How Businesses Grow: The Five Guys Story

What does America’s fastest growing restaurant chain look like on the inside and how was the growth accomplished? For the answers to those questions and many others I read a recent Forbes article entitled “Five Guys Burgers: America’s Fastest Growing Restaurant Chain“.

First, “Five Guys” growth in numbers:

  • Doubled number of stores since 2009
  • Started in 1986; since then, has grown to 1,039 stores in the US and Canada with commitments to open another 1,500
  • Grew 792% since 2006, nearest competitor Jimmy John’s grew 241% over the same period and now has 1,329 stores
  • Company-owned franchises 200; franchised 839
  • Projected sales of $1B+ in 2012; corp revenues of $275M with cash flow of $50M
  • Current value of the company estimated at $500M, $375M of which belongs to the founders, on an initial investment of $70,000

Founder Jerry Murrell and his sons came up with the idea in 1986 when Murrell offered his older sons nearing high school graduation a deal– they could go to college, or they could use their tuition money to start a restaurant.

Like many rapid growth successes stories, early growth was slow and hard to come by. Persevering through employee theft, customer service shortcomings and inter-family squabbles behind the scenes, the group opened their second store in 1989 after being turned down for business loans by numerous local banks. Instead, they raised money $10,000 to $30,000 at a time from 100 friends and acquaintances and committed to always paying on time.

Even early on Murrell received suggestions that he stray from the company’s “core competency” of high quality burgers and fries– coffee, chicken sandwiches, milkshakes and more were all brought up and some even tried but every time Murrell found it to be a disaster. Eventually, Murrell and company gave up, and his disciplined reasoning is instructive in demonstrating his understanding of his own brand:

My fear was that we’d add something new and not be good at it, then some reviewer would write about how bad our coffee was and not how good our burgers and fries are… [The demise of other restaurant chains involves one constant.] They all started to offer too many items and got away from their core.

By 2002, they had 5 stores in Northern Virginia and began thinking about franchising. Murrell received a copy of Franchising For Dummies from his son which he read and that, combined with a fortuitous meeting with former Washington Redskins-kicker and burger joint owner Mark Mosley and consultation with Fransmart the Five Guys team moved ahead, selling out all franchise rights to Virginia within three weeks.

The standard franchisee must have a minimum net worth of $1.5M and liquidity of $500,000. He pays an upfront fee of $75,000 per store, the average store costing $350,000-$500,000 to open and generates an average of $1.2M in revenues each year. Five Guys corporate charges 6% of gross revenues and another 1.5% which is collected for “audits” which are used to pay $1,000 weekly bonuses to stores that score will after being visited by independent examiners. According to Five Guys largest franchisee, stores break even within two and a half years and have operating margins in the mid-teens.

There are other entrants in the “better burger” category such as Smash Burger and Shake Shack (note: I’ve had both and I don’t think they offer much competition) and because of the rapid franchising, Five Guys has occasionally run into the problem of overlapping markets where franchise owners cannibalize one another’s sales. Murrell occasionally buys back franchises when he can and the company is currently working on an overseas expansion which will begin in the UK. There’s talk of expanding to the Middle East and private equity and investment bankers have been on the company’s case for years.

Who knows what lies ahead but so far, through all the ups and downs, the company has remained a thoroughly family affair.

How Businesses Grow: “The LEGO Story”

I found this video on the Laissez-Faire Books blog after Jeff Tucker posted it recently.

It’s an entertaining and educational video that provides anecdotes about how and why small businesses grow. In the case of LEGO, because they had to– the owner-operator of the company had no golden parachute to fall back on if he failed. This kept him thinking creatively about how to solve the many challenges he and his business faced. It was “find a way” or else he and his children would starve.

It’s a story of entrepreneurialism, the essence of which is experimentation, vision and constant change.

As you watch the video, it’s hard to imagine a story like this being told about anything other than an initially small, local, privately-owned business. It perfectly captures the idea of the “benevolent dictatorship” style of business and capital management. We also get a look at the innovative process that leads to the creation of a whole new industry (or sub-industry, much like the iPhone was an emergent sub-industry within the industry of smartphones).

 

Gary North On Time Management, 80/20 Rule

I am posting this for future reference. Gary North’s point isn’t original (it isn’t even his alone), but he has managed to articulate it succinctly, yet again, in “Putter, Fritter and Guess“:

It turns out that the best way for a businessman to spend his time is the 20% of his hours in a day that produce 80% of his net income. It may not be easy to identify these activities, but for a successful career, a person must do this.

