Case Study #3

In-N-Out Burger

The first In-N-Out Burger restaurant opened in 1948 in Baldwin Park in Southern California.  It was the nation’s first drive-through hamburger stand.  The original menu offered a simple burger and fries.  The Snyder’s early business philosophy was, Give customers the freshest, highest quality foods you can buy and provide them with friendly service in a sparkling clean environment.

By 1970 the chain had 18 outlets.  Son Rich Snyder took over as president when his father died in 1976.  Between 1976 and 1993 In-N-Out Burger expanded the chain to 93 locations and established a commissary facility to give the company greater control over its ingredients and created  a company university to train new management.  By 2003, the company had 171 locations in California, Arizona, and Nevada.  

In 2007,
an opening in Tucson broke company records for most burgers sold in a day and week. The crowd was so large news helicopters circled overhead to film the spectacle. The chain expanded to Utah in 2008 and i
n 2011 the company expanded into Texas where they now have 16 locations. Today In-N-Out Burger has 281 locations and more than 18,000 employees.  Analysts estimate annual revenues (2012) at more than $500 million with average revenue per location at $1.8 million which is more than double the national average.

The company’s operation focus has led it to pursue a very controlled expansion strategy.  In-N-Out Burger is a privately-owned company.  The Snyder family has staunchly refused to franchise maintaining that it is impossible to maintain quality when control has been relinquished.

In-N-Out’s red-and-while color scheme and 1950s decor has remained virtually unchanged through the decades.  The company’s packaging highlights a golden arrow stretched over the words In-N-Out representative of the Americana of the 1950s.  The packaging also includes clearly marked Biblical passages.

To ensure freshness, quality, cleanliness, and customer service, the company has inspectors that visit each location on a monthly basis.  In-N-Out Burgers stress the same values today that they have always emphasized: freshness, superior products, and good service.

In-N-Out’s menu has remained largely unchanged since the restaurant’s found in 1948.  The menu consists of six categories: hamburgers, cheeseburgers, double-doubles, french fries, milkshakes, and soft drinks.  In addition to ordering from the official menu, customers also order from the secret menu customizations.  The wish burger,   for example, is a burger without the meat.  Although these customized food offerings are included on the company’s POS terminals and on customer receipts,  they were not posted on the menu and did not appear in any advertising; rather, customers had to be in the know in order to ask for them.  Customers typically learned about the secret menu items by hearing about them from someone else.

Most of the $1 million plus the company spends on advertising each year goes to radio and outdoor advertising.  In-N-Out also offers a selection of logo-branded memorabilia that can be purchased in the restaurant.  Despite the minimal advertising budget, the company has an extremely loyal base of customers, many of whom like to brag about their fanatical attachment to the chain.  Other customers like to compare notes on how far they were willing to drive, or wait in line, for a burger.  Others carry In-N-Out directories with location maps or load the In-N-Out app to their smart phones.

Customer enthusiasm and loyalty is unprecedented.  In 2003, for example, Epinions.com boasted 156 restaurant reviews of In-N-Out, many from the Midwest and East Coast where the closest In-N-Out Burger is thousands of miles away.  By comparison, McDonald’s with revenues 75 times greater than In-N-Out’s and with 175 times as many locations had only 450 postings.

In-N-Out takes pride in its corporate culture that values and rewards its employees.  Generally, In-N-Out Burger pays their employees at least $2.00 per hour more than their competitors.  Restaurant managers average more the $100,000 per year plus a full benefit package!  As a result, in an industry noted for high turnover (200% to 300% range) In-N-Out’s turnover is about 50%.  The average tenure for managers is nearly fifteen years compared to just one year for overall retail food industry.

In-N-Out Burger has plenty of competition.  McDonald’s is the world’s largest fast food chain with more than 30,000 restaurants worldwide.  Burger King remains in the number two spot with more than 12,000 locations.  In-N-Out has more direct competition with California’s Fatburger and Johnny Rockets.  Five Guys is the most direct product competitor.

Five Guys, based in Virginia, was founded in 1986 and has 770 franchised locations throughout the U.S.  Both Five Guys and In-N-Out Burgers are a step above the other fast food hamburger places.  In-N-Out has drive- thrus, Five Guys doesn’t.  Five Guys has experienced rapid growth and expansion; In-N-Out has a very controlled growth strategy.

The Snyders’ insistence on never sacrificing quality for the sake of accelerated growth lies in stark contrast to the entrepreneurial culture of today, hypnotized by 5X multipliers, viral cultural adoption, and the sprint to IPO. Selling hamburgers may be as red, white, and blue of a business model as they come, but turning down the quick buck is an entirely different story. Perhaps this is why in the midst of a booming health and slow food movement, In-N-Out Burger remains a favorite.

Questions:

1.            Why do some business analysts say that In-N-Out’sbusiness model is counter intuitive ?

2.            Why is it said that In-N-Out Burger has a type of cult following ?

3.            Why do you think In-N-Out Burger has an estimated 20% profit margin while McDonald’s             reports                 a 6% profit margin?

4.            How would you describe the competition between In-N-Out Burger and Five Guys?

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