Five Guys

Mar 13, 2020 | Report Announcements

Five Guys is best known for quality burgers and even better fries which come loaded in a brown bag. The brand has developed a cult-like following along the Eastern seaboard and into the Midwest including a strong presence in DC where the chain started in 1986. All its ingredients are delivered fresh and there are no freezers in the store. Quality is reflected by use of: 80% lean beef; slow-growing, relatively expensive Idaho potatoes; lettuce “torn-out”, not cut; bread products prepared at company owned bakeries; and buns toasted on a grill (not a toaster) in order to produce a caramelized taste. Five Guys’ open kitchen has the look and feel of a mom-and-pop short order kitchen with cooks relying on experience rather than timers to know when the burger is just right. The chain’s practice of making customized food to order in front of the customer adds to the perception of quality and variety while its flat burger pricing allows customers to add fresh & flavorful toppings for free, including an “All The Way” option. This customization option appeals to Millennials and distinguishes Five Guys from QSR competitors. An innovative mystery shop staff bonus program drives service excellence and compliments word-of-mouth marketing strategy (which includes growing emphasis on social media). Notably, after a long period of comp challenges, sales rebounded in 2018 and through the first 3 quarters of 2019, reflecting the benefit of delivery. Having said all this, it is important to remember that sales pressure from 2012 – 2017 reflected: the brand’s high price points & price hikes during a long period of economic stagnation and increased burger competition from QSR, fast casual & casual; a 7-minute order prep time; capacity constraints at lunch (especially considering the lack of drive-thru capabilities); and excess development leading to the cannibalization of existing stores. Five Guys’ average check is significantly higher than the QSR sandwich segment and, despite the use of more expensive ingredients, its food costs outperform by a very significant margin, thus revealing a material value gap. In conclusion, the key questions for Five Guys remain: Could lower menu prices drive more traffic and incremental sales? If so, can operations handle a higher traffic load? Is the current sales boost from delivery sufficient to compensate for the brand’s value gap? Should Five Guys consider increasing its required marketing contribution to fund traditional advertising?

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