Chapter 2 – How It Works: Five Guys
We have a lot of tension in my family when the topic of “Which burger chain is best?” comes up. My daughters like “In N’ Out”, but I like burgers from “Five Guys”. Things get tense when we are in the car and looking for the best place to eat.
However, “Five Guys” is the biggest commercial success in burgers of the last decade. Five Guys have exploded their number of locations while charging a lot more per burger than their competitors. Since starting franchising in 2002, they have expanded to over 1,000 locations in 2014. In N’ Out was founded in the 1940s, and has only 290 locations today.
In addition, Five Guys have expanded in a very competitive industry with no advertising and while charging $5 per burger (much more than the $1 or so of McDonalds).
Forbes says that Five Guys is now worth over “$500 million… Not a bad return on an initial investment of less than $70,000.”
How did they expand so fast with no advertising? Most food chains that franchise and expand (think Subway) advertise a lot. The franchisor (Subway) collects a franchise fee from individual shops (the franchisee) for running the concept. As part of the franchise fee, they collect a percentage of the franchisee’s sales for adverting, and use that money to fund a national ad campaign.
Five Guys collects a franchise fee, but does something different. They take a good slice of the fee (1.5% of sales) and invest it in store employee rewards. They give exceptional payouts to store staff for doing a great job. Not surprisingly, the good staff stays around and customers come back again and again. Here is the story from an industry magazine who studied the success of Five Guys:
The quick-service industry is notorious for its 100-percent-plus turnover levels. But, with the costs of hiring and training new employees (both in money and time) stealing precious resources away from operators in a still-lagging economy, many are relying on employee incentive programs to keep their crew around.
Many operators are finding that such programs can address not just turnover, but also a range of personnel issues, such as attendance problems, customer service levels, and even average ticket size.
One popular way to encourage store employees to be consistently sharp, experts say, is the tried-and-true mystery shopper. The program is widely used by quick serves, but it is how companies structure the rewards that determine long-term success. [Emphasis Added]
“We use the information gathered from our third-party mystery shoppers to create weekly, monthly, and quarterly rewards programs for our hourly level staff members,” says Molly Catalano, director of communications and marketing at Lorton, Virginia–based Five Guys Burgers and Fries. “We reward the top 200 restaurants in the system for that week.”
Catalano says the weekly reward is anywhere from about $900 to $1,300 per store. “That money is split amongst the people working when they were mystery shopped, and there’s a chance to win every week,” she says.
— QSR Magazine, July 2011
Note that if five people were working the shift that got the award, they are getting say $200 each for the shift award. That award can be 2-3 times the pay that individuals were getting for the whole shift!
Think about what happens to the store that does not win because the mystery shopper noted that the counter person did not get the order right. The entire shift becomes pissed at the counter person, and the counter person will never, ever make that mistake again. Alternatively, if the counter person continues to make mistakes, crew feedback pushes the inept employee out of the company.
This is the essence of an “Eat What You Kill” pay scheme:
Incentives are big enough to matter
The incentives are clearly linked to performance that drives the success of the company (customer satisfaction)
The incentives reward the people actually doing the work, not just the executives
The incentives are “win-win” in that employees get paid more than those at competing firms, and the company has better success than the competitors
There are a lot of hamburger joints out there. Many say that that they have the best taste or the best quality. The truth is that it is way hard to differentiate and win just on taste and quality. However, Five Guys has found a way to win based upon employee performance. Naturally, five values drive Five Guys success. Here are the Five Guys values that drive the company:
Five Guys Values and Attributes
Our values and attributes reflect our core ideologies and drive the decisions
we make. Our values and attributes are:
We make and sell our burgers and fries with the best taste ever.
We provide our customers with a very comfortable environment.
We keep our establishments clean and with a good hygiene.
We provide our service, as well as our products, with the best quality possible to our customers.
We interact with our customers in a very friendly manner that makes them feel satisfied and good.