The "better burger" category has soared on the coattails of fast casual's good-tasting, sustainable ingredients movement and it's meant big business for restaurant operators. Shake Shack is aiming for a $1 billion valuation following its IPO this year, which would make it the biggest restaurant-related public offering in history
Better-for-you burgers take off
But just because people are willing to shell out $4.50 for a burger and $5 for a shake doesn't necessarily mean the food is the best. For that information, we turn to a survey of more than 32,400 Consumer Reports subscribers who ranked 65 restaurants during 96,000 dining experiences across the country.
Shake Shack was curiously left off the list of rated restaurants, but all the other major industry players were present. McDonald's (NYSE:MCD) came in dead last in the rankings, only slightly worse off than Burger King Worldwide (NYSE:BKW), demonstrating that diners are rejecting the frozen, too-small patties typically served up by the fast food titans. Not surprisingly, better-burger chains claimed the top 10 spots of the survey.
Still, even some of the best known, trendiest chains didn't make No. 1. Smashburger? No, it came in fourth. In-N-Out Burger? It might be the best fast-food restaurant to work in, but it was only second in best-tasting burgers. Five Guys? Nope, the Murrell clan's burger chain was third.
So what was the best burger restaurant? The Habit Burger Grill, operated by The Habit Restaurants (NASDAQ:HABT).
Don't start making a habit out of this
Starting out with just one restaurant in Santa Barbara, Calif., in 1969, The Habit Burger Grill today operates nearly 100 stores in 10 markets across four states. The tri-tip steak, a cut of beef that was popularized in California in the 1950s, is central to its burgers.
Yet the Habit Burger Grill is just the latest entrant in the $34.5 billion high-growth, fast-casual restaurant business that specializes in serving fresh, made-to-order char-grilled burgers and sandwiches. It also offers grilled chicken and sushi-grade albacore tuna that are cooked over an open flame in its restaurants.
Like Shake Shack, it found the intense interest in better burgers made the timing right to go public, and last November it began trading on the Nasdaq exchange.
The Habit's revenue has grown growing at a compound annual rate of 44% since 2009, outpacing the expansion of its stores. Its adjusted earnings before interest, taxes, depreciation, and amortization have risen at a 66% annual clip.
Shaking up the industry
Compare that to the hyped Shake Shack IPO, in which company revenue is growing at a 62% CAGR as it expands the number of restaurants in operation, but adjusted EBITDA has widened by less than 19% over the past three years.
The Habit's IPO was priced at $18, and the stock opened at $30 a stub before rising as high as $44. Now, however, as the euphoria has worn off, it trades at about $29.
But The Habit's burgers could be a dining treat you'd want buy into regularly. First, its better burgers represent a better deal than many of its rivals, with prices starting at $3.50 and the average guest check coming in at just $7.56, one of the lowest tallies in the fast-casual dining segment.
Foundations of a good business
Just as important, it considers service a key component of its business, which is also one of the reasons In-N-Out Burger remains a popular destination. That attention to detail is paying off in repeat business: The Habit has recorded 43 consecutive fiscal quarters of positive comparable restaurant sales growth, primarily from increases in customer traffic, which boosts the averages sales volume, or AUV, of each restaurant.
The Habit reports company-owned restaurants grew AUV at a 39% CAGR over the past three years, hitting $1.7 million as of the end of September 2014.
The burger market is a $72 billion industry within the restaurant business, the largest dine-out segment, ahead of second-place pizza. Although McDonald's, Burger King, and Wendy's (NASDAQ:WEN) account for most of the segment's sales -- Wendy's, by the way, came in 14th in the Consumer Reports' taste survey -- they have also lost significant ground to their fast-casual, better-burger rivals.
Now they're scrambling to recover. McDonald's is introducing build-your-burger kiosks that let customers use fresher ingredients and give personalization. Hardee's is testing the same concept at 30 of its stores, while Wendy's is pushing through a restaurant remodeling program to update and scale up its image.
Burgers are easily among Americans' favorite food. Arguably the best thing to come out of the "better burger" movement is, well, we get to eat higher quality, better-tasting burgers. That's a trend you might not want to shake a stick at.
Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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