Back Yard Burgers, Inc.

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Back Yard Burgers, Inc.

1657 N. Shelby Oaks Drive, Suite 105
Memphis, Tennessee 38134-7401
U.S.A.
Telephone: (901) 367-0888
Fax: (901) 367-0999
Web site: http://www.backyardburgers.com

Public Company
Incorporated: 1987
Employees: 1,000
Sales: $29.3 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: BYBI
NAIC: 522110 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works); 722211 Limited Service Restaurants

Back Yard Burgers, Inc. offers a gourmet alternative to the traditional fast-food hamburger: a charbroiled, 100 percent Black Angus Beef burger dressed with fresh red onions, tomatoes, and green leaf lettuce. The company owns and franchises nearly 100 “fast-casual” restaurants in 17 states, primarily in the mid-south. In addition to a variety of burgers, the menu includes grilled chicken sandwiches; seasoned or waffle fries; milkshakes made from hand-dipped, premium ice cream; fresh-squeezed lemonade; and fresh-baked cobbler.

Out of Boredom, Back Yard Burgers in 1987

Lattimore “Lattie” Michael opened the first Back Yard Burgers drive-thru restaurant in 1987. Michael owned and managed the grocery store started by his father in Rosedale, Mississippi, but he wanted to start a business himself. He opened a discotheque in Jackson in 1979, but the Pearl River flood damaged the club and, after renovation, the melancholy mood of the town hampered business. He recovered from his losses and began to look for a new challenge. After reading an article about double drive-thru restaurants, Michael thought to open one himself. He considered a variety of foods—chicken, pizza, barbeque—and decided on hamburgers. To compete with the national fast-food hamburger chains, he decided to offer something different, a premium quality hamburger like those he made in his own backyard.

With a $124,000 bank loan and an investment from his two brothers, Michael opened the first Back Yard Burgers store in Cleveland, Mississippi, in March 1987. The small size of the store, at 525 square feet, on leased land allowed for a low start-up cost. For $1.69 Back Yard Burgers offered charbroiled, all beef hamburgers with fresh slices of red onion and tomato, pickles, green leaf lettuce, mustard, ketchup, and mayonnaise. With service at two drive-thru windows, the gourmet burger place filled an order in less than a minute, and each unit served 120 to 140 cars per hour, potentially generating up to $600 in sales per hour at peak business times. Although the store did not have indoor seating, Michael placed picnic tables outside, keeping with the backyard concept.

Within a few months Michael received inquiries about franchise opportunities. He had already considered the possibility that he might open another three or four stores if the first succeeded, so he had been careful in plotting the methods and procedures used at the original store. A year after Back Yard Burgers opened, a franchise store opened in Greenville, Mississippi. Soon more franchises opened, including two units in the Memphis area, three in Florida, and another in Mississippi. By the end of 1988, the company owned one unit and franchised 11 units; these garnered revenues and royalties of $561,000 that year. Back Yard Burgers’ success attracted several private investors and, in January 1990, the company relocated to Memphis where it planned to develop into a major market area.

Franchisees found Back Yard Burgers an attractive investment, not only as a gourmet alternative niche, but also for its low cost. A franchise on leased land with a prefabricated building cost $260,000 to $400,000 to open compared with $1 million for national chain franchises. Costs included approximately $200,000 for the building and equipment, $35,000 for signs and canopies, a $16,000 franchise fee, which included four weeks of training for three managers, plus funds for site work and working capital. Franchisees paid a 1 percent advertising fee and 4 percent royalties to Back Yard Burgers. For each additional unit opened, a franchisee paid the company a $5,000 fee.

In 1990 Back Yard Burgers units opened in Tennessee, Alabama, Arkansas, Kansas, Texas, Georgia, Florida, Mississippi, and California. The San Diego store came into being after a Louisiana man stopped at the Greenville store. He was so impressed he called a friend in California to tell him about Back Yard Burgers. In addition to new franchises in North Carolina, Ohio, Missouri, Nevada, and South Carolina, several more stores opened in Tennessee and Arkansas.

