The 330-store fast casual, backed by Yum! Brands, is growing on the coasts and refranchising restaurants in California for the first time.
The Habit Burger Grill prefers area development agreements as opposed to signing deals of one to two units.
On the fifth page of its franchise brochure, The Habit Burger Grill quickly lets prospective operators know what type of track it’s on—more than 2,000 locations in the U.S.
As it stands now, the fast casual has 330-unit restaurants in more than a dozen states. The long-term growth objective is steep, but John Phillips, chief global brand partnerships officer, has little doubt in The Habit Burger’s aims.
His confidence starts with Yum! Brands—also parent of KFC, Pizza Hut, and Taco Bell—which bought the burger concept in 2020 for $375 million. It’s the largest restaurant company in the world, with more than 54,000 units. Yum! is coming off a year in which it added a record 4,180 gross openings, or one restaurant debut every two hours on average. Since the company took over The Habit two and a half years ago, the legacy concept has grown by a net of roughly 50 stores.
The chain is also working through a new growth directive. For the first time, the brand is refranchising restaurants in its home state of California and using the capital proceeds to build more company-run locations alongside franchisees on the East Coast where there’s already penetration, and in Middle America, which presents the most whitespace opportunities.
“We’ve got a great program of support that we continue to enhance from the real estate and construction piece, the new restaurant opening piece, and ongoing field managers support,” Phillips says. “It’s really a great way for a franchisee to come in with that support whether it’s on the coast or in the middle.”
The chain’s same-store sales lifted 16 percent in 2021 year-over-year and 3 percent on a two-year basis. Also, 24 U.S. restaurants opened systemwide. In the first quarter of 2022, the fast casual debuted 11 locations to give itself 285 corporate units and 33 franchisees. The brand’s system sales grew 17 percent in Q1 year-over-year, fueled by 13 percent unit growth and a 3 percent increase in same-stores sales.
The Habit Burger prefers area development agreements as opposed to signing deals of one to two units, giving operators exclusive territories and the ability to be more opportunistic in their markets. For instance, Legacy Hospitality Companies signed on to open 10 restaurants in the Tampa Bay area—a new market for the fast casual—and entrepreneur Stan Singh purchased five locations in California and agreed to open another eight units in South Riverside County.
Phillips explains that building company-run and franchise restaurants concurrently allows for supply chain and operational efficiencies and local marketing opportunities.
“Historically, we always expected we would have a large equity position of restaurants because we’re all operators here,” Phillips says. “We’ve been operating the restaurants for 55 years now. We like having some skin in the game. We like having the operational prowess to make sure we’re hitting on all cylinders on running the restaurants and understanding what’s happening in the restaurants. It makes us a better franchisor, and we happen to make some pretty good money doing that, as well.”
Admittedly, The Habit Burger sometimes struggles with how to approach its franchise expansion, Phillips says. Initially, the brand first identified a well-suited operator and made it happen in whatever market that person is in, but now the development team is seeking a more hub-and-spoke, concentric approach around a core region. The former method is still used somewhat, but that’s assuming it’s a large enough operator and agreement that it would make sense, not a routine five-unit deal in the middle of Texas.
The Habit Burger offers franchisees four prototypes — nontraditional (less than 1,200 square feet), freestanding drive-thru (2,500-3,000 square feet), endcap (flexible square footage), and endcap with drive-thru (2,400-2,800 square feet). The concept was born out of the non-drive-thru endcap design, but as the fast casual ventured outside of California and navigated the pandemic, freestanding and endcap stores with drive-thru capability have soared in popularity among operators, with the edge going to standalone because of the visibility and easier egress and ingress. The nontraditional options are typically one-offs with licensing partners as opportunities become available.
Prior to COVID, dine-in accounted for 60 percent of sales, which Phillips describes as a “rare event” for quick-service brands, but the rise in digital cannot be ignored. During the first year of the pandemic, app and web order sales mixed nearly 40 percent, and now, about one-third of stores have pickup shelves, with plans to expand more broadly in the coming months.
However, Phillips says The Habit Burger will continue to take great pride in the build of its dining rooms and maintain a menu that lends itself to the dine-in occasion. The chain views it as a competitive advantage, and will dedicate resources to it as the in-restaurant mix keeps recovering.
“We’re happy with where it’s going and the dine-in continues to increase as the weeks go on,” Phillips says. “That’s why we’re still looking at having well-defined dining rooms. So as some of the typical [quick-service restaurants] are kind of ostracizing dining in, we want to make sure we continue to embrace that as a great respite for our guests to be able to come in and do what they’ve done before.”
As economists warn of a recession, Phillips says everyone is “looking at things a little bit harder and longer” to assess where the company is going. Right now, the team can see that leases haven’t gotten any better and that construction is about 20–25 percent more than pre-COVID figures. And there are still concerns around COVID and what locations make sense, i.e. will people ever truly return to the office.
He also points out The Habit is known to be a value-oriented brand, which served it well during the Great Recession more than a decade ago. Rising labor and commodity costs squeezing margins make it tougher, but Phillips still prefers The Habit’s current positioning in the marketplace. He feels there will be opportunity to accelerate development long-term as competitors without staying power fade away.
The key part is that franchisees aren’t facing the new environment alone. The company is building and investing beside operators, which breeds optimism and confidence throughout the system.
“We can walk the talk, so to speak, because we are out there developing, and we’ve got a lot of stores in the pipeline,” Phillips says. “All of our franchise partners know that we’re doing our best to keep the cap on construction costs and do things, but we do see a light at the end of the tunnel. We’ve been a historic brand. We have a great working relationship and we’ve got some great real estate programs that we work with to find sites.”
“They work really in tandem with our construction folks to build at a good level,” he adds. “The support—and us building at the same time—you show them that we’re in this to win it and it’s a partnership down the road. Every day seems a little bit different between COVID, recession, inflation and everything else, but we’re keeping a steady path and eyeing things long term.”
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QSR Magazine (Ben Coley)