Burgers Are Back—Again

When it closed its initial public offering in January, Shake Shack had raised more than $112 million—which MarketWatch calculated as about $150 for each burger it sold last year. The Habit Burger Grill had a similarly spectacular IPO in November, and excitement is building for Smashburger’s expected stock-market debut later this year.

Does the outsize attention paid to these chains represent realistic expectations for profit in the coming years?

There’s no doubt that consumer demand for high-quality hamburgers is solid. Even struggling McDonald’s is striving to produce “better burgers.” But while the fast-food chains are stuck offering attention-getting price deals (and making up for these loss leaders on the prices they ask for fries and drinks), fast casuals face little price sensitivity from their customers and can raise burger prices as needed. That’s a distinct advantage. Even as expansion slows for the larger better-burger chains, it should come as no surprise that unit tallies continue to show widespread growth in the sector: BurgerFi’s system almost doubled last year, and location counts for Smashburger and Wayback Burgers were up by double digits.

Yet we’ve been here before—as far back as the debut of Fuddruckers in 1980 or even Hamburger Hamlet in 1950. Their success didn’t last forever: Fuddruckers went through a bankruptcy in 2010, and Hamburger Hamlet is now down to one Los Angeles-area location. Despite the perennial popularity of burgers with the American public, it seems there’s a cycle to the gourmet hamburger business.

Is there a “burger bubble” brewing?

AS I SEE IT, in any sector, there’s only so much room for growth before market saturation is reached. Not every entrepreneur has the savvy of Shake Shack’s Danny Meyer—and not every limited-service burger chain can pull in $3 million a year per unit. I suspect that we may later look back on the Shake Shack IPO as a tipping point for the better-burger category.

Note: This content originally appeared in the February 2015 issue of Technomic’s Foodservice Digest newsletter.

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Ron Paul

Ron Paul founded Technomic over 45 years ago. As President and CEO, he directs the firm and all its research and consulting engagements, covering almost every aspect of the foodservice business. Ron has written extensively about management and marketing topics, as well as a broad range of food and foodservice issues. He is a frequent industry speaker and is often quoted in trade, news and business media, including the New York Times, Wall Street Journal, USA Today, BusinessWeek, Newsweek, CNN-TV and CNBC-TV.

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  1. I think that is warranted skepticsim. And hopefully some independent owners are skeptical too – and don’t fall into the me-too trap.

    The reliance on single-item (so to speak) menus can raise visibility for novelty, but it also leaves operators locked into a narrow concept. This approach always reminds me of single-item places that put the ‘not just’ disclaimer somewhere in their marketing. (Remember Knot Just Pretzels? – are they still around?)

    We see local restaurants try to mimic the focus of ‘single-item’ concepts and struggle because they don’t have the budget or planning depth to function as efficiently or convincingly for their customer as a chain restaurant.

    In truth, a local’s real strength is flexibility – in responding to and fitting in with a customer base they can know and understand on a much more intimate level. It’s no surprise that strength is the polar opposite of a chain’s strengths, which are more operational and financial. For independents, it’s important to not compromise that mutability with a too-narrow concept.

  2. avatar Richard Adams says:

    “But while the fast-food chains are stuck offering attention-getting price deals (and making up for these loss leaders on the prices they ask for fries and drinks)”

    More damaging is that these chains have to raise prices on core menu items such as large sandwiches and wraps to cover the losses. This is the reason the McDonald’s Angus line failed and is the reason Create Your Taste will likely fail (in addition to the fact that it doesn’t apply to drive-thru.

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