WEBVTT - Smashburger CEO Jim Sullivan Talks Franchising, Cyclospora and Pricing 

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Smashburger North America same store sales grew two point four

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<v Speaker 2>percent in the fourth quarter. It's also planning to open

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<v Speaker 2>twelve new locations this year via franchise. Joining us now

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<v Speaker 2>is Jim Sullivan, Smashburger CEO Jim. This debate over franchising

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<v Speaker 2>chains really seems to have picked up some steam with

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<v Speaker 2>Jeff Smith yesterday and one of our analysts, for example,

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<v Speaker 2>basically said it's hard for a company to kind of

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<v Speaker 2>switch and get out there and start to franchise. I

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<v Speaker 2>would love to hear just what your experience is and

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<v Speaker 2>how difficult it is to get franchising right, because you

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<v Speaker 2>obviously have a brand and equality that you also want

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<v Speaker 2>to preserve.

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<v Speaker 1>Great Well, first, thank you and good morning. Thank you

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<v Speaker 1>for having me.

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<v Speaker 3>I think one I support what Jeff had to say

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<v Speaker 3>one hundred percent franchising within the restaurant sector specifically, it's

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<v Speaker 3>a great way for us to grow.

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<v Speaker 1>It's a great it's a great return on our invested capital.

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<v Speaker 1>It is difficult.

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<v Speaker 3>It's all about making sure you have the right unit

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<v Speaker 3>economics that are scalable and sustainable, and then it's picking

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<v Speaker 3>the right partner that are well capitalized and experienced within

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<v Speaker 3>the space. So it is a challenge, but it's one

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<v Speaker 3>that's very rewarding when you get the right partner in

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<v Speaker 3>the right market and they can accelerate and propel the

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<v Speaker 3>growth of the brand, which just drives many efficiencies across

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<v Speaker 3>many channels of the business, whether it be marketing, supply chain,

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<v Speaker 3>spans of control. So we at Smashburger are completely committed

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<v Speaker 3>to the franchise model. In fact, we plan to become

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<v Speaker 3>an asset light model here over the next eighteen months.

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<v Speaker 3>So we're going to double down and really ramp up

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<v Speaker 3>what we're doing both from a traditional franchise as well

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<v Speaker 3>as our non traditional franchise space.

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<v Speaker 4>As you look to expand, how are you identifying the

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<v Speaker 4>best places to put in new franchises? The space is crowded,

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<v Speaker 4>there's a lot of fast food everywhere. How do you

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<v Speaker 4>pick what's going to be successful for Smashburger?

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<v Speaker 1>You know, it's interesting, it's kind of an art and science.

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<v Speaker 3>We have technology that we utilize that will help us

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<v Speaker 3>pinpoint exactly based on performance of existing restaurants within the portfolio.

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<v Speaker 1>We take those characteristics and then we repeat them.

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<v Speaker 3>Through an algorithm, and then we have what I call

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<v Speaker 3>the art, which is our people on the ground that

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<v Speaker 3>are actually viewing each of the sites, studying the trade area,

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<v Speaker 3>studying the competition, understanding how the competition is performing.

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<v Speaker 1>We benchmark against that and we want.

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<v Speaker 3>To make sure that they index north of one hundred

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<v Speaker 3>of where their national average is.

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<v Speaker 1>That gives us a.

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<v Speaker 3>Good indication that there's a demand for burger within the

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<v Speaker 3>markets that.

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<v Speaker 1>We want to compete in.

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<v Speaker 2>The Other thing that's happening in this space at the moment, Jim,

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<v Speaker 2>which I'm sure you are acutely aware of, are the

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<v Speaker 2>various outbreaks, whether it be silospora, salmonella. How has that

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<v Speaker 2>impacted you? Have you had to take a good and

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<v Speaker 2>hard look at your supply chain and is that protected

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<v Speaker 2>at this moment.

