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.
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: