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Five Guys strengthens support, infrastructure to keep up with rapid growth rate

Five Guys strengthens support, infrastructure to keep up with rapid growth rate

Five Guys Burgers and Fries’ founder Jerry Murrell was initially opposed to franchising the fast-casual concept and finally had to be persuaded by his business partners — his wife and five sons. 

Even then, Murrell doubted that the family-operated cult concept had any serious growth legs, and when Five Guys opened its doors to franchising in 2003, he harbored concerns it would never catch on outside of its home base of Virginia, Maryland and Washington, D.C. Rapid expansion into Georgia and the Carolinas did nothing to ease his misgivings, and he told his family that Five Guys wouldn’t work in Florida, reasoning that “nobody knows us there.”

Then Florida opened up, followed by other Southern states like Kentucky and Tennessee.

“Around that time, I guess I decided that we would probably stop at the Mississippi,” recalled Murrell, who also is president and chief executive. “And then, suddenly, we’re in California.”

In fact, Five Guys suddenly is everywhere. The undisputed front-runner in the sizzling fast-casual “better burger” sector, Five Guys has grown almost overnight from a handful of family-run outposts in the D.C. area to more than 630 locations in 41 states and Canada. 

In 2009 the company and its approximately 200 franchisees opened 171 company and franchised locations, according to Nation’s Restaurant News’ Top 100 census. The brand entered the Top 100 this year after growing its systemwide sales by nearly 69 percent in 2009 to $499 million. Furthermore, Murrell said, Five Guys anticipates having 775 outlets operating by the end of 2010, and has plans to open an additional 550 stores by the close of 2012. Things are moving so quickly, in fact, the chain has sold all of its territories in the United States and Canada and currently is exploring international markets such as Europe and Asia for expansion potential.

‘First-mover strategy’

Clearly, Five Guys represents the dominant player in a field that is growing increasingly crowded day by day. Similar fast-casual concepts like Smashburger, Elevation Burger, BGR, 5 Napkin Burger, Mooyah, The Counter, Bobby’s Burger Palace and Shake Shack are following in Five Guys’ wake, with several touting their own high-octane expansion schedules.

Even Southern California’s cult-classic burger granddaddy In-N-Out is expanding outside of its home turf, into Dallas, the easternmost point the 240-unit chain has traveled in its 62-year history.

“I’m thinking about printing a bumper sticker,” said Dennis Lombardi, executive vice president of foodservice strategies for WD Partners in Columbus, Ohio. “It would say, ‘Honk if you’re not opening a new burger concept.’”

But while the field is filling up quickly, Five Guys seems to have irresistible momentum, experts say. Noting that the streamlined fresh burger-fries-and-beverage concept is constructed on a simple but highly effective business model, New York restaurant consultant Malcolm Knapp points to the brand’s aggressive store-opening timetable, saying: “They’re obviously going for a pre-emptive strike. This is a prime example of a first-mover strategy. They’re the first guys in.”

To be sure, ramped-up growth is not a new tactic for winning the foodservice game. Moreover, cautionary tales abound of determined players with replicable concepts that expanded too swiftly and then were forced to pull back and retrench. Lombardi cites chains like Quiznos, TCBY, Schlotzsky’s, Miami Subs, Moe’s Southwest Grill and even Boston Market as moving out of the franchising gate too hastily. Boston Market, in particular, became a restaurant industry poster child for too-rapid expansion after its vaunted “financed area developer” program failed it in the 1990s, and the innovative home-meal-replacement chain eventually wound up having to shutter about half of its locations.

In general, most ambitious franchised chains run the risk of “damaging the brand when they grow beyond their infrastructure,” Lombardi said. “Also, the more liberal the brand is in screening and selecting franchisees, the greater the risk of failure. Many just ‘check the franchisee’s heartbeat’ before they sign them up in the early stages of growth. But then they end up having to deal with franchisees they later wish they hadn’t let into the system.”

Undiscriminating site selection also can contribute to engine failure of a high-velocity growth chain, Lombardi said.