What we find is that even when people do this, they do not have the self-discipline to ruthlessly abandon the 80%. They keep doing these low-return tasks. This may be pure habit. It may be a commitment to the ideal of perfectionism: to be sure that everything gets done right. The person refuses to decentralize and delegate. He cannot bring himself to let go. The result is that the person does not attain his maximum output/income.

The person who steadfastly refuses to delegate and decentralize is violating the principle of the division of labor. This principle says: “You can’t do it all.” In some cases, it says; “You can’t do it at all.” A task may not be a one-person task.

The person who is a perfectionist and who insists on doing an entire project is asking to minimize his output. If, by hiring an assistant, he can double his output and reduce quality only (say) 4% (20% of 20%), this will not matter, if the 4% is related to the 80% of the product’s functions that people rarely use.

Progress Requires Innovation, Innovation Requires Freedom; No Freedom, No Progress, That’s Government

Joe Quirk on seasteading:

Benjamin Franklin participated in several major innovations in his day. He helped discover and control electricity, and he helped design the US Constitution. The control of electricity set off a cascade of innovations, driving almost every modern technology we can name. Yet the instrument of government he helped invent has not progressed.

Consider that Franklin’s many inventions have advanced beyond his wildest imagination: the Franklin stove, bifocal glasses, refrigeration, the flexible urinary catheter (my favorite). Yet, the methods of government he helped invent have not evolved. And why?

Because inventors and entrepreneurs had the freedom to experiment with Franklin’s technological ideas, but not his political ideas. More importantly, as Patri [Friedman] says, customers had power to choose amongst gadgets competing to please them, while citizens are captive to the political system they inherit.

One day, people will laugh at the idea of government (legitimized, institutional theft and murder) just as today people laugh at the idea of monarchy as a system of government.

Government is a technology– it is a means for achieving particular ends. What people don’t understand right now is that

  1. government is a means, not an end and
  2. government is an inappropriate and contradictory means for the end of “living in a harmonious, civilized and prosperous human society”

Government reduces human relationships to the Laws of the Jungle, the very thing we all claim to be striving so mightily to avoid.

As Allen Thornton wrote in the early 1980s,

And just what is this government? It’s a man-made invention. It’s not some natural phenomenon or a special creation of God. Government’s an invention, just like the light bulb or the radio.

The state was invented for me, to make me happier, but a funny thing has happened: If I don’t want this invention, people are outraged. No one calls me unpatriotic for refusing to buy a light bulb. If I don’t choose to spend my money on a radio, no one says that I’m immoral. Why should anarchy upset everyone?

Anarchists are ahead of their time, even though the truth they speak is itself timeless– conservatively, probably 200-300 years ahead of their time. The gradual evolution of the “human collective social consciousness” over time has been away from absolutism and toward individualism, with various depressing but ultimately temporary and regional setbacks along the way. Most visionaries DO look like kooks to their neighbors and countrymen before their vision is realized.

But it is the “market purists” who will have the last laugh, and ultimately deliver every one into the closest thing to a perfect society that one can get while still remaining firmly in the grips of reality in this universe.

They’ll be naysayed and boohooed and shouted at quite a bit along the way, though. Good thing most of us are of stout heart and strong mind.

The True Principle Of Modern Education Exposed: To Make Us A Means To Others’ Ends

What is the true purpose of public education?

According to a new research study reported in the WSJ, it appears to be all about career-prep:

Can finger-painting, cup-stacking and learning to share set you up for a stellar career?

Research says yes, according to Dr. Celia Ayala, chief executive officer of Los Angeles Universal Preschool, a nonprofit that funds 325 schools in Los Angeles County, Calif., using money from tobacco taxes.

“When they enter kindergarten ready to thrive with all the social, emotional and cognitive skills, they perform at grade level or above,” she said. “When they don’t, that’s where that achievement gap starts.”

Note: don’t ask why money from tobacco taxes is being used to fund preschool research nonprofits.

There’s a lot at stake here– not only does pre-school appear to grant an advantage, but NOT doing appears to confer disadvantages such as increasing the likelihood of becoming a “special needs” student:

Kids without that early boost have been shown to be more likely to get special-needs services, be held back a grade or two, get in trouble with the law and become teen parents. Preschool alumni have a better chance, she said.

Today, a child’s life ends before it even begins:

“Those who go to preschool will go on to university, will have a graduate education, and their income level will radically improve,” she said.

Implication: don’t go to preschool, don’t go to university, don’t get a graduate education, watch your income level stagnate or decline, eventually you’ll probably kill yourself through obesity or suicide in a depressed state of lifetime unaccomplishment.

The article goes on the explain that preschool could hold “the key to job success in adult life” and warns of the sorrows of children who don’t receive an education in preschool because they’re spending time with “parents or caregivers.” Yes, there is nothing being learned there, apparently. Nothing valuable, at least.

