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Smashburger: “We’ll Survive the Shakeout”

Filed under Canada, Fast Casual, Marketing, Pricing, Q&A

 Dave Prokupek, chairman and CEO of Smashburger, says he expects a shakeout among fast-casual “better burger” concepts with two or three brands emerging as national players. Smashburger will be one of them, he says.
     The Denver-based chain intends to be a global power, having announced its first two overseas development deals this month. One will result six Smashburger locations in Kuwait and three in Bahrain. The second is for eight airport locations throughout the Kingdom of Saudi Arabia. asked Prokupek to assess the fast-casual burger marketplace.

Smashburger is still a fairly young concept; your first unit opened in 2007 and you’ve got about 120 locations open in the U.S. Why jump overseas now?
Yea, it’s a big jump. I’ve said to our team here that our primary goal is to be the No. 1 player around the globe in better burgers. As you say we’re at about 120 stores now and we’re targeting about 150 by the end of the year. And while we don’t have it perfect necessarily, Smashburger is being accepted by a broad range of consumers across a lot of demographics.

Dave Prokupek

Many brands wait until the end of their growth in the U.S. to step out but we’ve decided to look at the world as one big pie and pick the best opportunities as we go.

Was the Middle East specifically targeted or did you just open the doors to the world and welcome all opportunities?
Somewhere in between. A year ago, we identified a half-dozen or so areas where we’d like to expand: Canada, Middle East, Southeast Asia, Latin America and Western Europe. These are places with, for the most part, strong economies and strong acceptance of Western brands, where they like beef and meat and are fundamentally underpenetrated in the better-burger segment.

How close are you on entering Canada?
Close. Stay tuned. We’re building both a corporate model and a franchise model, and the franchise model’s principally built around experienced multi-unit operators here in the States. As we’re going global, that’s what we’re focusing on: experienced operators.

Overseas, are you finding interest in upscale burgers similar to what we have here?
I think so. The early interest has come from people who are running Western brands. A lot of those brands that have done well don’t have a compelling better-burger offering. So guys who are in the pizza or chicken or sandwich businesses recognize that burgers are a big market and Smashburger is simple to operate and with a fairly low-cost of entry: $400,000 or $500,000 in the States although I don’t know it will be overseas.
     But the food’s carrying the day. People really like our burgers and what we keep hearing is that it will translate well.

What convinces you that the better-burger category has staying power in the U.S.?
I’d say the burger business is somewhere between a $60 billion and $100 billion category, depending on how you want to count. And better burgers are probably $6 billion to $10 billion of it. Our view is that it’s going to be 20% to 30% of the marketplace over the next 10 or 15 years, and I believe there will be two to three national players in better burgers.
     I think there’ll be market shakeout in better burgers just as in Mexican, Asian and other categories. Certainly there will be regional competitors and local firms, but there will be a small number of national players.

Does that explain your expansion pace?
Part of our strategy has been to be “near national” pretty quickly. So in the last three years we’ve gotten ourselves in 30 states with 120 stores open. We’ve come on strong not only on the burgers side of the menu but on chicken and salads as well and that’s becoming a big differentiator for us.
     We’ll see what’s said when the business-school case studies are written, but I believe that [a shakeout is] how this will play out and that we’re well positioned to be one of those top players.

How do you expect Smashburger to evolve? You’ve made some significant adjustments in the past year, but no concept can be static.
Our name is Smashburger so clearly or brand is built around our burgers and the way we prepare them. We’ll continue to evolve, though. We’ve done a really good job of localizing the menu and that will continue. We have a lot of customers who are interested in traveling the world and in global flavors, so I think you’ll see the menu evolve in that direction as well.
     We have beer and wine and carbonated beverages, but we’re looking very hard at how people are using beverages in their lives.
     And we’ve just started to open in urban environments. We’re in Brooklyn and we’ve just opened in San Diego. As we open in more urban locations, store formats will change.     We’ve been mostly a suburban concept previously so we’re evolving in store design in that way.
    And I won’t say we’ve necessarily been a leader in social media, but we’ve been at the forefront in launching a brand from scratch in that regard. We’ll continue to try to stay expert at connecting with customers in modern ways. I would look for continued innovation from us there, and hopefully leadership as well.

When do you hit enough mass that traditional advertising, especially television, would make sense for the brand?
Our current thinking is that we won’t be a television advertiser for a long time. We’ve been successful with print, PR and social media in getting people to taste our food. And if you look at the fast-casual market in general, it has not been defined by brands using television as their main medium to get the better food message out. We’re at scale in some markets now—in Denver, say, or Houston—but we think this marketplace is better served by word of mouth.

Traditionally, fast casuals are busier as lunch destinations than at dinner. How do you level the traffic through the day?
We run almost dead-on 50/50 with a slight skew to lunch. Dinner for us is pretty steady, 5 p.m. to 8 p.m., and it’s worth staying open 9.p.m. and 10 p.m. There are parts of the country—New Jersey—where it’s just dead busy all day long and dinner runs until 9 or 9:30 and lunch ends at 2 or 3 p.m. There are areas like San Diego where meal periods blend into each other.
    I’d say we have a really good two-daypart business right now. In a few markets we have beer and wine and we’re doing some craft-beer happy hours, but at this point we’re more focused on growing our takeaway and to-go business than on lunch vs. dinner. I’m happy with the mix.

The economy’s been tough on some brands’ expansion plans. Are you seeing an easing of the challenges?
Traffic for us is up 3% to 5% this year and we’re happy with our same-store sales growth. We haven’t taken a price increase at Smashburger. I’ve been a little bearish on the economy so we’ve been reluctant to take price. We’ve focused on keeping our signature burger offering below $5 and I think that’s been a wise move.
     We’ve built the company with all equity financing, so our firm put in equity and we’re not allowing debt into the system. So everyone who’s building Smashburgers is building with equity right now, which has been helpful. We haven’t seen financing problems; everyone’s pretty well financed. I would say the pool of people who can build 20 or 30 units all equity-financed may be shrinking a bit, though.
    What we’ve all seen in the marketplace probably should have all restaurateurs and retailers a little concerned going into the fourth quarter, but overall we’re pretty bullish.

2 Responses to Smashburger: “We’ll Survive the Shakeout”

  1. Tom Kelley

    It’s a good product…not sure why they resort to daily deals and coupons to sustain business. Perhaps more of a community relations marketing focus would help.

    Tom Kelley
    Concept Branding Group

  2. QSRking

    In your last two posts I’ve found it interesting that fast casual dinner traffic is holding its own against lunch business.

    Thanks for two great interviews.