrificed leading to a culture within the business that sets it on a path to disaster.
And mall occupancy costs and terms and conditions are typically abusive. It is a sad day when you can review what is potentially a good financial model but where the concept can only really survive in a mall where the rent kills that model. That would bring us back to the math and researching potential and consequences but those considerations are not limited to malls.
The more things change; the more they stay the same.
May I suggest that a figure of $1M in gross revenue is almost irrelevant when the issue is net? The location is relevant.
I don’t know what the breakdown is for all the other operating costs but it would sound reasonable to suggest $72k [and is that everything] and a $1M gross should work especially if franchisees get buying power and advertising value and all that good stuff such as support and such. The franchisee financial model has to not only work it has to justify the investment and the life.
I don’t have typical benchmarks for the restaurant industry and I imagine they would vary considerably depending, if for no other reason, than simply on market.
From benchmarks you can produce projections; high and low and in-between, whatever. Potential growth is relevant to location and different rental values and different market potentials have to be researched. What is happening in the market and what can be forecast?
One research outcome could show a high revenue/high rent location producing less net than a lower revenue/lower rent location. The math is simple but the research takes an effort and people just cannot get away with Googling everything.
And then how does any security offered in rental agreements effect considerations should the business prosper. Or the consequences should it not. It is not an exact science but the level of effort determines the level of accuracy.
The more things change; the more they stay the same.
account for all the items that are included in the concept of occupancy - especially in a mall location.
In the restaurant business there are targets. Occupancy should be less than 10 % of sales, and the closer to 7 % the better. Food costs should be not more than 30 % and preferably averaging around 25 - 28 %. Labor should not exceed 30 %. Those are targets and few meet them. Franchised businesses have to add the expenses associated with just being a franchisee (royalties, advert fund, other fees, higher costs because you don't have access to competitive vendors). One should expect lower quality food in a franchised restaurant as the owners struggle to control expenses. If I recall correctly Quiznos changed to lower grade meats not long ago, according to some of the franchisees posting in here.
I remember when my pizza franchisor client would extol the high quality of the cheeses and meats that his franchisees had to use. You don't hear much of that anymore. Pizzas I used to love now taste like MREs. Wood/coal fired brick oven pizzas in better joints/restaurants are now my only recourse. YUM! Grimaldi's just opened near here - an Arizona company that has not yet begun to franchise. Those are really good, but the press is dissing them because their pizzas are somewhat more expensive. Hopefully they will locate only in wealthier locations - demographics is destiny when you are talking about really good food. I actually hope that if I ever come back in the next life, it is as a member of an Italian family in the food business.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Attorney Ryan Knolls dives into an interesting financial analysis of these no-frills gourmet burger chains that are sprouting up and comes out with mixed feelings. He states:
Like Franchise Pundit, I too have mixed feelings on what may be looming on the horizon.
The new crop of better burgers have cost advantages in Pundit's key driver of lease cost. These new gourmet burger chains, like Five Guys, are typically located in low cost strip malls. There are no drive-thrus. Marketing is very limited and the stores are no-frills. Those qualities play into franchise unit strengths. In short, there is short-term wisdom in minimizing those costs. As for marketing, the gourmet buzz seems to be getting out by word of mouth (and a visit by the U.S. President to Five Guys), without a lot of media spending. That's smart.
The mega-chains have prime locations that trumps the secondary locations of the new better burger restaurants. That is to say that these better burger franchises can more easily be forgotten when the Burger King real estate is so conveniently placed before the consumer. The upstarts can also easily be outflanked by the best marketers in the world. And the marginal cost of offering better burgers for the mega-chains is minimal.
The tide is rising for all as the desire by the market for a better tasting burger surges. I just wonder how much of this is caused by consumers flocking away from pricier fast casual diners in the current recession to cheaper quick service restaurants. Technomic doesn't think so.
But I still wonder if the tide will go out with a rising economy. As I said, I've mixed feelings.
If you care about lowering risk and optimizing profits, it does make sense to target a rent well under 10% of your projected gross sales. You have to balance the anticipated revenue that you believe can be generated from a particular location, versus the occupancy costs.
For example, if I found a great location for my QSR that will cost $6,000/month, then I will want to be confident that the attributes of that location can reasonably support a $1 million in annual sales.
the "better burger" "concept" (NOT) is really a FranWhack.
When you add to that the identities of who are involved at the top - people with no food experience coupled with people with a sad reputation in the food business, the FranWhack character becomes much clearer.
Good job.
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Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
This 'team' didn't arrive to Not sell franchises. They will produce turnover - watch the first generation franchisees come and go and watch for new faces on the 'team' as second-stringers move on. 12 months max and you will see it begin to hit the fan.
What may not surprise us is how many franchises they sell. I can hear the crap now - 'this concept requires a much lower investment than a McDs and look at how well those franchisees do in this same market'.
There will be people out there right now leading comfortable lives who are setting themselves and their families up to go through franchising's windscreen.
The more things change; the more they stay the same.
5 Guys promoters focused on Burgers for all markets.
Muldoons to install Organic Burgers mmmmm .. you'll be in heaven ...
(And if the "gimmick" or "hook" proves popular, the major chains will just copy it anyway.)
The more things change; the more they stay the same.
Have tried the Angus burger here. It is OK, but hardly a gourmet burger.
Also I think we need to remember that this "gourmet" trend in burgers is nothing new. The McDLT from years back was a decent burger (better than the new Angus, in my opinion) and flopped. To give you an idea of how many years ago that was... Jason Alexander still had a full head of hair .
Incidentally, the special packaging for the McDLT was developed by a franchisee . Given the Schaden history, I doubt they will be amenable to franchisee input of anything other than their life savings, LoL
QSR trends come and go. While I would not be dismissive of the current trend, I think we need to have a bit of perspective here.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
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