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The company's approach to the premium burger involves choice ingredients and, as Houston Chronicle blogger Alison Cook puts it, a "splat-and-frizzle cooking gimmick" -- or smashing the meat down on the griddle to lock in juiciness. The company's approach to building a business involves a rather aggressive growth-by-franchise tear. So, is this growth model a good one for the recession? And what of the niche/upscale/better burger market in general? Smashburger on May 11 announced its latest franchise agreement with a group in Texas. The deal adds 10 restaurants to its system, brings the number of total franchisees to 177 and moves the company along on its five-year-path to 500 restaurants -- 150-200 corporate-owned and the balance franchises -- according to Smashburger chairman and Consumer Capital managing partner David Prokupek. Smashburger, so far, operates in Colorado, the West and Midwest, and with its franchise agreements, it will be near-national by year's end. Burgers overall, Prokupek says, are a $100 billion market. And better burgers, he says, are as a $30 billion category within five to 10 years. Smashburger hopes to be a leader in the space, alongside Five Guys Enterprises LLC (Five Guys Burgers and Fries), and of the handful of other smaller players, he expects a few to rise the ranks. The economy, Prokupek says, is playing into the company's growth plan as real estate prices have tumbled, making for lower rents, and likely more options. Further, "consumers are just stepping back," he says, from opting out of dining everywhere from big steak houses to casual spots like Chili's Grill & Bar and Applebee's. Additionally, Tom Forte, a director and senior research analyst with Telsey Advisory Group, says that given the tight credit markets, it's hard for some franchise models to get credit, like Domino's Pizza Inc. (NYSE:DPZ), so those that are well-capitalized may be at an advantage. Indeed, there are examples of niche dining concepts -- like frozen yogurt chains Pinkberry Inc. and Red Mango Inc. -- that despite the pullback are expanding, Forte says. These two, for their part, are fresh off funding rounds. Pinkberry in April announced a $9 million round of funding from undisclosed new and return investors with plans to open stores in the Middle East and to expand domestically, including in Northern California. The company in 2007 took a $27.5 million Series A round led by Maveron LLC. Red Mango in November took a $12 million round from CIC Partners LP's CIC Advantage Holdings LLC. Smashburger, Prokupek expects, will be cash-flow-positive by year's end, well-funded through '09 and may seek other financing options in 2010. And what about the competition? Five Guys, born in the Metro D.C. area, and smaller players like New York's Goodburger are competitors in premium burger niche. Lorton, Va.-based Five Guys spread outward from the D.C. area -- also on a growth-by-franchise tack -- to now have more than 300 locations in more than 25 states. Both companies are in the better burger space, Prokupek says, but he sees points of differentiation -- Smashburger with a more loungey feel than Five Guys' peanut-shelled floor and a broader range of offerings. The premium hamburger concept, Forte says, certainly has a market. McDonald's Corp. (NYSE:MCD) is getting into it with the angus burger, Burger King's in there as well, and it's something Carl Jr.'s has always been good at, he notes. He concurs there is an expanding market opportunity as customers tone down their dining. So is this a recipe for success? For some in the restaurant business, things are pretty tough out there right now. For other burger-restaurant-recession-related news, mine The Deal Pipeline and you'll find: May 18: OSI Restaurant Partners LLC (parent of Outback Steakhouse) sold Cheeseburger in Paradise to Steve Overholt, the chain's president, for $2 million.
Also, see tangentially related Dealwatches: Restaurants on the hot seat, Steakhouses: Buyouts and bankruptcy, for more. - Carolyn Murphy
CategoriesComments
From: Brian,
Phocion, the location number came from Five Guys own site (check the the link in the post). What about In-N-Out Burger? Do they qualify as being in this sector?
Posted on:
May 26, 2009 5:30 PM
From: Linda,
One thing that always bothers me when reading these rapidly growing chains ... Per the report above, "The deal adds 10 restaurants to its system, brings the number of total franchisees to 177 ..." As of today, 6/2/09, Smashburger's home page shows 14 open locations. Fourteen is a long way from 177. Dreams have a way of falling down in mid-flight. Tight credit, strong competition, and even shortages of suitable real estate can all negatively impact long-term plans. I would like to see writers and reporters show a little more restraint or at least use some of the "forward-looking statements" that public companies always include when commenting on their plans.
Posted on:
June 2, 2009 1:20 PM
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Last week I popped "burger" and "private equity" into Google, and the first hit returned was not Burger King Holdings Inc. (NYSE:BKC) -- the No. 2 U.S. burger chain, whose PE backers TPG Capital, Bain Capital LLC and Goldman Sachs Capital Partners have 
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Five Guys has 430 locations...do your homework before going to print please. Oh, and the Motley Fool suggested a back-of-the-envelope valuation of close to $2 Billion for the "Guys."