Why nobody goes to Five Guys anymore

Five Guys Burgers hit $1.3 billion in revenue. They were named by Zagat as the best burger in America, and heck, even the president was ordering them for lunch. But today, sales are down over 10% from their peak. They're closing stores left and right. They've been kind of a joke on social media.

I spent $40 on this for one cheeseburger combo and a grilled cheese. Hey, let me know in the comments, guys, would y'all pay $40 for this?

It's easy to think that inflation and All the things that are happening post-pandemic are what are killing Five Guys? Turns out it's more complicated than that. This video is the rise and fall of Five Guys.

By the way, I made this video in partnership with my company, Near. More on them later.

By the way, I turn each and every one of these stories into a one-page document you can read alongside this video. girdley.com/youtube. How we got here actually starts back in the beginning in 1986 when a financial planner, not a restaurant guy, named Jerry Murrell decided to open a restaurant. From the beginning, his vision for the restaurant was the opposite of the way most restaurants worked, which was they worried about costs and spreadsheets. And Jerry, who should have been a spreadsheet guy— he was a financial planner after all— he just said, we don't care, we're going to make the absolute best burger and fries possible. Jerry did one of the most boss parenting moves possible. He sat down his two sons and he said, hey, either you're going to go to college or we're going to take that money and you can start a business. The two sons decided to start a business with them, and they rented out a small space in a strip center, 460 square feet. The name Five Guys actually comes from Jerry and his four sons, and when Jerry stepped out of the picture, well, a fifth son would join in, and that's how it was Five Guys. Jerry has a business genius insight, which is he realizes he can't out-location McDonald's, he can't out-supply chain them, but he can do one thing better than they can, which is to make the absolute best hamburger, and that's how he's going to win. That's the whole plan. That's their entire focus and the entire business plan, basically. Fresh, never frozen beef, free peanuts, basically hand-cut fries done every day in the store. They just go all out on quality. Actually, I'm going all out on mud. It's super muddy. It's been raining like crazy in San Antonio recently. Look at all this mud. Yeah, 2 inches of rain last night in San Antonio. I thought there wouldn't be muddy, but here we go. Whether Jerry knew it or not, he had stumbled on a thing called product-led marketing. And they actually had no marketing budget in the early days of Five Guys. The idea was that word of mouth would carry the message far and wide, and it did. Jerry's line was that anybody can buy great food. If you've got a Saturn or a Mercedes sitting next to each other, you're gonna drive a little bit further and buy the Mercedes. He trained staff to reinforce this idea. He would tell them to deliberately overfill things like fry bags, give it a little bit too much, make the customers feel like they got a special deal. Interestingly enough, this would set the brand up for a thing called the quality trap. When your whole strategy is about being better than the next guy, it boxes you in. Suddenly, if the world changes around you in the future, well, you got no choice and you're trapped. That's why it's a trap. Get the idea? For now, the quality trap wouldn't be a problem for them, but it'll come back later. And over the next 15 years, Five Guys expanded slowly. They became a cult inside of the Virginia Beltway. Basically, they had 5 stores and people loved them. Then in 2003, the Murrells would make a decision that would change everything. When you run a successful restaurant concept like Jerry did, people will come to you often and ask you to franchise. They want to make money by franchising a working thing. And for years, Jerry refused to do it. And until 2003, he finally caved. They decided to sell their very first franchise territory. That's the way franchises work. Typically, a person is granted exclusive license to run a business over an area, either a small one or in a whole town. In this case, in the case of Five Guys, the DC, Maryland, kind of Baltimore area, well, sold out within a few months. That's how much people wanted to get in on the Five Guys business. When you sell franchises, there's actually two options that a business can do. You could be like McDonald's or Subway and you sell onesies-twosies to individual mom-and-pops, often called single-unit operators, or you go sell them to big professional multi-unit operators, people who are operating 10, 20, or even hundreds of franchise types. This was obviously great for the Morells. Suddenly they would be in one of the best businesses in history, licensing the intellectual property of restaurants and collecting royalties. But there was a downside to all this. Suddenly they brought in a bunch of business partners, and that's what these multi-unit operators were, who had one incentive, not to make great food, but to make money. Happened next was one of the most incredible restaurant scale-ups in the history of American business. From 5 stores in 2003, they were at 300 just a few years later, and then at over 1,500 just 12 years later. Remember in the 2000s, we were still at the tail end of the American monoculture. Everybody was watching the same TV shows, reading the same newspapers, magazines, and so on. And at that moment in 2009, President Obama walked into a Five Guys, did something that would propel the brand to even greater notoriety. He bought a bag of fries and some burgers for his staff, and suddenly that was on the news clip of every news show in America. That got them propelled to national recognition, and that's when Zagat rated them the number one burger in the United States. The irony is that Jerry Murrell, the guy who's a financial planner who did everything the wrong way according to restaurant people and refused to advertise, was suddenly the most talked about hamburger in the United States. This accelerated almost everything with the growth. Suddenly even more franchisees wanted in on the game. More people were trying to, well, basically get in and get rich on the burger craze that was Five Guys. So let's come back to this idea of the quality trap. Remember that Five Guys had built their entire brand around having the absolute best quality. When you're in a McDonald's or something like that, if things start to change in the world around you, there's a million things you can change. You can make your burgers slightly smaller, you can change where you source them from, heck, you can even change the shape of your fries. But at Five Guys, hand-formed patties are the brand. Peanut oil is the brand. Premium is the brand. You can't change that. You're trapped. And this shows in the numbers. In a typical Five Guys, food costs might be 30 or 35%. Just in a normal time without inflation or crazy cost. A McDonald's is down in the 20s. In 2010, we still had cheap fuel, which helped us have cheap beef, which helped us have cheap ingredients. Labor was not scarce like it is now because there were still lots of kids running around and things were going great for the brand. They took that to the next step and they expanded into the UK, going international. By the mid-2020s, the franchising model would help them get into over 25 countries. They're in places like the UAE, Singapore. Nuts. But you can see what's happening here. We have suddenly a bunch of partners and franchisees who are totally interested in making as much money as possible. You have Jerry, who by now is starting to age out alongside his family, who are interested in maintaining the quality and the brand. Uh, and then you have an entire cost system that is not ready for what is about to happen next. And that next thing was something that shows up a lot in the stories on this channel— the COVID pandemic. Which started in March 2020, and suddenly all the inputs into Five Guys started to go ballistic.