“When a concept is lenient about a franchisee, it’s usually lenient about site approval,” he said. “So you have a poor operator going into a relatively mediocre site. A double whammy.”

But, he added, “from my perspective, Five Guys is doing it right. They’re a strong concept.”

And despite Murrell’s early concerns about franchise expansion, it would appear that the Lorton, Va.-based brand has constructed an evolving infrastructure that will allow the chain to continue growing at a pretty rapid rate.

All in the family

“Five Guys has a unique business philosophy,” said chief operating officer Sam Chamberlain, who noted that the brand had only five stores in the Northern Virginia area through 2001. Today there are about 100 company-owned shops. “It’s unique in that it was a family business for 18 years without much growth,” he said. “When they started franchising, their ownership depth was much deeper than that of the average company, and each [family member] is intimately involved with running the company to this day.”

The five guys in Five Guys — the brand is named for Murrell’s five sons — are Jim, Matt, Chad, Ben and Tyler Murrell, all of whom are active in daily operations along with their father and their mother, Janie, who also has been involved from the beginning.

Another strength is the chain’s inherent simplicity. Five Guys serves only a handful of core menu items: premium hand-packed burgers made from freshly ground beef, hand-cut fries prepared in peanut oil, hot dogs, some vegetarian sandwiches and beverages — although no milk shakes. Toppings like sautéed mushrooms, tomato and jalapeño peppers are available.

All of the chain’s bread products are prepared at Five Guys’ 10 bakeries — six more are coming on line — around the country.

As a result, the stores themselves are relatively simple in design and cost comparatively less to open — between $350,000 and $400,000 per unit. And because all of the food Five Guys serves is fresh, there are no freezers in the back-of-the-house.

“They are simpler even than McDonald’s was in the 1960s,” Knapp said. “Even a Baskin-Robbins has more complexity. [Five Guys] is very focused, and they’re pretty fast on the cooking lines.”

“I don’t think we’ve changed one little thing in the restaurants after we started franchising,” Murrell observed.

Return on investment also tends to be healthy. Five Guys generates average sales per unit of about $1.1 million. New stores are averaging 50 percent higher than the current average unit volume, Murrell said, “even after a grace period.”

“We’re just getting better real estate now,” he said.

Cementing a foundation

Over time, however, the company has changed in that it has had to establish an infrastructure that can sustain rapid growth while protecting the brand.

“My family is fanatical about the quality of the product,” said Murrell, who opened the first Five Guys in Arlington, Va., in 1986. “And we have put money into maintaining that quality.”

Admittedly having known little about franchising in the beginning — “We read ‘Franchising for Dummies,’” Murrell joked — Five Guys has been steadily assembling a more extensive corporate infrastructure.

To help strengthen the brand, seven or eight high-level executives who, as Murrell said, “understood the rules,” such as Chamberlain and chief financial officer Peter Hanson, were hired in 2008.

Chris Calloway, chief operating officer of the Calloway Consolidated Group, a franchisee whose territory encompasses the Jacksonville, Fla., area, said communications between the corporation and the franchisees have improved considerably since his company began franchising in 2005.

“There were only about 100 stores [in the system] then, and communication has improved drastically,” he said. “There just was not the infrastructure then. Things weren’t as tight as they are now.”

Calloway currently operates eight stores in the Jacksonville area, one of which generates more than $80,000 a week in sales — the highest volume in the system. He says his company plans to open 25 locations.

Five Guys employs a pair of store-level programs to help it maintain a requisite level of quality among its rapidly growing franchisee population. Although Five Guys admittedly does no advertising, it collects a “marketing” fee of 1.5 percent annually from franchisees. That amount is matched by the corporation to help fund its hourly bonus program, Murrell said.

An elaborate secret-shopper program is conducted for each location twice a week by a third-party firm. Each store and shift is graded on its performance. Depending upon store volume, a bonus of anywhere from $700 to $1,300 a week can be awarded to shifts who receive top grades.

Bob Dorfman, whose TCH Restaurant Group in Tampa, Fla., owns territories in Tampa, Houston and Columbus, Ohio, said generally half to three-quarters of the stores receive the money.

