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.