Five Guys vs. In-N-Out Burger: Can You Guess Which Is the Better Business?

Two burger chains with great growth prospects go head-to-head in a financial showdown.

Tim Beyers
Tim Beyers
Oct 10, 2014 at 11:30AM
Consumer Goods

Both chains have their fans, but which would you want to invest in? Credits: Five Guys Burgers and Fries, In-N-Out Burger.

Anyone who's ever lived in Southern California can tell you that the world's best burger is made by In-N-Out Burger, a family owned quick serve restaurant that started in 1948 as the region's first drive-thru burger stand.

I've been away from SoCal for going on 17 years now. Only during occasional trips back do I get a chance to enjoy In-N-Out's signature creation, the Double-Double: a two-patty cheeseburger decorated with lettuce, tomatoes, grilled onions, and a mouth-watering special sauce.

Local Colorado friends -- and more than a few at Fool HQ in suburban Washington, D.C., where the chain started -- say I'll be just as happy with Five Guys Burgers and Fries, which, unlike In-N-Out, now has several locations near me. I've yet to accept their invitation. Looking at the numbers, I wonder if they have a point.

Beyond the bun
According to QSR Magazine, Five Guys joins McDonald's (NYSE:MCD), Burger King (UNKNOWN:BKW.DL), and The Wendy's Co. (NASDAQ:WEN) as one of America's top-10 burger chains:

Chain
Systemwide Sales
Franchised Units
Company Units
Total Units
YoY Unit Growth

McDonald's

$35,856.3 million

12,739

1,539

14,278

0.85%

Wendy's

$8,787.0 million

4,745

1,046

5791

(0.45%)

Burger King

$8,502.5 million

7,103

52

7,155

(0.39%)

Sonic Drive-In

$3,800.0 million

3126

396

3,522

(0.96%)

Carl's Jr./Hardee's

$3,400.0 million

1,964

894

2,858

1.09%

Jack in the Box

$3,108.5 million

1,786

465

2,251

0.04%

Whataburger

$1588.4 million

125

633

758

2.43%

Five Guys

$1.138 million

805

315

1,120

5.66%

Culver's

$905.6 million

487

8

495

4.87%

Steak & Shake

$895.0 million

103

415

518

4.44%

Source: QSR Magazine.

Give this list a close look and you'll notice three things:

  1. Say what you will about the company falling apart before our eyes, McDonald's grosses four times as much as its closest peers.

  2. Keeping a large network of quick serve restaurants is tough. Of the top four names, three closed more stores than they opened in 2013.

  3. Franchising is volatile -- see point two -- but it's also the surest path to growth.

In-N-Out doesn't franchise. As a result, its $558.2 million in gross sales ranked 13th among burger joints last year and 44th on QSR's annual top 50 list. Contest over, right? Five Guys is not only bigger but it's also growing faster thanks to franchise leverage.

If only it were that simple. The size of Five Guys' empire isn't so important as the cost of expansion, and what each store is capable of earning.


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A slow burn cooks better
How well does Five Guys do on a store-by-store level? Not as well as a potential investor might like. Last year's $1.027 million in per store sales not only trailed In-N-Out's $1.955 million, but it was also down from $1.049 million in 2012 and $1.156 million in 2011:

Source: QSR data and author's calculations.

See the difference? While Five Guys has enjoyed bursts of growth, In-N-Out is expanding more predictably as the chain proves itself in new territories. In 2011, the company opened its first stand in Texas. There are now 25 locations either doing business or in development across the state as locals prove insatiable. Further expansion into surrounding states seems likely.

Knowing what we do about In-N-Out's history and strategy, chances are it will all be funded through excess cash generated by existing stores. That's a mark of a truly great business, and why I think In-N-Out should get the nod over Five Guys.