Five Guys Burgers: America's Fastest Growing Restaurant Chain

Jerry Murrell says it’s time for lunch, and he knows exactly the place to go. The 68-year-old founder and chief executive of the brightest star in the restaurant industry jumps into his blue Ford pickup parked at the company’s headquarters, a redbrick building in an unremarkable office park hard by Interstate 95 in Lorton, Va. He negotiates the back roads of the town–once home to a 10,000-inmate correctional facility–to a strip mall, which, of course, has one of his restaurants, Five Guys Burgers and Fries. He ambles in and, without glancing at the sparse menu he personally designed, orders a burger and some fries. The staff–a gaggle of twentysomethings–is jumpy, deferentially calling him “Mr. Murrell.” They have reason to be nervous. For the past two days this store, along with a dozen others, has been involved in an intense “fry calibration” class led by Murrell’s third-eldest son, Chad, who has drilled them on the proper mix of starch, water and temperature needed to create the perfect french fry (Murrell believes cooking is about feel; there are no timers in his restaurants). “Fries are much harder than burgers,” says Murrell. “We work day and night on them, all the damn time.” Such are the problems of being the fastest-growing restaurant chain in the U.S., which has doubled its number of stores since 2009. Murrell initially had the idea for a higher-quality burger restaurant back in 1986, as a way to keep his family nearby and, perhaps, make a little money on the side. He has succeeded grandly on both counts. He, his wife and all five of his sons (the “five guys”) work for the company, live within 20 minutes of one another and vacation together every summer. And the money? The private burger chain has 1,039 stores open in the U.S. and Canada, and another 1,500 committed to build. Since 2006 the company has grown 792%, according to Technomic, a Chicago-based food industry research group. (Its nearest competitor is Jimmy John’s, which grew 241% over the same period and has 1,329 stores.) Five Guys, with a mix of company-owned (200) and franchised (839) stores, has sold out all of its franchise rights in North America. The entire chain, including sales at the franchises, will surpass $1 billion in revenues this year, up from $950 million in 2011. Corporate revenues, from company-owned stores and franchise fees, will be roughly $275 million, with a cash flow of $50 million. The seven Murrells each own equal shares of the ­company, which add up to 75%. Miller Investments, a boutique Philadelphia firm, owns 20% of the company, and a few of Murrell’s school buddies own the remaining 5%. The company is worth an estimated $500 million, which puts the Murrells’ stake somewhere around $375 million. Not a bad return on an initial ­investment of less than $70,000. Five Guys rules what’s known as the “better burger” category (hamburgers in the $8 range) of fast-casual restaurants, a $2.2 billion segment that grew 16% last year. (Five Guys represents nearly half of the segment.) The entire burger category is a $40 billion industry in the U.S., dominated by McDonald’s, Burger King and Wendy’s. Growth there has been slower, at 3.2% last year. Should McDonald’s and the others be worried about Five Guys? “We could never compete with them on price,” says Murrell. Still, the big boys have taken notice. Both McDonald’s and Burger King have ­introduced burgers made with higher-quality Angus beef, moves Darren Tristano, an analyst at Technomic, views as a direct response to the “better burger” chains. “Five Guys’ burger is better than McDonald’s,” says Tristano. “Americans have always fallen in love with a better product.” But still, there are those damned fries. Murrell sits at the table in the Lorton Five Guys and cracks open a few peanuts as he awaits his meal. When it arrives he digs into the brown paper bag for a fry. He scrutinizes it, holding it between forefinger and thumb. Then he takes a bite. After a few slow chews he nods his head. “Not bad.” MURRELL WAS BORN AND RAISED in a middle-class family in Alpena, Mich. His father “wasn’t around much,” says Murrell, and had an aimless professional career, doing stints in a car factory and as a stunt pilot. His mother was the opposite, a diligent saleswoman for Stanley Home Products, a sort of Amway for brushes, mops and household cleaners. Murrell took to food early in life. “When I was a kid I’d wake up early on summer mornings, ride my bike to the brook and catch a bunch of trout and cook them up for breakfast,” he says. But any ambition he had in the food world was put on the back burner. “My mother always told me that if I didn’t study, I’d be flipping burgers somewhere,” says Murrell. “Little did she