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<v Speaker 3>Yes, we absolutely take a hard look at that every

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<v Speaker 3>day that we operate. From the standpoint of the recent outbreaks. One,

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<v Speaker 3>we don't use iceberg let in our restaurants. We use

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<v Speaker 3>a green leaf let us a whole head, and we'd

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<v Speaker 3>also use one that's a pre cut. We've taken precautionary

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<v Speaker 3>measures where we've instituted a double washing of our whole

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<v Speaker 3>head as well as an additional washing, even though it's

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<v Speaker 3>a pre wash product that comes in that's purely precautionary.

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<v Speaker 1>There was no need for that.

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<v Speaker 3>We verified with our suppliers that our supply is safe

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<v Speaker 3>as it relates to Halapaenno's in the recent news that

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<v Speaker 3>came out, we want to use it on a very

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<v Speaker 3>limited basis. Klapeno for us is what we call a

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<v Speaker 3>modifier under our create your Own menu where if you

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<v Speaker 3>want to add Holopeno you can. We don't feature on

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<v Speaker 3>any of our core builds. However, we did last night

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<v Speaker 3>elect that we would voluntarily remove Hoolapeno for the time

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<v Speaker 3>being until we further understand the impact. So for us,

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<v Speaker 3>we're just taking a precautionary measure to protect our guests

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<v Speaker 3>in our team members. So we pulled it. But we

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<v Speaker 3>don't feel that there's any risks to the business. This

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<v Speaker 3>is purely precautionary.

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<v Speaker 4>Well, have you seen any decline in traffic or any

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<v Speaker 4>effect on traffic from all these headlines?

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<v Speaker 1>We have it, We have it.

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<v Speaker 3>We continue to drive positive same store traffic, same store sales,

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<v Speaker 3>So no, we have not seen an impact from that.

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<v Speaker 3>But if you think where we're situated, we're burger right,

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<v Speaker 3>We do have a let us component to what we do,

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<v Speaker 3>but we're primarily.

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<v Speaker 1>A protein so we have not experienced.

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<v Speaker 3>That, and I'm quite frankly we haven't even heard from

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<v Speaker 3>our guests questioning what it is or what we're doing

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<v Speaker 3>as it relates to our produce.

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<v Speaker 2>Jim, you know this industry well, and I wonder perhaps

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<v Speaker 2>we're just suffering from recency bias. But it feels like

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<v Speaker 2>there's been a lot of outbreaks as of late. Is

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<v Speaker 2>it actually the case has something changed? Is it hotter

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<v Speaker 2>weather that's allowing this to happen, Is something changed with

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<v Speaker 2>like overall supply chains, or is this like a normal

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<v Speaker 2>course of business what we're living through right right now?

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<v Speaker 3>You know, I honestly I think that there's always risks

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<v Speaker 3>that are out there. We just rely on the FDA

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<v Speaker 3>and the CDC and we follow what they direct us

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<v Speaker 3>as to what the risks may be that are out there.

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<v Speaker 3>I do think it's just kind of an anomaly right

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<v Speaker 3>now that you head back to back. We haven't experienced

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<v Speaker 3>that for now several years. There's always small cases that

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<v Speaker 3>break out, but I'm not concerned that there's an overwhelming

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<v Speaker 3>concern for supply chain.

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<v Speaker 4>What about pricing and the inflation that you're facing, particularly

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<v Speaker 4>in the beef market. How is that affecting your margins

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<v Speaker 4>and how are you trying to protect them.

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<v Speaker 1>It's definitely impacted our margins.

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<v Speaker 3>We've been very disciplined around price and pricing, understanding the

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<v Speaker 3>macro that's out there and consumers are pinched. So we've

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<v Speaker 3>introduced our Everyday Value, which is a four ninety nine

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<v Speaker 3>price point for us. This is a way for us

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<v Speaker 3>not only to promote a price point, but it's really

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<v Speaker 3>about our quality and our experience. So value for us

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<v Speaker 3>is an entirely different equation versus just price. But we're

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<v Speaker 3>offsetting what's occurring with beef by driving other proteins and

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<v Speaker 3>other products through our menu and through product innovation.

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<v Speaker 2>Hey, Jim, that's all we have time for. Thank you

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<v Speaker 2>so much for joining us. Jim Sullivan of Smashburger