The fast-casual field gets crowded in the race to build the better burger

By: Lisa Jennings; Nations Restaurant News

In a world where the quick-service burger has long been king, fast-casual “better-burger” operators are threatening to steal the crown.

So say observers of the downfall-defying better-burger space, the fastest-growing foodservice category at a time when most other types of concepts have put hopes of growth on hold.

Americans, it seems, have become increasingly dissatisfied with the burgers offered by most quick-service players. Despite the lightness of their wallets, many are willing to pay more for a higher-quality hamburger served in a fast-casual setting.

As a result, fast-casual burger chains are racing to plant their flags in markets across the country, proliferating at a recordbreaking clip, and setting their sights on stealing market share from their quick-service brethren — without the use of coupons, discounts or, as one burger operator put it, “employees in chicken suits.”

Demand fuels growth
Many such brands were born within the past few years, including Smashburger, Elevation Burger, Mooyah Burgers & Fries, Shake Shack, M Burger, Boardwalk Fresh Burgers & Fries, Meatheads Burgers & Fries, and Bobby’s Burger Palace. Others have been around a while but their growth only recently took off, including Five Guys Burgers and Fries and Habit Burger Grill.

Both newcomers and old timers, however, are riding a wave of demand for quality burgers that shows no sign of abating. “There’s nothing on the horizon that will change America’s love for burgers,” said David Prokupek, chairman and chief executive of Denver-based Smashburger. “It’s America’s favorite food.”

Burgers were the top-growing food in the restaurant industry in 2009 across all segments, said Bonnie Riggs, an analyst at market-research firm The NPD Group, based in Port Washington, N.Y.

Last year, the number of burger orders was up 5 percent across all segments, with customers ordering an estimated 420 million more burgers in 2009 compared with 2008, she said.

“There weren’t many things that were positive in the restaurant industry last year, but burgers were certainly one,” Riggs said.

Though traffic was down across all segments over the past six quarters, Riggs said, the bakery/sandwich category within the fast-casual segment was up 3 percent in 2009. The category includes bakery-café concepts, such as Panera Bread and Corner Bakery, as well as the growing number of better burger concepts.

Riggs said the demand for better burgers is increasing for a number of reasons. Among them, she noted, the concepts are new, and consumers believe they offer a fresh, better-tasting and better-quality product.

Cash-strapped diners also have traded down from full-service casual-dining restaurants to fast-casual brands, where they still feel they get a good experience for the money.

“We’re looking for convenience and affordability,” Riggs said. “These better-burger concepts offer a good price-value-and- convenience proposition.”

No saturation yet
When asked whether the nation may be reaching a saturation point for burgers, researchers respond with an emphatic “not for a while yet.”

“There’s a lot more opportunity for better burgers to grab market share,” said Darren Tristano, executive vice president of Chicago-based research firm Technomic. “We’ll continue to see a high level of growth over the next two or three years.”

According to Technomic, fastcasual better-burger chains were a $1.4 billion category in 2009, up 21 percent in unit counts compared to 2008. Strong unit growth helped to push sales up 18 percent in 2009 as well.

For example, Five Guys jumped from 360 to 547 units, a 52-percent increase, during 2009, Tristano said.

“Five Guys could hit the 1,000 count faster than any chain in history,” he said.

Quick-service players, however, are not planning to give up market share easily.

McDonald’s and Burger King in recent months have introduced new premium-burger products in an attempt to keep the attention of guests who may be trading up to better-burger concepts.

Researchers, however, do not see consumers shifting down from the fast-casual category.

“The Quarter Pounder user will upgrade to the Angus Third Pounder [at McDonald’s], but the Five Guys user is not switching to the Angus,” Tristano said.

Better-burger operators point to the fact that the quick-service players also are putting more emphasis on breakfast and coffee, in part, they say, because they’re losing their grip on burgers.

Tom Ryan, founder and chief concept officer of Smashburger, contends the better-burger category is still in the early stages of defining itself.

Within the next few years, he estimates that fast-casual burger concepts could steal about 20 percent to 30 percent of what he sees as a $100 billion annual burger market, with three or four players emerging as leaders in the space.

Racing toward $1 billion
That prediction may be optimistic, Tristano said. Technomic estimates the quick-service and fast-casual burger categories combined to be a roughly $64 billion business, including the sale of chicken, beverages and other non-burger items.

Still, Tristano and others agree that a billion-dollar fast-casual burger player will soon emerge.

A leading contender is Five Guys Burgers and Fries, based in Lorton, Va., which first opened in the Washington, D.C., area in 1986.

After opening about five units and developing what some have described as a cult following — founder Jerry Murrell started franchising the brand in 2002.

The chain now includes 577 locations, about 90 of which are company-owned, and officials expect 250 to open by the end of 2010, including another 30 corporate locations.

Five Guys is known for its short menu of one-third-pound burger patties, hand-formed and made from never-frozen beef. Fries are cooked in peanut oil. Hot dogs are also offered, and vegetarians can purchase a sandwich or grilled cheese, but the menu includes no chicken, no salads and no shakes.

Five Guys uses a network of about 10 bakeries across the country, which supply the buns created from a “secret recipe,” and deliver them fresh daily, Murrell said.

Units are typically about 2,500 square feet with no drivethru and cost roughly $300,000 to $350,000 to open. Corporate locations have an average unit volume of about $1.2 million, Murrell said.

The average ticket at a Five Guys is about $11, higher than most quick-service burger brands. The top seller is the bacon cheeseburger at about $6.

