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Battle of the Beef

Nation's Restaurant News - September 12, 2011 - by Ron Ruggless

The Dallas-Fort Worth area appears to be about one beef patty and two pickles away from becoming the front line in a full-fledged burger war.

California's In-N-Out injected some major sizzle into the area's burger competition this year by entering the North Texas market with five stores, long lines and plans to build a distribution center in Fort Worth. Carl's Jr., a division of CKE Restaurants, has ramped up development in the metropolitan area, with 13 new stores open and more planned.

And the Big Three of McDonald's, Wendy's and Burger King continue to go head-to-head with regional favorites like Dairy Queen, Sonic and Whataburger.

And they are all adding units.

Meanwhile, the major better-burger players like Five Guys Burgers and Fries and Smashburger are competing with homegrown chains like Mooyah, Twisted Root Burger Co. and Mexican-inspired Burguesa Burgers.

And all of the chains are competing with a wide number of independent operators like Love Shack, Maple & Motor, Wingfield's Breakfast and Burgers, and Kenny's Burger Joint.

With its relatively strong economy compared with many other areas of the nation and a business-friendly environment, Texas has drawn the attention of the burger brands.

"For the past several years, CKE Restaurants has been focusing the majority of our expansion efforts in Texas, and we will continue to make Texas our focus," said Beth Mansfield, director of public relations for CKE Restaurants Inc. in Carpinteria, Calif. She said the Carl's Jr. brand is nearing completion of its 50th unit in the Lone Star State.

"For the DFW market we have 13 units open and will likely open additional units by the end of the year," Mansfield said. "With the franchise agreements we already have in place, coupled with our company-owned units, we hope to top the 350-unit mark in Texas by the end of the decade. DFW will be our largest market with 125."

Favorable demographics

Demographic trends have helped fuel the development, said Larry Leon, partner and head of the hospitality and entertainment division of Venture Commercial Real Estate LLC, a tenant brokerage service in Dallas.

"Our economy and growth are so strong relative to the rest of the country, with the exception of Washington, D.C.," Leon said. "We still have pretty decent availability of real estate, so people have been able to penetrate this market relatively well with decent real estate at affordable prices."

Dallas-Fort Worth's diversity of job growth at various income levels also has helped, Leon added.

"Dallas-Fort Worth has gotten pretty diverse job creation over the past several years, from minimum wage up to manufacturing and technology," he explained. "You still have a ton of money in Dallas, but you also have a lot of good, strong working-class families here — and they seem to be great burger eaters. Dallas isn't dependent on just one company."

The major municipal centers also have satellite suburban developments with good office and residential density, Leon said.

"Density has always been the highest correlation of success for any restaurant operator and almost any retailer I've worked with over the years," he said.

Also, while retail shopping-center development slowed between 2007 and 2010, during the recession, it didn't stop entirely.

"It did get more challenging for a lot of people to find locations," Leon said. "Fortunately for a lot of these burger players, there are pad deals and land deals available."

Denver-based Smashburger has what Doug Thielen, the vice president of communications, called a "fantastic franchise partner who knows the [market area] and understands the Dallas consumer.

"The DFW area has always been home to great food, so it is no surprise to us that they've really taken to Smashburger and the better-burger concept," Thielen said.

However, according to Leon, differentiation is key.

To position itself against its host of competitors, Smashburger offers menu diversity, with everything from "fresh tossed salads to veggie frites to sweet-potato fries and even Häagen-Dazs shakes," Thielen said. "There is really something for everyone to love."

Leon added, "If I were looking for an investment, I'd look for someone who had a differentiation point: The food is better; they are faster. It's a very competitive landscape, and it's going to get more so."

Independent competition

Independent operators, especially among those offering their own version of the better burger, said they welcome the increased competition from the chain players.

Jack Perkins, owner of the popular 2-year-old Maple & Motor burger-and-beer spot north of downtown Dallas, said, "Our business continues to increase. I call this an unnatural growth curve. We shouldn't probably still be growing two years down the road."

Perkins said he gets high repeat business at his burger restaurant.

"I would guess that 60 percent of the people in here today have been here before," he said. "We have a giant group of return customers."

And business even blips up when the newcomers open their doors.

"When In-N-Out Burger opened, we actually felt an immediate increase," Perkins said. "In the news every day, people were talking about burgers. This time of year, when all you are talking about is the weather, the idea of talking about something other than that makes the line at In-N-Out Burger a good topic, and eventually, that brings up our name. When the second store opened, we were busier than ever."

Part of the boost is that nearly all restaurant patrons can relate to the burger, he added.

"Burgers are the American taco," Perkins said. "Everybody eats it. There's a reason McDonald's is what it is. There's a reason In-N-Out comes here and blows up the market. People eat them, and in this kind of economy, they eat a lot of them. A $9 lunch of a quality burger and soft drink is where you want to be in a recession."

