How to Improve on the Best Business Ever Seen

Last summer, my fellow Fool Tim Beyers told you all about the best company he'd ever seen. Californian quick-serve king In-N-Out Burger impressed him mightily with four core qualities:

  • In-N-Out is family-owned. Since 1948, In-N-Out has grown under the watchful eye of the Snyder family. There are "no plans to take the company public," says the company website. Compare and contrast to fellow burger flipper McDonald's (NYSE: MCD  ) , where institutional investors own 77% of the company and insiders don't even register as a blip on the radar – less than 1% inside ownership.
  • Its customers are "insanely loyal." Tim himself would go to the extreme of fisticuffs if his In-N-Out shirt was in any danger. Short of Apple (Nasdaq: AAPL  ) , you won't find a more dedicated fan base anywhere in Southern California. Hold that thought.
  • It's different. "Quality you can taste" sells burgers, and Tim can appreciate the fact that his son's allergies to proteins and preservatives never get triggered by In-N-Out's handmade fries. Fresh ingredients and generous employee training programs ensure the quality factor.
  • There's a disciplined growth strategy. Just as In-N-Out isn't planning to go public, management also doesn't want to sell franchises. "Expansion beyond southwest Utah would require freezing and, from management's view, damage the brand," said Tim. And that, my friend, is where I start to think that I've seen a better company.

In-N-Out Burger sounds like a fine business, and I'd love to sample those patties. But I have two big problems with this company. For one, management sounds pretty dead-set on staying private. More power to them, but it disappoints the investor in me. And for another, I might never get a chance to try the burgers. The closest location to my Tampa home base is in Tucson, Ariz. -- a mere 2,000-mile drive away. Because the company insists on sourcing its own beef and shipping unfrozen patties to the stores, it would have to build another meat processing plant in order to grow any further east.

Filling some large shoes
East Coast dwellers like me may never have seen an In-N-Out location. But wherever you live, I bet you've heard of Five Guys. The Murrell family ripped entire chapters out of In-N-Out's playbook, and then spiced it up with a few plays of their own. Five Guys started out as a single burger joint in 1986, serving up tasty sandwiches made from never-frozen beef on freshly baked buns. On my first visit in 2001, there were no more than five locations, all in the Fool's own backyard around Alexandria, Va.

It was already a local legend. Some people showed up for the Zagat-rated burgers, and others filled up on generous helpings of handmade fries. It's not exactly fast food, because the cooks start from scratch and form the patties right there on the grill. But that's OK, because while you're waiting, you can nibble away on the free, unshelled peanuts.

The similarities to In-N-Out should be obvious by now. But then, Five Guys took a turn for the better.

Top-notch one-upsmanship
Five Guys is still family-owned, but the Murrells started franchising the concept in 2003. By 2006, there were 87 stores, mostly along the eastern seaboard. Today, there are more than 300 from coast to coast, including three locations that are each less than a 30-minute drive from my house. I'm a burger fan of epic proportions, but the McDonald's five minutes away gets zero business from me these days. The Wendy's (NYSE: WEN  ) Baconator is pretty good, but it ain't the real thing. And Burger King (NYSE: BKC  ) can keep its Angry Whoppers chained up and muzzled for all I care. I'd open a Five Guys in my kitchen if I could. And I'm not alone.

There's nothing wrong with a properly conceived franchising plan, if you ask me. Buffalo Wild Wings (Nasdaq: BWLD  ) is living proof that franchisees can keep the spirit of a powerful brand alive -- as long as the franchisor stays involved with training and support. Five Guys doesn't have to hand-pick each head of cattle for its burgers, so it can grow wherever you'd find suppliers, like a Sysco (NYSE: SYY  ) distribution center. There are more than 1,500 Five Guys units in development.

And here's the kicker: Five Guys may not stay private forever. "We do not currently have plans to go public," the company says, but they don't suggest that they've closed the door to Wall Street entirely. The franchising step alone is a sign of the Murrells' ambition to grow bigger and more profitable; an IPO would be a logical next step.

The Foolish conclusion
So Tim, I think I've found a better company than your best. This one marries the same recipe of quality product and highly involved management to a thoroughly modern growth concept. Five Guys was said to be worth $1 billion three years ago, at one-third its current network size. If and when this baby goes public, I'll be standing in line.

I do agree with Tim's idea of the best stock he's ever seen, though -- we both own that longtime Stock Advisor recommendation. That company takes the hands-on management and fanatical attention to detail that the burger boys have shown here, and applies it to the entertainment industry. It's kind of like the early days of Walt Disney (NYSE: DIS  ) , with a definite potential to become a giant like the Mouse in a couple of decades. A free 30-day trial of Stock Advisor will reveal the identity of this masked vigilante in the time it takes to get a Five Guys masterpiece.

Chow down on some more tasty Foolishness:

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Sysco is a Motley Fool Income Investor pick. Walt Disney is a Motley Fool Inside Value recommendation. Walt Disney and Apple are Motley Fool Stock Advisor picks. Buffalo Wild Wings is a Motley Fool Hidden Gems selection, and The Fool owns shares of Buffalo Wild Wings. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in Disney and Buffalo Wild Wings, but he holds no other position in any of the companies discussed here. He can't wait to get his hands on some Five Guys stock, and all this food talk is making him hungry. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2009, at 2:39 PM, Rasbold wrote:

    Sometimes staying private is best, consider Asplundh. I live in California, In and Out is an old standby for burgers that actually taste good, unlike McDonalds or BK. Their biggest problem is time. THEY ARE SLOW. Any location you see will have a full drive-thru, all the time. The product is worth the wait, but I don't think it would compete well in areas that have a strict lunch schedule, like the East Coast. Here in Cali, we kick back more than the average citizen, if we have a 30 minute lunch break, but it takes 45, no one cares. Back East, you'll get fired for that crap. You will spend no less than 30 minutes at the restaurant, even if they are slow.

    I'd buy the stock in a New York minute, though!

  • Report this Comment On February 24, 2009, at 2:56 PM, npmsfan wrote:

    I grew up in CA, and now live in CO. No In-N-Out here, but there is 5 guys, as well as Smashburger. If you've never had In N Out, don't waste your time analyzing it. It is a far superior product to 5 Guys. 5 guys is loaded with sauces, and their fries are terrible.

    Moreso, the employees of In-N-Out get orders right, the food is ALWAYS great, and they care about their customers. And, the employees are paid well, not like most fast food joints.

    Yes, I hope In-N-Out continues to move east and add more distribution network, but if not, that's ok.

    Some things are kept in the family. I will gladly wait for In-N-Out on trips to areas where they are before I ever step into 5 Guys again.

  • Report this Comment On February 24, 2009, at 6:32 PM, cddata wrote:

    "But wherever you live, I bet you've heard of Five Guys."

    I've lived in Tampa, FL, San Diego, CA, and Sacramento, CA and I've never heard of Five Guys.

    Rasbold (above comment) did say something that is absolutely true based on EVERY In-N-Out location I have ever seen..."Any location you see will have a full drive-thru, all the time." Now why can't a publicly traded company repeat that?

  • Report this Comment On February 26, 2009, at 7:00 PM, stallis wrote:

    I was introduced to 5 guys when I moved to D.C. durign the summer of '01. I would agree that out here there is no match, excluding the bite-sized "sliders" at Matchbox, which are twice the price.

    However, it is my opinion that Culver's is every bit as good as Five Guys with the added advantage that they serve homemade frozen custard. Culver's has also seen great growth and recently commented that they will continue to expand this year because they are doing so well.

    Stallis

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