But valuable to whom? And for what?

Why, valuable to society, for the purpose of making the child a good little worker! The definition of success is one who works productively for others. The purpose of education is not to develop a society of individuals, but a society of workers.

Or, as one French director of an “ecole maternelle” put it, the object is to give them social skills “to be students and citizens,” a “citizen” being one who obediently does what others ask of him.

Meanwhile, policymakers in the US are big on preschool:

Policymakers in the U.S. are most concerned about eliminating the gap between kids who do well in school, going on to college and successful careers, and those who fall behind. Preschool, say policymakers, offers educators the best shot for getting children of varying backgrounds on equal footing.

There’s a codeword in there– “equal”. Equal means same. Same means, “not different.” But wait, individuals ARE different. They have different likes and dislikes, different skills and aptitudes. How can beings who are inherently different, ever be equal? And why would policymakers care? How does being “equal” help one succeed at living ONE’S OWN life?

Answer– it doesn’t. It isn’t about living one’s life. Sameness, equality, is being sought to create an army of interchangeable cogs to go on society’s wheel. Then, the elites spin the wheel. And round go all the equal people, never asking why.

Don’t worry, though. Policymakers at Department of Education won’t let anyone fail to be equal. They’re “equal” to the task:

“We’re really focusing on the cradle-to-career continuum,” said Steven Hicks, special assistant for early learning at the federal Department of Education, where there has been a recent shift as officials realize “we need to start earlier.”

Once people are in the work force, the Social Security Administration is responsible for the “career-to-grave continuum”. Which means no matter what point in the continuum you’re at during your life, the State is there to help you out, with kid gloves, of course.

Although most education funding happens at the state level, the federal government has been trying to fuel a preschool wave with a half-billion dollars in challenge grants funded in January. The next five states in line will share $133 million in preschool money this year. Call it a pre-job-training program.

Are you starting to get the picture here? You’re being trained from the moment you develop the mental, emotional and conceptual faculties to see yourself as a differentiated “other” in the world, to prepare to work for someone else. This is scary stuff. And it’s all coming in the innocuous guise of “equality” for all.

Most teachers and parents would agree that early-childhood education matters to a child’s trajectory in life. But with budgets stretched around the country, a lack of money is forcing some states to make choices about scarce education dollars. Too bad, the DoE thinks.

“Secretary Duncan says there are smart investments and some things you can do that are not so smart, and one of those is cutting early childhood education,” Hicks said.

To calculating socialists running short on Other People’s Money, future worker bees are like hot dogs from the corner stand– “Get ’em while they’re young!”

This article, intentionally or not, is coincidentally the most timely and blatantly obvious confirmation of Stirner’s false principle of education. Nobody in this article is aiming at an educational system which produces “self-developed” individuals. The name of the game is forming human clay into pre-determined molds appropriate to other people’s ends.

It is distinctly anti-individual. It’s a quiet and brutal form of slavery-as-virtue.

Review – The Pixar Touch

The Pixar Touch

by David A. Price, published 2008

It starts with Disney

The story of Pixar is interesting because it starts and ends with Disney, but under very different circumstances in each case. The two primary characters in the company’s founding and subsequent rise to glory, Ed Catmull and John Lasseter, were both Disney aficionados and aspiring animators from the get-go. At the time each was coming of age and establishing their careers, Disney was not only the premiere animation studio to work for, it was essentially the ONLY major animation studio to work for. But Catmull almost missed playing a pivotal role in the development of computer-animation when he decided, in high school, that he was not artistically cut out to be an animator. Lasseter, by contrast, found his high school experience to be an affirming one and it was during this period of his life that he knew for sure that an animator was what he wanted to become.

The two luminaries: Ed Catmull and John Lasseter

Though they had similar aspirations (with Catmull’s muted initially), Catmull and Lasseter took quite different paths to their eventual rendezvous at LucasFilm where they would come to create a Pixar Animation-in-the-womb.

Catmull went from the computer science department at the University of Utah, which was not only the scene of huge amounts of R&D spending by the Department of Defense’s ARPA project, but was also the unwitting locus of a number of individuals who would come to be highly influential innovators in the space of computer graphic design. It was here at the university where Catmull had a second awakening and decided that while he may not have a future as a traditional animator, he might become one yet by pioneering animation in the computer-generated space.