know.” He went to Alpena Community College for two years, then to the University of Michigan, where he took a job running a fraternity house kitchen to help pay tuition. (His father died while he was in college.) He graduated in 1967 and, though he says his “heart wasn’t into it,” took a job with AXA Equitable. Murrell then went through some calamitous years. He got married and had three sons (Jim, Matt and Chad). His mother died. He got divorced and shared custody of the boys. In 1974 he and his sons moved to northern Virginia. There he met a woman named Janie Androsik. They married in 1981. Two years later they had their first son, Ben. In 1986, as his older boys neared the end of high school, Murrell came up with a proposition: The boys could go to college if they desired, or he could use their education money to start a restaurant. The idea was that the entire family would pitch in. Matt says his father’s initial ambition was just to keep the family together. “His own family wasn’t as close as he would have liked,” he says. The decision to forgo college was a no-brainer for the kids. “I was pretty ­excited when the old man said he was starting a business,” says Matt, who is now 43. “The idea of going to college terrified me.” For a little less than $70,000 Murrell opened the first Five Guys in Arlington, Va. “It was in the middle of nowhere, there was no parking and no place for customers to sit and eat,” he says. The “five guys,” originally, were Murrell and his four boys. Jim, Matt and Chad all worked in the restaurant, doing everything from cooking to cleaning the bathrooms. (Ben was too young to work.) Janie kept the books. Another son, Tyler, was born in 1987. From that point on the “five guys” referred to his sons, says Murrell. There were tough times early on. Employees stole money from the register. There were intrafamily squabbles. “We’d have arguments, and one brother would walk out of the restaurant in a huff,” says Matt. “Then you’d realize, ‘Damn, I have to finish his shift.’” One fight escalated to the point where Matt tried to hit Jim with a mop but ended up popping himself instead. But the store thrived, thanks to word of mouth and some positive reviews in the local press. Murrell quit his job at AXA. “We all started dreaming then,” he says. “Not of being huge but of duplicating what we’d done in that one store. It seemed simple enough.” The difficulty came with raising money. “The banks just laughed at us,” says Murrell. So he turned to 100 friends and acquaintances and asked for loans of $10,000 to $30,000. “We gave them high interest, and we always paid them exactly on time each month,” he says. (Murrell is a fanatic about being on time; he used to fine his kids for being late to their shifts.) A second restaurant opened in 1989. A handful more opened in subsequent years. The new places had a positive effect on family harmony. “We needed to spread everybody out a bit,” says Janie, now 62. “We were all working together while living under the same roof.” As they expanded Murrell was adamant about one thing: The menu had to stay the same. Just burgers and fries, and good ones. The burgers were handmade and never frozen. The hand-cut fries, also never frozen, were sourced from northern climes (“Denser texture,” says Murrell). “We kept trying to refine what we already did,” he says. He set his house on fire while trying to figure out how to cook better fries. There were some brief pokes at adding new items to the menu. Coffee was a disaster. “Kids just don’t know how to do coffee right,” Murrell says of his employees. They tried a chicken sandwich for a week, then pulled it. “My fear was that we’d add something new and not be good at it, then some reviewer would write about how bad our coffee was and not how good our burgers and fries are,” says ­Murrell. A hot dog, a veggie sandwich and a grilled cheese sandwich eventually did make it onto the menu. From the beginning the seven Murrells have made business decisions by a unanimous vote. To this day the entire family meets every Tuesday at 1 p.m. at the Lorton headquarters to talk business. The meetings can get boisterous. “We have soundproofed walls in the meeting room, and my office is on one side and Janie’s is on the other,” says Chad. “We don’t want the rest of the office hearing us go at it.” Their biggest decision came in 2002. By then there were five restaurants, all in northern Virginia. There appeared to be an appetite for more, and franchising seemed like the way to do it. Murrell was initially against it. “I just wasn’t sure I could get strangers to buy into our concept,” he says. But his sons–led by Matt–pushed him. Matt bought his father a copy of Franchising for Dummies, co-written by Wendy’s founder Dave Thomas. The book