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The Pipeline

Burgers and beer! Got better ways to grow a franchise system?


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David Farkas

Overall sales growth hovers around a measly 4 percent. Yet limited-service burger joints are opening at a brisk pace, driven today by diners demanding something fresher and better than the wafer-thin patties at traditional chains.

The demand is so great, in fact, that sales at so-called better-burger chains—also known as fast-casual—climbed 20.8 percent in 2011 from 2010, the latest figures available, according to research firm Technomic.

Beer is also on a better, fresher trajectory. The Brewers Association, which represents craft brewers, reports micro-brew output was up in 2011 by 13 percent and retail sales by 15 percent. By contrast, the overall beer market (totaling about $96 billion) fell 1 percent in 2011, the trade group says.

So it’s no surprise to discover that franchisees of a 36-unit chain of craft-beer-only bars known as World of Beer—and now headed by a former top Outback official—are attempting to cash in on the dramatic growth. More on that effort in a moment.

Fresh from Canada

First meet Big Smoke Burger, a Toronto-based outfit that operates five fast-casual eateries and franchises two in Canada. The chain hopped across the border last year, signing development agreements for New York, Chicago, Detroit and Denver.

Founder and CEO Mustafa Yusuf told me that what sets his 6-year-old concept apart from burger rivals is its small footprint (thus lowering occupancy costs). Unit size ranges from 1,200 to 2,000 square feet. Yusuf claimed he’s squeezed one into a 500-square-foot mall space.

The menu itself features a mere 13 items, including chicken and lamb in addition to organic beef burgers. House-made sauces top the burgers and, strangely enough, there’s also poutine—a gravy, cheese curd and french fry mashup popular in Quebec. “It’s a very Canadian thing, but Americans will understand it,” Yusuf explained.

Cameron True, a former financial services executive, is the Denver franchisee. He’s never worked in, let alone owned, a restaurant, he said, unless you count a years-ago stint as an assistant manager at Little Caesar’s. True has been hankering to own a business but buying one was too expensive and he didn’t have the gumption to launch his own. Franchising made more sense.

True paid a franchise consultant $750 to show him possibilities. “Nothing made sense,” he recalled. “I looked at them and they didn’t excite me.” Missing from the list, however, were restaurants.

Big Smoke Burger came to his attention via Fransmart, a franchise broker in Alexandria, Virginia. True liked the concept and the food but he also had his eye on Fuddruckers because of brand recognition. The beleaguered chain, however, had shuttered its Colorado outposts two years earlier during bankruptcy proceedings. “There was a different risk associated with the closings,” True said.

Willing to take risk

There was less risk, True reasoned, with Big Smoke Burger despite its newness to the U.S. and the fact that Yusuf, who had been a regional manager for a Canadian chain, hadn’t owned a company before launching Big Smoke in 2007. “The only risk is that maybe three years from now he finds out it is more work than he thought it would be,” True said, referring to Yusuf. “But that is a risk I am willing to take.” True agreed to open five units in a 10-county area. The first opens this month in Glendale, an “urban community” inside Denver proper.

The unit economics are enticing. True and a financial partner estimate opening the first unit will cost $400,000, though tenant improvements may lower the figure. The restaurant should produce $1.5 million in sales. True is basing sales on revenue of nearby restaurants. “Panera does $2.5 million and a Mexican place does close to $2 million,” he explained, adding 70,000 cars a day will pass his restaurant.

True, who’s financing the first site with a combination SBA loan and equity, isn’t fretting about his many better-burger rivals in Denver. “I went to each one,” he told me, “and none was hitting the ball out of the park.”

Special suds

Veteran Richard Reeves, meanwhile, has been in the restaurant business for 35 years, holding executive slots with Chi-Chi’s and KFC. Reeves was “semi-retired” when an associate talked him into the bar business while in a bar. The bar: World of Beer. The business: the same.  

“I noticed one day that World of Beer didn’t have a kitchen,” Reeves recalled, noting the cost savings. It sealed the deal. Since becoming a franchisee in 2009, Reeves has scooped up territory in Florida, Texas, Virginia, North Carolina and Oregon. He operates seven of the kitchen-less establishments. Three are under construction, and he has letters of intent out for five more sites, he said.

Franchisees are expected to open 40 bars this year, according to new CEO Paul Avery, who acquired a controlling interest in the entirely franchised company with two partners early this year. “We are scheduled to open 50 a year moving forward,” he claimed. “It’s my expectation we’ll attract industry people who have the capital to make this commitment and a love for beer and hospitality.”

Food, required by law in many states, is supplied by nearby fast-food and full-service restaurants, whose menus are available inside the bar. Reeves claimed World of Beer can account for as much as 30 percent of a restaurant’s sales.

No mass-produced suds

As mentioned, World of Beer limits itself to craft and imported beers—no mass-produced suds, hard liquor or wine are sold. The bars stock more than 500 bottles and pour from 40 to 60 taps. “When you blow a keg, you put a different one on. You keep on moving and creating real change, and that’s what keeps people coming in,” said Reeves.

Reeves wouldn’t disclose average unit volumes at his bars. Pencil it out for yourself. “I’d never get involved with a concept that didn’t have 2-to-1 or even 3-to-1 sales-to-investment ratio,” he allowed.

Avery said investment costs run about $700,000. The franchise fee for the first unit is $50,000. An ongoing cost is live music, “integral to the concept,” said Avery, who estimated the figure can run from “a couple hundred dollars to $700 a night.”

Another expense looms: kitchen equipment for franchisees opening bars in areas that require food prepared on-premise. Avery hired a culinary executive in February to oversee the program.

David Farkas has covered the restaurant industry for 25 years as a reporter and food writer. Submit your company’s development agreements to him  at dfarkas99@gmail.com.

 

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