Seeking to Build Critical Mass in Major Markets Following 1993 IPO

Back Yard Burgers prepared to take the company public in mid-1993. The company merged with Double S Development, the largest franchisee with five units, and American Back Yard Burgers, the Arkansas franchisee. With the merger the company owned and operated eight units, while franchisees operated 37 units, for a total of 45 stores in 13 states. The merger was designed to show higher operating income to potential investors by adding store revenues to income from royalties. The franchise fee increased to $25,000. To enhance the company’s clout among investors, Back Yard Burgers hired veterans of the fast-food industry for executive positions: John Arnold from Wendy’s for vice-president of franchise services; H. Ray Jones from Pizza Hut for vice-president of training; and Stephen Reid from Burger King for vice-president of research and development. Michael sold his supermarket to concentrate on his duties as chairman of the board and CEO of the company.

The initial stock offering took place in July. The company netted $9 million from a sale of 1.5 million shares at $6 per share. Back Yard Burgers applied the funds to pay $400,000 in debt, buy back the territory rights for Atlanta, fund a television advertising campaign, and open 14 company-owned restaurants in Memphis, Nashville, and central Arkansas. The company held commitments for 16 franchises as well.

With a critical mass of Back Yard Burgers stores in some markets, Back Yard Burgers began to advertise on television in the fall of 1993. Early commercials, titled “The Great Burger Wars,” satirized the national competitors. In June, the company launched a series of commercials featuring Dennis R. Phillippi, a popular comedian in Memphis. In addition to regular performances at The Comedy Zone, Phillippi appeared on a children’s television show and wrote a regular column for a local magazine. As spokesperson for Back Yard Burgers, Phillippi brought his ability to develop a rapport with the public. Known as Dennis the Back Yard Burgers Guy, Phillippi obnoxiously asked questions of competitors’ customers, then went on talking before they responded. The commercials advertised the company’s burgers as bigger, at one-third pound compared with the one-quarter pound burgers at national fast-food chains. In addition, the angled grill made a healthier, tastier burger, as the fat rolled away from the patty during cooking. The commercials succeeded in increasing sales 10 to 15 percent over the previous year.

In September another commercial promoted the company’s new bacon-cheddar and bacon-Swiss burgers. In these spots Phillippi encouraged patrons to attempt the tongue twister, “Back Yard Burgers’ bigger, better, bacon burger.” Phillippi introduced the new honey-mustard chicken sandwich in November. Franchisees in small markets used audio from the television commercials for less expensive radio advertising. Direct-mail advertising supplemented the television and radio commercials.

By the end of 1994, Back Yard Burgers owned and operated 26 units, while franchisees operated 39 units. The total of 65 units accounted for 12 store closures and 16 new store openings, and one store converted from a franchise to company owned. Sales from royalties and company-owned stores rose from $6 million in 1993 to $17.2 million in 1994. Same-store sales increased 6.4 percent on the strength of its television advertising. Net profit increased also, from $22,000 in 1993 to $682,000 in 1994. The company ended the year with commitments for seven single franchise units to open early the following year.

In 1995, Back Yard Burgers experienced a decrease in sales related to a lack of sustained interest on the part of its customers. Although sales from company-owned stores increased 35.8 percent to $21.2 million, with 14 new units opened in late 1994 and in 1995, same-store sales, from stores open more than one year, declined by 10.9 percent. The company attributed the decline to competitive discounting and promotions by the national chains as well as to a lack of indoor seating. Profits also declined as the costs of labor and of the company’s own promotions increased. Back Yard Burgers changed its accounting system to better reflect the true valuation of impaired assets, resulting in a $2.56 million non-cash charge in 1995. Overall revenues of $22.7 million in 1995 garnered a net loss of $3 million.

The company addressed the concern with indoor seating as customers had often expressed a desire for a dine-in option. A store in Boone, North Carolina, added indoor seating in 1994, resulting in a 165 percent increase in sales. Research found that the public associated the double drive-thru restaurant with cheaper priced food. In converting double drive-thru units to a single drive-thru restaurant with indoor seating, the company created a new market niche between traditional fast food and casual dining, called fast-casual. The conversion to indoor dining cost $250,000 to $450,000 per unit, but most of these units experienced more than a 30 percent increase in revenues. By the end of 1996, 12 of 34 company-owned units and 25 of 47 franchise units had indoor seating.