struck a chord. And around that time the family met Mark Moseley, the former Washington Redskin and the last “straight ahead” kicker in the NFL. Moseley had a burger joint of his own and had been interested in franchising “before my partner sold it out from under me,” he says. Moseley and the Murrells met with Fransmart, a franchise-development company. The family all voted in favor of the move. Moseley was hired to head up franchising. Within three days of the decision, Murrell says, the franchising rights to Virginia were sold out. “Word just got out,” he says. And thus began one of the most remarkable franchising runs in recent restaurant history. Fransmart tapped its national database for potential franchisees. Five Guys caught fire, says Dan Rowe, the founder and chief executive of Fransmart, when existing franchisees starting adding additional stores. “The biggest problem Five Guys had was herding the new franchisees and getting them to buy into the concept,” he says. “Everyone came in with their own opinions about what should be on the menu.” Other “better burger” chains existed before Five Guys. In-N-Out Burger, a western chain, was founded in the late 1940s. Fuddruckers started in 1980. But the revolution started in earnest in the mid-2000s with the rise of Five Guys. Smashburger soon followed suit and now has 162 units. Famed New York City restaurateur Danny Meyer founded Shake Shack in 2004, which has 15 restaurants. Meyer says he doesn’t see Murrell as a competitor but rather as “a friendly restaurant colleague.” Murrell actually asked Meyer to speak at a Five Guys franchisee convention in 2009, which Meyer says struck people as “odd.” He went anyway and talked about hospitality. Says Meyer: “A rising tide lifts all burgers,” perhaps the first time that phrase has ever been uttered. Five Guys got some great press. In 2009 President Obama stopped in for a cheeseburger, with dozens of cameramen in tow. The next year golfer Phil Mickelson, unprompted, told a roomful of reporters that Five Guys served “hands down the best burger I’ve ever had.” (It was revealed a week later that Mickelson was an investor in Five Guys franchises.) Potential franchisees came knocking. Murrell says he looks for a franchisee to have a net worth of at least $1.5 million and liquidity of $500,000. Franchisees pay an upfront fee of $20,000, then an additional $75,000 per store. The typical franchisee has 10 to 15 restaurants, which cost $350,000 to $500,000 to open and average $1.2 million in annual revenues. Five Guys collects 6% of gross revenues, which it pockets. ­Another 1.5% is collected but given to the employees for what Murrell calls his “audits,” in which stores are monitored by ­independent examiners for quality of service, safety and cleanliness. Crews that score well collect $1,000, awarded weekly. Tom Horton, a managing partner in Richmond, Va.-based Monument Restaurants, is Five Guys’ biggest franchisee, with 75 stores open across the South, Midwest and California, and the rights to develop another 275. He says he became a franchisee in 2004 “because I tried the product and I liked it.” It’s been a good investment: Horton says that individual restaurants break even within two and a half years and have operating margins in the midteens. Most franchisees have worked out well, but there have been a few problems. One sought to sue Five Guys for terminating his franchise rights after he closed a store without their permission. (Five Guys eventually bought him out.) Others have been nudged to sell their stores to more aggressive franchisees. But the biggest problem Murrell faces with his franchisees is their constant attempts to get him to add items to the menu. They push for chicken sandwiches and coffee. Recently they’ve been asking for milk shakes. “I bet we’ve had the shake conversation 6,000 times,” says Horton. But Murrell always sticks to his guns. When he analyzes the demise of franchises like Boston Market, he sees one constant: “They all started to offer too many items and got away from their core.” The Five Guys franchise agreement is so tight that Murrell says he isn’t sure he’d sign it. Horton agrees that Five Guys holds the firm upper hand. “They maintain first right of refusal,” he says. “If you make a deal to sell your operation to a guy who’s wearing green shoes, the Murrells can decide they don’t like green shoes and nix the deal.” Still, Horton says, the Murrells have made some concessions along the way, especially during the worst part of the recession, when they eased their demands on franchisees to open new stores. After all, Five Guys had its own troubles during that time. “We were expanding like crazy and had all these leases and contracts signed, when suddenly we ­couldn’t get any money