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Labor was going crazy. Inflation was going crazy. Beef was up 30 to 50%, and rent in the places where they were, you know, finding their affluent customers like Manhattan and Los Angeles went ballistic. As governments pumped money into the system, inflation happened and costs went up. Basically, every single restaurant chain in America had to figure out a way to relieve that pressure. McDonald's reformulated a lot of their stuff, cutting costs here and there. Domino's tried to push towards carryout to reduce costs and overhead. Chipotle tried to go digital. And here was Five Guys without a play to run. And their only choice in order to not start losing money as Five Guys was to start raising prices to match inflation and cost increases. And they did it again and again. A cheeseburger combo at Five Guys that might have been $14 in 2010 in some markets was $22 or $24 by 2024. That's a nearly 50% increase on top of prices that had already been high. They've been competing on value, not on affordability. If you look at Five Guys' strategic position, this left them in a horrible place. They weren't able to be cheap and affordable and high frequency like a McDonald's. They weren't able to be so expensive that you could be seen as a luxury good with nice sit-down experience and all that kind of stuff like a Shake Shack could., and here they are just kind of stuck. Made worse was something else going on, which was Five Guys was fundamentally a story built on the back of millennial tastes. They were starting to age into the 2010s and starting to spend money on stuff, and Five Guys was the perfect brand for the type of place they wanted to go. Those same millennials that had been Five Guys enthusiasts were 25 and 35 years old during the Obama era. Now they're 45 and 50 with kids minivans, and mortgages. They don't have the money they used to. Made worse is the generation behind them, Gen Z, has grown up feeling like there's just everything too expensive. Their wages are stagnated, and to them, the idea of spending $24 on a burger meal, well, you might as well ask them to fly to Mars with a kite. It's just not going to happen. Most importantly, Gen Z invented the idea of showing receipts, literally and figuratively, whereas previous generations like mine, Gen X, might complain about prices being too high, keep it to themselves and run away, never come back to shop. Gen Z, well, they'll shame you on social media. Like, it's always a joke to be like, oh, Five Guys is so expensive, but like, seriously, it's so expensive. Layer on these changes with the franchise structure they'd created with a bunch of like spreadsheet jockeys who wanted to make money and had high rent payments they needed to make, and suddenly that was a recipe for the next disaster to come. And that's when in 2023 there came the basically burger receipt heard around the internet. Some random poster takes and puts their $23 receipt for a burger combo at Five Guys on the internet and the entire internet explodes. It becomes a meme on the internet. And look, this is just bad luck for Five Guys. This TikTok post, the Instagram post, they're just the poster child for what people are really mad about, which is wages have not gone up with how expensive everything is. And that's made worse by the fact that people feel like they can't afford homes, they're not getting paid enough for their jobs, and heck, even healthcare and education. Like, they're crazy. And young people, well, they feel left out. And here's Five Guys just taking the brunt of the whole thing. And remember that Five Guys had used an entire word-of-mouth strategy to build their brand. Millennials had been telling their friends how cool they were, that they got extra fries, and that had grown the brand to great heights. But here, word of mouth was doing the exact opposite thing and being propelled to, well, horribleness by TikTok and social media where Gen Z were shaming Five Guys. Interestingly enough, America is one of the few countries in the world where financials of big companies are kept very private. In places like Nordics and the UK, they actually publish all that stuff. Well, so anybody can read it. During this time, the economics of the UK filings were showing what was going on with the whole chain, which was foot traffic was going way down and they were only still staying in business and making money by raising prices. And Jerry had structured the entire business around franchises and this quality trap, the high-quality food. And here they were, absolutely trapped by those two decisions. One of the quotes we talk about on this channel is, "Show me the incentives and I'll show you the outcomes." Well, there's a Girdley version of that too, which is, "Show me the way people are structured and who's in the room and I'll show you the outcomes." And here the structure they'd created and the decisions they'd made around franchising and where they were going to be in the market around quality that led them to entirely where they were today. Not ready to face the new world. Awesome thing about Jerry and his family is building a higher quality burger and selling it to people at a fair price is indeed an honorable thing. You can only respect them. It's not like these were bad guys. They were doing something really great for anybody who likes burgers, including me. A lot of business outcomes turns to luck. And in this case, they made some decisions. The world changed around them. It's pretty unlucky. And to be further fair to the founders of Five Guys, There are tons of victims in the better burger space. Smashburger, Umami, all these different ones. Like they've all gone to crap and out of business. At least Five Guys is one of the two ones standing. And I forgot BurgerFi almost also died. There was one near our house. We used to go there and then one day they were closed. Now it's a fish restaurant. Interestingly enough, Smashburger is actually owned by a Filipino McDonald's called Jollibee.