He eventually was scooped up by an “eccentric millionaire”, Alexander Schure, who drafted Catmull as well as a number of his computer science comrades from the University of Utah computer science department to come to his mansion-turned-technical institute (the nascent New York Institute of Technology on Long Island) and essentially tinker away at computer graphic design on his dollar. Catmull and company obligingly did so until personal and family pressures drove him to seek other employment, eventually finding his way to George Lucas’s design outfit in northern California where he and a number of other defectors worked on various technology-related odd jobs for Lucas’s studio.

Meanwhile, John Lasseter graduated from high school and went into the animation program at CalArts, an art school that was partially meant to be a recruiting ground for future Disney animation talent. He was subsequently hired into Disney’s animation studios only to be later fired in a political scuffle. He, too, wound up at Lucasfilm, where he teamed up with Catmull and the other NYIT veterans to develop the proprietary Pixar Image Computer. On the side, the ambitious would-be animators continued teaching themselves the craft of computer-generated animation, a technology they were largely innovating into existence on their own. Each year they attended the SIGGRAPH convention and showed off their latest minutes-long computer-animated film clips to an awe-struck and excited audience.

Even early on, Lasseter was showing a knack for story-telling beyond his years and experience.

Exit Lucasfilm, enter Steve Jobs

Having tired of losing money on the Pixar Image Computer and the Pixar company itself for long enough, Lucas looked for a buyer at an asking price of $15M plus an additional $15M to capitalize the spun-off business. Initially, there were no takers. At one point, an executive at Disney considered purchasing the entire company at $15M to subsume it into Disney’s animation facilities, but a young Jeffrey Katzenberg felt pursuing it was a waste of time.

Another series of failed deals followed (including one in which GM almost acquired the company before board member Ross Perot shot the idea down) when Steve Jobs’s offer of $5M for the company was finally accepted.

For the next several years, Jobs stuck $5M at a time into Pixar to keep in afloat, but he, too, had trouble finding anything to do with it. Initially imagined as a hardware design company, everyone ended up being frustrated as Catmull, Lasseter and their team were truly animators at heart (and certainly not businessmen) and Jobs was impatient and still reeling from the ego-blow of being booted out of his own company at Apple. He was looking for vengeance.

Jobs almost abandoned Pixar but at the last minute he decided to hold on to the company, realizing what he controlled was an outstanding group of talented individuals, not a failing hardware business. Soon after, Pixar inked its first deal with Disney animation (under Katzenberg, who had come to see the error of his earlier ways) to create what would become the smash, breakout computer-animation genre hit, Toy Story.

Jobs, always the savvy financier just as much as he was an outstanding technologist and businessman, took the company public on November 29, 1995, one week after the premiere of Toy Story. Still hot off the success of the film, Jobs brilliantly managed to hype the IPO by placing it so close to the release of their first major film even though he was technically supposed to be observing an SEC-enforced quiet period leading up to the IPO event. Jobs 80% stake in the company was valued at around $1.1B.

The story ends with Disney

Just over a decade after going public, Disney, the long-time partner of Pixar (and the long-time dependent, as Pixar’s computer-animated films essentially had become Disney animation, not the mention a substantial part of Disney’s total film and company-wide earnings) announced its offer to acquire Pixar on January 24, 2006, for 287.5M shares of Disney valued at about $7.4B.

Pixar’s fortunes, and the fortunes of its two central figures, Catmull and Lasseter, had now come full circle. What started with inspiration, dreams and ambitions based on the world of Disney had ended as a massive payoff from that very same studio. And along the way, these gentlemen and their co-creators not only revolutionized the world of animation, they created and popularized a genre, all while maintaining a nearly uninterrupted stream of critically-acclaimed, highly profitable film franchise hits.

The moral of the story

The Pixar story carries with it many morals: Always have the courage to follow your dreams; Don’t let the absence of something stand as proof of its impossibility; A lot of life’s magic and human progress is due to lucky happenstance.

But the most enduring lesson of all from the Pixar story is most likely the fact that greatness is hard to forecast, and the future is always full of uncertainty. Before Pixar was sold to Disney for $7.4B in stock, it was first nearly kicked to the curb by Lucasfilm for a song ($5M on the original asking price of $15M) and thought to be hopeless. And this was the view of it from a highly successful film studio whose chief architect was a successful technological innovator himself! From there, the group went on to suck millions of dollars out of Steve Jobs nearly to the point of exasperation before it finally had its first major breakthrough. How many failed deals came and went before Pixar turned out to be a multi-billion dollar enterprise?

Would the Pixar we know today even have existed if no one had ever thought to drop the frustrating hardware side of the business and let these technological entrepreneurs follow their true passion in story-telling and computer-animation?

The world could always be a different place than it is. It’s easy to see how obvious everything looks when you’re at the end of the story and not the beginning.

What kind of value would you have put on Pixar in the early 1980s?