“With a shift of five or six people splitting $900 for the week, you can see how that adds up,” he said. “There’s a lot of peer pressure. A store can lose 20 points if the cashier doesn’t offer fries and a drink along with a burger or if someone didn’t get the proper greeting or a burger was overcooked. Stores are also graded on cleanliness and other factors. There’s so much money at stake, people work to earn it. It’s one of the ways Five Guys ensures that everything is done well.”

Another regular monitoring program conducted by a third-party firm that grades health and safety issues at the store level affects managers’ bonuses. Following specific criteria provided by Five Guys, the outside firm conducts a white-glove examination of each location. 

“If they find a tomato seed on a cutter, you get dinged,” Dorfman said. 

If significant problems exist, a franchisee could find himself called on the carpet for review by the company.

Continuing education

Five Guys’ corporate training department also has been strengthened to accommodate growth. There are now about 35 employees dedicated to training, who are responsible for schooling everyone from franchisees to hourlies. No one, in fact, escapes training — even franchisees must put on an apron and a hat and work at a headquarters store in Lorton for 30 days before being allowed to go back into the field searching for sites.

Training continues when stores are opened. Three or four experienced corporate trainers work on-site at each new store with hourlies and managers for the first 10 days or so, Murrell explained. Continued training via video is also part of the process for Five Guys’ 16,000 employees.

Five Guys’ district managers also help franchisees maintain the requisite quality levels. There are some 40 district managers who visit about 15 stores each on a regular basis. Dorfman said corporate district managers visit the stores “pretty regularly.”

“They evaluate them, and work with the general manager and team to make sure the store is on track,” he said.

“The district managers are at the heart of the program,” Murrell said, adding that the company is in the process of hiring additional DMs to accommodate further growth.

Individual franchisees also must create their own infrastructure as they grow. To help ensure greater buy-in from franchisees, Five Guys avoided signing any deals with mom-and-pop operators who wanted to open only one or two units, and focused instead on operators who would commit to at least five locations. 

Dorfman, who paid out about $1.5 million to become a Five Guys franchisee and expects TCH to be a $100 million company by 2018, currently operates about two dozen units in his three diverse markets. Each area has a regional vice president of operations with a district manager reporting directly to him, “and as the company grows, we add another level,” Dorfman said.

Everything at the regional level rolls up to the parent company, which also employs executives like chief financial officer and vice presidents of marketing and human relations.

Andy Stern of Five Points Partners LLC, which franchises all of Manhattan, has created a corporate structure for his six-unit company with an operations vice president, district manager and trainer. In addition, he receives plenty of support from Five Guys.

“We see them pretty frequently,” he said.

A foodservice veteran who operated such brands as Dunkin’ Donuts and Subway in New York state, Stern said his company is responsible for all hiring. 

“We require every person to be interviewed by five people, including the general manager, trainer, the district manager and at least one employee,” he said. 

Stern allowed that doing business in New York can present some unique challenges not faced by most other operators around the country — for example, lunch in some outlets accounts for 
70 percent of sales, which can lead to long lines. Stern plans to open more than 20 restaurants in Manhattan.

Miles to go

While Five Guys operators acknowledge that the better-
burger market is filling rapidly and eventually there will be some cannibalization, no one thinks that day is near. So far Five Guys has closed only about 10 locations in seven or eight years, in most cases because the leases had ended and it wasn’t worth it to reopen on those sites, Murrell said.

“I’d say we’re only about 
halfway done with new burger concepts,” Lombardi said. “There are more coming down the road. Eventually, there will be a shake-out, but Five Guys is clearly strong enough to withstand it. From my perspective, they’re doing it right.”

Murrell and his family believe they’re doing it right, too, and have no plans to reconcept any time soon. 

“We started off running a small family hamburger place, and it’s been successful with customers and critics,” he said. “We’ve stuck with that and have been smart enough not to try to do something new. I guess Five Guys just has a brilliant CEO.”

Contact Paul Frumkin at [email protected].

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