It's crazy.

If you're ever interested, you should check out Jollibee. They've got crazy stuff like hamburgers with like spaghetti on it. Insane kind of cool stuff. Of the two that are standing in the Better Burger movement now, you have two basically. The first one is Shake Shack. And where did they end up saving themselves? By being even more premium than a Five Guys with fancy offices, fancy retail, fancy all that stuff. Whereas the typical Five Guys, it's just in a strip center somewhere. And while Five Guys was not ready for a K-shaped economy where the poor folks are doing even worse, and the rich people are doing even better. Shake Shack is ready to take advantage of that top end of the K-shaped economy, the very wealthy who are happy to pay $25 for a hamburger and they'll say thank you. And at the other end of the spectrum, at the bottom end of the K-shaped economy, you have In-N-Out Burger. And what saved them? Well, they didn't go down the franchising path. They're owned by the same family who is more than happy to have slightly lower profits in order to play the long game, which Five Guys couldn't 'cause it was a franchise system. And that's why, especially here in San Antonio, I drive past an In-N-Out Burger— by the way, I don't eat beef, it makes me feel icky— but, uh, and they'll have twice the line or even 10 times the line of the local Five Guys, which frankly I never see people go into. That leaves us to why Five Guys is closing stores and sales are down. It's because fundamentally, if you compete with In-N-Out Burger, you're losing on price, and if you compete with Shake Shack, you're losing on quality. And experience. And here's Five Guys in the quality trap, not winning at any one thing. All right, that's it for Five Guys. If you have an opinion, let me know in the comments below. And if you enjoyed this video, please let me know and encourage me to make more. Catch you next time.