from lenders,” says Murrell. They could have sold the business, of course. But Murrell didn’t want to do that. Instead, Miller Investments doubled its equity stake. But the recession ended up being a good thing for Five Guys. They got better real estate for their restaurants and hired better employees from competitors. A former Checkers executive is in charge of building new stores, and a former Burger King franchiser runs the Murrells’ 200 company-owned stores. And the money came eventually: Five Guys now has a $100 million line of credit with GE and 6,000 corporate employees. Murrell’s sons have all settled into different roles in the company. Jim, 45, helps manage the entire operation. Matt opens new sites. Chad, 40, does the manager training. Ben, 29, is the IT guy. And 25-year-old Tyler oversees the bakeries that provide the Five Guys buns. The family still has their fair share of disagreements. Moseley remembers walking out of a meeting with a potential franchisee and seeing the boys and their father screaming at one another in the parking lot. “I thought there was going to be a ­knock-down, drag-out brawl,” says Moseley. “Then Jerry turns to me and says, ‘Can’t you see we’re having a friggin’ family meeting here?’” Five Guys does have its share of real potential problems. “Everything has moved so fast,” says franchisee Horton. With companies like Shake Shack and Smashburger on the scene, “it’s become a much more competitive business.” Even Five Guys’ own restaurants are beginning to compete amongst themselves, a problem Starbucks ran into in the early 2000s. “Whenever we open a store within 10.5 miles from another, they eat away at each other,” says Murrell. “That’s a problem that I don’t know how to get around.” Ed Rensi, a former McDonald’s CEO who has recently opened his own “better burger” concept, Tom & Eddie’s, warns: “The faster you go, the harder it is to execute.” But potential investors don’t seem to mind. Murrell says he meets with banks who want to take him public every three months or so. And he has met with private equity firms, including the Carlyle Group, interested in buying a majority stake. Murrell says he always politely listens but wants to stay private and in control for the time being. And why stop now? Though the U.S. and Canada are sold out, Murrell keeps buying back franchises whenever he can so he can run them. “Those stores are more profitable, and they serve as good models for our franchisees to see that we do everything we ask them to do,” he says. Murrell is even expanding overseas. He has an agreement with ­Freston Road Investments, a British firm run by Charles Dunstone, the founder of British mobile phone retailer the Carphone Warehouse, to open 200 to 300 stores in Great Britain starting next year. He’s had offers to open stores in the Middle East but says, “We’ll get our feet wet in England.” Murrell has no immediate plans to step down, but his success has given him a bit more free time these days. He says he’s working on his golf game, “but those damn windmills keep getting in the way.” He goes deep-sea fishing in the Bahamas and Maryland. But he generally likes to keep life simple. “I look at him like a football coach,” says Moseley. “He’s the leader, and he hires good people and lets them do their jobs.” Murrell likes to say that he had little to do with the success of Five Guys and that it was all due to Janie and the boys. Others have a different take. “He’s a self-effacing guy, kind of a good old boy,” says Horton. “But he’s a benevolent dictator for sure.” Says Chad: “It’s his genius.” And what motivates him? “He likes the money.” Murrell admits he likes the money but says it’s more than just about him. “I enjoy seeing the kids, the managers and the franchisees make money. I like to see everyone have fun.” The Conversation Forbes Staff Writer Monte Burke asked readers … What is your favorite burger joint and why? Noah Chestnut wrote: It depends on my mood: Wendy’s on a long road trip; Bob’s Big Boy for nostalgia; In-N-Out for a classic stand experience; Shake Shack for classier fast food. Weewayne wrote: In-N-Out Hamburgers. There is no other. End of story. Courtney Slautterback harwood Wrote: The best burger is the Ambrosia Burger from Nepenthe in Big Sur. Perfect sourdough bun–the kind you can only find in California–and “Ambrosia” sauce. Kashmir Hill wrote: I actually really like McDonald’s burgers: the barely-there patty, the limp pickle, the delicious mix of mustard and ketchup, the processed bun. I think it’s the taste of nostalgia. DMAC wrote: Five Guys has the most amazing burgers ever. And the fries aren’t too bad either. Frederick Checke wrote: In-N-Out, hands down. Five Guys is overrated. Atherton20 wrote: Friendly’s. The Big Beef on toast.