On a recent Saturday, Perkins sold 600 burgers at his 60-seat restaurant, which he said indicates the economy is strong.

"The reason we opened the business in the first place is we didn't trust the stock market," he said. "We put our money into something we knew."

Jason Boso, general partner and a founder of Twisted Root, has over the past six years found growth opportunities for his better-burger concept, which just opened its seventh location in suburban Arlington, Texas. Twisted Root plans to add two units a year in the foreseeable future, Boso said.

"The idea behind it was just chefs after work drinking beers and wanting a better burger, but not wanting to go to a steakhouse and eat one," Boso recalled. "I thought there was a real discrepancy between fast food and the steakhouse's $15 burger. Now everyone has the same idea."

Friendly economy

Mansfield of CKE said one favorable factor for development in Texas is the business-friendly climate.

"It is easier to get a new restaurant built in Texas than it is in other states, especially compared to California due to its onerous permitting and regulation," Mansfield said. "The other factor is that people in Texas love burgers. Even though there are other competitors there, we think our premium-quality offerings are appealing to burger fans in the Lone Star State."

The state's business-friendly climate is reflected in things like municipal tax abatements. Fort Worth this summer was considering a proposed tax abatement for In-N-Out Burger's regional distribution center at CentrePort Business Park near Dallas/Fort Worth International Airport. The proposed 10-year, 60-percent tax abatement for 25 acres was valued at $840,000, and In-N-Out agreed to spend $21 million in capital investments. In return, the Fort Worth Star-Telegram reported in August, In-N-Out also would create 100 jobs by December 2018, with half created by the end of 2013.

And while In-N-Out was expected to expand further, more established operators like San Antonio-based Whataburger — which has been operating in the DFW market for 40 years — also expanded its number of locations in the region, adding three new units and bringing its total area restaurants to 121.

Quality rules

Leon of Venture Commercial said success for a burger-restaurant operator in DFW depends on the product, in the end.

"If you think your product is as good or better than anything else in the market, you can use the Walmart strategy of going in next to a high-volume Kmart," he said. "You can key off that. If the market is deep enough and you feel like you can get your share, you are going to do fine.

"If you are wanting to expand and you are competitive, this is a great market," Leon added. "If you feel you have a really great product and you are willing to compete, it's a good market. This is not a market for the weak sisters or the faint of heart."

CKE said it was confident its Carl's Jr. product fit that bill.

"People in Texas know about quality beef and love burgers," Mansfield said. "Carl's Jr. offers premium-quality burgers, char broiled for that backyard-grill taste and with premium beef — 100-percent Black Angus in our line of Six Dollar Burgers. Because we are a regional brand, we can offer flavors that aren't found in most chains that dumb-down their flavor profiles. Spicy jalapeños, freshly prepared guacamole and bold sauces are our hallmark."

Carl's Jr. is accommodating some regional differences from within the brand.

"We offer [sister chain] Hardee's Made from Scratch Biscuits in Texas," she said. "Additionally, guests can order our burgers Texas-style with mustard. Obviously, our pillars of premium-quality, value and variety have brought Texas guests in the door and coming back for more."

Mansfield said the first Carl's Jr. in Houston opened earlier this year and set a company sales record, with $117,000 in sales the first week.

"That record had been held by our Leon Valley [San Antonio] Carl's Jr. that opened in late 2009 with $115,000 in sales," she said.

Mass-market challenge

The retail experts did point out, however, that Texas is not an easy market in which to develop a large-scale following — even though In-N-Out's cult status may make the brand an anomaly.

Leon said, "What we've found over the years is that DFW is a strong market, but it takes a longer-term build.

"Chipotle had some challenges when they first came here, and they were underperforming for a few years," he said. "But when it caught on, this has become one of the better markets in the country. There's a lot of competition. There are a tremendous number of restaurant seats in DFW. People do seem to eat out an inordinate amount."

Suburban markets also are getting more attention than in the past, Leon said.

"There is so much money in Plano and Southlake and other suburbs, you are starting to see some intriguing operations moving into those areas and not into the core city area," he said.

But as in any automobile-centric city, real estate on major thoroughfares can help draw in business in the early days. In-N-Out, for example, had its most recent opening on the north side of heavily traveled LBJ Freeway in North Dallas and is nearing completion on another a few miles away on the south side of the artery.

"You also should be willing to pay for some really good real estate," Leon said. "I think it's probably more important here than in most places because there are so many alternatives."

But while real estate is a major concern, the independent operators located off the beaten path stand by the quality of the product as the end-all-be-all.

Perkins of Maple & Motor likened serving burgers to cutting diamonds.

"The guy who cuts diamonds the best makes the most money and is the most successful," Perkins said.

"The people go to him. And we want to be that guy. When people talk about burgers, they won't say, 'Hey, did you see the finish-out on that place?' No one says that. They don't talk about the best commercial, marketing strategy or branding," Perkins concluded. "They talk about the product."