A SMASH HIT

Smashburger’s varied menu has put it on a sizzling growth pace

By Steve Raabe The Denver Post

 
Smashed ground beef is proving to be a winning concept for Denver-based Smashburger.

With 143 locations opened nationwide since its inception in 2007, Smashburger is one of the fastest-growing restaurant chains in the U.S.

Commitments from newly signed franchisees will bring the store total to 450 by 2014.

But that number is small fries to Smashburger chief executive Dave Prokupek, who said the business “easily” could reach 2,000 to 3,000 outlets in the next 20 years.

“No one has ever really grown this fast in the first five years,” he said during a recent lunchtime interview at the Tabor Center Smashburger, gripping a napkin in one hand and in the other a grilled chicken sandwich with goat cheese and spinach.

Gourmet grilled chicken in a joint named after a burger? That’s part of the Smashburger appeal, analysts say. In what the industry defines as the “better burger” niche within the hamburger hierarchy, Smashburger is wooing customers with a diverse menu ranging from customizable burgers to chicken sandwiches and salads to innovative sides such as flash-fried mixed vegetables.

Its largest competitor in the “fast casual” subset of the better-burger category is Five Guys Burger and Fries, a national chain with six times as many U.S. restaurants.

“But Smashburger is different because they have a broader menu. They don’t just have burgers and fries and hot dogs,” said Darren Tristano, executive vice president of Chicago-based restaurant consulting firm Technomic.    Recently, Forbes magazine listed Smashburger as No. 1 among its top 100 “Most Promising Companies.

The Smashburger name derives from the cooking process, in which raw Angus beef meatballs are placed on a grill and smashed into patties by a cook wielding a hand-held steel paddle.

The cook keeps pressure on the patty for 10 seconds, causing it to sear and lock in juices while it continues cooking for another three minutes. According to Prokupek, starting with a loosely packed meatball instead of a preformed patty makes the burger less dense and allows it to better express flavor.

“I eat a lot of burgers, and I would describe this as a very good burger,” said customer David Jasper at the downtown Denver outlet. “They’re juicy and they’re tasty. And you can get in and out of here pretty quick." 

Customers order at the counter, then are served tableside within about five minutes.    The average check is $8. A typical restaurant grosses $959,000 a year.

Although Smashburger is privately owned and not required to report financial information, it recently disclosed to analysts that 2011 sales were $118.7 million, a 72 percent increase from $69 million in 2010. Most of the growth was from opening new outlets. Same-store sales increased 3 percent in 2011.    Smashburger was founded by Denver-based private equity firm Consumer Capital Partners — that same company that until last month was a principal owner of the struggling Quiznos chain. Consumer Capital ceded its Quiznos ownership in a financial restructuring that gave control to New York hedge fund Avenue Capital Group.     

Analysts and Smashburger insiders say the hamburger chain is entirely unaffected by the Quiznos financial problems and restructuring.    “Smashburger is growing much smarter than (Consumer Capital) did with Quiznos,” said restaurant analyst John Gordon of San Diego-based Pacific Management Consulting Group.

While many of Quiznos’ franchisees are one-store mom-and-pop operators, Smashburger is focused on high-volume, multi-store franchise investors, Gordon said.

Initial franchise fees are $40,000 per store, plus royalty payments of 5 percent to 6 percent of gross sales and a marketing fee of 2 percent.    The current mix of Smashburger restaurants is 58 percent owned by franchisees and 42 percent corporate-owned.

Prokupek said that going forward, growth will come primarily from new franchises. Smashburger projects that by 2014, 72 percent of its 464 units will be owned by franchisees.

The chain recently announced an international expansion plan with proposed franchise locations in Calgary and Edmonton, Alberta; Costa Rica and undisclosed countries in South America and the Caribbean; and Middle East locations, including Bahrain, Kuwait and Saudi Arabia.

Franchisee David Whisenhunt opened his first San Diego restaurant in 2010. He now has eight in operation and has the rights for an additional 18 in the area.

“It’s a brand-new brand that’s still catching on,” he said, “but I think the potential is huge.”