As Smashburger CEO Crane Leaves, Long Live Chief Nolan

Michael Nolan
Smashburger new CEO Michael Nolan

DENVER—In an email on Friday to employees and franchisees, Smashburger announced that its CEO, Scott Crane, was immediately leaving the company. Three working days later, yesterday, the franchisor of better burger restaurants announced it had appointed a replacement – industry veteran Michael Nolan.

Outgoing CEO Scott Crane wrote his own memo to Smashburger employees and franchisees to explain his departure: "After nearly 8 ½ years of being a part of the Smashburger family, it is time for Smashburger, and me personally, to move in a new direction." As is typical with such executive departures, there was no explanation why. Crane concluded, "I will be cheering you from the sidelines."

Rick Schaden, troubled chairman and CEO of bankrupt Quiznos, who is now chairman of Smashburger and its private equity holding company Consumer Capital Partners, praised how Crane had helped build the firm since its beginning days. "We have a deep appreciation for everything he has done for the company, our brand and, most importantly, our people," stated Schaden.

The resignation of Crane comes nearly half a year after Philippine fast-food chain Jollibee Foods Corporation bought 40 percent of U.S.-based Smashburgers for $135 million.

From Icon Burger to Smashburger

The better burger concept has come a long way in a short time. In June 2006, Smashburger took over Icon Burger, a restaurant that offered Coloradoans better burgers with gourmet toppings. By 2009, the concept had been rewrapped and sold as Smashburger franchises. The company quickly grew.

History of Smashburger

Today Michael Nolan is its newest CEO. Before him there was Scott Crane, who stepped in as Smashburger's chief executive two and a half years ago. Crane's immediate predecessor, CEO David Prokupek, left without public explanation.

All CEOs faced high expectations and short terms.

In May of 2013, Prokupek told business journal Bloomberg that he expected the chain to have 500 units in the U.S. within the next two to three years. But as April 2016 closes, the private company has yet to reach that lofty goal. It has a respectable 365 restaurants under its logo, but not 500. Prokupek also expected an initial public offering.

"Schaden and Prokupek failed to take Smashburger public," observes John Gordon, principal and founder of Pacific Management Consulting Group, about the chairman as well as the company's ex-CEO.

Having been with the chain from its earliest days, David Prokupek started as the chairman of Icon Burgers, which became an early prototype for franchisor Smashburgers. He would become the young franchisor's CEO. Prokupek's term as Smashburger's chief executive officer was roughly the same length as Crane, two and a half years.

After leaving, Prokupek sued Smashburger and Consumer Capital Partners, claiming that they deceptively cheated him out of millions in stock. He was known and liked in the franchising industry. So it is no surprise that a few months later in 2014 a large tax service franchisor, Jackson Hewitt, recruited him as its own chief executive officer.

"It is very ominous for a brand when CEOs come and go every three years," thinks franchise unit economist John Gordon about Smashburger's changing of the guard yet again. "It takes some time for a new CEO to get in place and even longer to shift the corporate culture. There is uncertainty for Smashburger in that now more time needs to be spent to get its new CEO up to snuff."

New CEO Michael Nolan became Smashburger's executive vice president and chief development officer two months ago. Having served as a member of the Smashburger board of advisors since 2012, his new role had him managing the selling of franchise licenses, restaurant build-outs and real estate.

Source: FDD

Nolan is a seasoned executive with strong brand experience. Serving most recently as an executive vice president and chief development officer at Corner Bakery, prior to that Nolan oversaw restaurant development strategy at Bloomin' Brands Inc. for more than 1,500 locations across 26 countries. Previous to that he led growth strategies for fast-casual giant Panera Bread Company during a 12-year expansion phase that saw its units grow from 250 to more than 1,500.

"Michael has a great history with the Smashburger brand and a great career delivering unparalleled food and hospitality experiences for customers around the world," commented Rick Schaden, chairman and co-founder of Smashburger. "At Smashburger we continue to set aggressive goals for quality, value, service and sales on an increasingly large scale. Michael's experience and perspective will be instrumental as we evolve from a regional player to a food first global brand."

The announcement follows a significant recapitalization of Smashburger that was completed in the fourth quarter of 2015. In late 2015 Smashburger announced a new strategic partnership with Jollibee Foods Corporation (PSE: JFC), a Philippines-based fast food firm.

Smashburger Smashes against Wall of Slipping AUV, Tougher Competition

One worrisome sign for the better burger restaurant chain is the significant increase in the ratio of company-owned to franchised restaurant units. The mix of franchises in its system has decreased from 56 percent in 2010 to 43 percent by the end of 2015. Company-owned stores have now become the majority of restaurants in the system. "The company store ratio has gone up," observes restaurant economist Gordon. He stresses that a healthy franchise system should have sustainable and growing store sales averages and unit counts, with the mix of franchises growing.

So what's wrong with a company that is so bullish on its prospects that it wants to invest more into its own company stores rather than selling proportionally more franchises?

Gordon points out that can indeed be a good thing, but points out that chains that want to grow fast like Smashburger grow faster by selling franchise rights to owners, not by building a massive supply of their own brick and mortar stores. The analyst also looks at the average unit volume, or store revenue, which has been dropping.

"The large upsurge in company restaurants through corporate acquisitions is a signal that Smashburger franchisees are struggling and that the company is stepping in," surmises Gordon.

Smashburger's ex-CEO Crane tried to meet the chain's many challenges. He bundled menu offerings at a better value price to be more competitive. Smashburgers do not have drive-thru service like quick service restaurants Wendy's, Burger King or McDonald's. Crane tried increasing store traffic by experimenting with drive-thru service. Though the chain's rate of growth was strong, particularly in buying stores for itself, Crane was under pressure to sell even more franchises.

To analyst Gordon, Crane's difficulty in increasing store traffic and his need to bundle burger menus show that competition has heated up in this sector. "The better burger space is extremely competitive and overloaded," says Gordon.

"Smashburger's same average unit sales have declined," he says to show additional evidence of the restaurants' troubles within the chain.

Smashburger company-owned restaurant AUV in 2010 vs 2015
Source: FDD

What Gordon is talking about is that Smashburger reported a drop in average unit volume for its company-owned stores from $1,049,522 in 2010 down to $1,017,276 in 2015, according to its franchise disclosure documents that it files annually.

Meanwhile, competition keeps pouring in. Other major players have announced their interest in this fast-casual sector. Even troubled Mexican grill chain Chipotle, which has seen its same-store sales tumble because of an earlier outbreak of E.coli and norovirus in its restaurants, has been talking about hopping on.

Darren Tristano, president of food researcher Technomic, has a different viewpoint. He thinks Chipotle is not too late to the kitchen. "The U.S. market probably isn't saturated with too many burger chains, said Tristano to Bloomberg. "If you're Chipotle, you're kind of looking at it saying, 'Wow, look at Shake Shack—they went from one to such a large volume of sales.'"

Smashburger's investors may feel left out. They may think that the market is great and with just the right CEO, he can supersize the medium-sized chain and attract Wall Street's interest even better than Shake Shack.

Chairman Rick Schaden stated in a letter, "As this chapter of Smashburger closes, our leadership team stands ready to take the brand to new heights and the future remains bright."

There is now talk about reaching a thousand restaurants.

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Don Sniegowski