Despite the recession, Murrell said the chain hasn’t lost customers to lower-priced burger players.

“I don’t consider McDonald’s a competitor,” Murrell said, noting that one Five Guys location in Alexandria, Va., amicably shares a parking lot with a McDonald’s. “They’re trying to copy us, and I get a lot of satisfaction from that. They’re just getting people in the mood for paying more for burgers, and that’s good for us.”

With the number of better burger restaurants changing by the day, some wonder whether brands like Five Guys will soon feel the pain of overbuilding, poor site selection and the difficulties of maintaining quality — common hazards for rapidly growing brands, said Tristano of Technomic. So far, however, the better-burger purveyors seem unfazed by the pace of growth.

Others in pursuit
Smashburger is another brand jockeying for position within the booming segment. Much smaller than Five Guys, Smashburger was founded with a $15 million startup investment by private-equity firm Consumer Capital Partners, developed by Rick Schaden, who also founded the Quiznos sandwich chain.

Though Smashburger has about 56 stores open — about 80 percent of which are corporate — officials expect to end the year with as many as 105, and they project hitting the 500-unit mark within five years.

“It has been our goal to be the No. 2 [chain] within the next year,” said Prokupek, who is also a managing partner and chief investment officer for Consumer Capital Partners.

Currently, Smashburger operates in 12 states, but the company began franchising last year, and said it has about 350 franchise development agreements, which would cover about 80 percent of the United States.

Prokupek said Smashburger appeals to franchisees in part because of its low cost of entry. The initial investment for a restaurant, which is typically 2,000 square feet with no drive-thru, is roughly $400,000.

Smashburger’s menu is centered around Angus beef burgers smashed on the griddle, a technique that officials say sears in juices.

The burgers are cooked to order using a proprietary method that reduces cook times to about three minutes, Prokupek said. The food is served “restaurant style,” with real silverware and glass in a comfortable atmosphere with great music.

Though chicken, salads and hot dogs are on the menu, about 90 percent of sales are from burgers, Prokupek said.

The chain has an $8 average check, and officials estimate that about one-third of the brand’s customers are quick-service regulars trading up for a better experience. Another third comes from trade over from fresh Mexican and other fastcasual brands, and a third comes from those trading down from casual dining, they said.

Smashburger has yet to become established on the West Coast, where better-burger players face stiff competition from In-N-Out Burger, a quick-service brand based in Irvine, Calif., with a cult following that many better-burger operators seek to emulate.

One brand taking on In-N-Out Burger is Habit Burger Grill, based in Santa Barbara, Calif., a brand that caught the eye of private-equity investors KarpReilly LLC, which bought the then more than 30-year-old chain in 2007.

At the time, Habit Burger had 15 units. Since the acquisition, the chain has doubled in size to 30 units, and company officials plan to open about 25 per year, initially focusing only on California. Habit Burger does not franchise.

Known for charbroiled burgers cooked over an open flame, Habit Burger also offers salads and grilled chicken as well as a signature grilled-albacore-tuna sandwich, which has helped the brand be more “gender neutral,” said Russ Bendel, Habit Burger president and chief executive.

Typical Habit Burger locations are about 2,000 square feet in size and most have no drive-thru, though the company recently opened a drive-thru location to test the feature.

Because of the cooked-to-order nature of the business, however, service times are about six to seven minutes, which is longer than most quick-service drive thrus. Bendel said the company has no plans to add more drive-thru locations for now.

Habit Burger units average about $1.2 million in sales, and Bendel said the company has never seen a year without samestore sale increases. In 2009, same-store sales were up about 3 percent, he said.

Bendel said he’s not worried about the West Coast plans for both Five Guys and Smashburger. “We feel we do have momentum,” he said, “and competition always brings out the best in restaurant people.”

Some seek niches
As the larger players grow, others are looking for niche opportunities.

For instance, Elevation Burger highlights its environmental consciousness. Based in Arlington, Va., Elevation Burger was founded in 2005 as a concept that offers burgers made from organic, grass-fed beef and fries cooked in heart-healthy olive oil — ingredients that don’t leave diners in a “burger coma,” brand officials said. The company also emphasizes its environmentally focused building plan.

The chain includes one corporate unit and six franchise locations, and more company-owned stores are in development, said Michael Berger, a partner and director of restaurant development. The company has commitments for 58 franchise units over the next five years, with 15 to 20 expected to open by the end of 2010. “I think the healthier burger will really be taking off,” Berger said. “Investors are seeing us as having the ability to move in the marketplace.”

As the category becomes more crowded, however, some observers anticipate fallout as smaller start-ups attempt to compete against the better-financed, established brands.

That’s not stopping newcomers to the field, however. Among them:

  • Lettuce Entertain You Enterprises in Chicago last month debuted a fast-casual concept called M Burger there, with burgers for under $5.
  • Celebrity chef Bobby Flay is growing his fast-casual Bobby’s Burger Palace, with the fifth unit scheduled to open this month in Philadelphia.
  • In Los Angeles, the operator of the casual-dining Umami Burger chain is planning to open a fast-casual variant of the brand later this year.
  • Boardwalk Fresh Burgers & Fries, based in Columbia, Md., has five locations open and another 188 in development.

“It’s a me-too industry,” said Riggs of NPD Group. “Any time somebody hits a success, others jump on the bandwagon. Has it reached a saturation point? No. But as others enter the segment, maybe it will.”