Company Perspectives:

To deliver the highest quality service and best tasting food in a clean environment for a fair price. That is our mission statement, and to achieve it, we at Back Yard Burgers are constantly scrutinizing every aspect of our business, from scheduling to equipment to ingredients. Whenever we find a way to enhance our customers’ dining experience, we look for ways to implement that improvement. After all, our goal is to offer you, our customer, a delicious meal and exceptional service every time you visit.

Back Yard Burgers rebounded slightly in 1996 as the company increased menu prices 3.5 percent at the beginning of July, generating $22.3 million in sales from company-owned units and $1 million in royalty fees. While same-store sales at company stores continued to stagnate, franchisees experienced a 3.7 percent increase. At the end of 1996, Back Yard Burgers counted 34 company-owned units, including ten in the Memphis area and 11 throughout Tennessee, and 11 in Arkansas, including five in Little Rock. Of 47 franchises, seven were located in both Tennessee and North Carolina, five each in Arkansas and Mississippi, and four each in Ohio and Florida. Other stores were located in Kansas, Alabama, Oklahoma, Nebraska, Kentucky, and South Carolina. In 1996 Back Yard Burgers recorded $24 million in revenues, including franchise fees for 11 new units, and $357,000 in net income.

Slowing Growth to Refocus for Late 1990s Expansion

Back Yard Burgers decided to slow development of new franchises and company stores to focus on improving operations and sales. The company increased its menu prices twice in 1997, by 4 percent in May and 3 percent in September. In January 1998 a new series of radio commercials featured the voice of John Hurley, who played J. Peterman on the popular television sitcom “Seinfeld.” By November Back Yard Burgers had converted two-thirds of the company-owned and franchised stores. With 2,700 square feet of space, each dining room seated 84 people. In 1998 same-store sales increased 7 percent and 6.5 percent for company-owned units and franchises, respectively. The increases were attributed to the September price increase, the availability of indoor seating, and improvements in customer service. Increased sales at franchise units boosted royalty payments 11.5 percent to $1.3 million. Back Yard Burgers recorded systemwide operating revenues of $59.6 million, $25.1 million from 33 company-owned stores and $34.5 million from 48 franchises. Overall company revenues of $27.4 million garnered net income of $1.2 million.

By 1999 the company reinvigorated plans for franchise development agreements throughout the mid-south. In August the company signed an agreement to add five stores in the Kansas City area, in both Missouri and Kansas, where 13 units already existed. Another agreement committed to the addition of seven units in Louisville, Kentucky. New stores also were planned for markets in Texas, North Carolina, and Oklahoma.

To bring a new perspective into the business, the company hired Michael W. Myers as chief operating officer. Myers brought 14 years’ experience with Whataburger, Inc., where he held the position of regional vice-president when he left for Back Yard Burgers. Myers initiated several new programs to improve operations, including implementation of incentive programs for unit managers. He eliminated coupons and discounting programs, a marketing approach that he viewed as sending a mixed message, given that the company was offering a premium product. The company also hired consultants to evaluate operations and facilities, including building design, signage, and site plans, to streamline the restaurant for a new prototype. In May 2000 Back Yard Burgers purchased franchise properties in Jackson, Tennessee; Tupelo, Mississippi; and Jonesboro, Arkansas—high-volume units that fit into the company’s strategy to build critical mass for media advertising in the Memphis vicinity.

The most significant change Myers made sought to improve the Back Yard Burgers concept as an alternative, gourmet burger outlet through the introduction of a burger made with Black Angus Beef, the best quality beef available. After six months of testing 100 percent Black Angus Beef burgers in Memphis, the company instituted use of the branded beef at all company-owned stores in late 2000. The company rolled out Black Angus Beef at all franchises in early 2001.

Reestablishing Back Yard Burgers as a premium product resulted in a slight decline in sales during 2000. Michael and Myers attributed the decline to the loss of part of the customer base when the company cut its discount programs; the change, however, was intended to improve overall profitability and long-term growth. Company-owned stores generated $26.18 million in 2000 with 35 stores, down from $26.5 million in 1999. Same-store sales declined 5.6 percent at company-owned stores and 5 percent at franchises. Franchises paid $1.7 million in royalty fees on $42.3 million in revenues with ten new units opened in 2000. The company rebounded from a loss of $558,000 in 1999, due to an impairment charge of $1.4 million, to a net income of $466,000 on $29.3 million total revenue in 2000.

Back Yard Burgers continued with its growth strategy in 2001. The company logo was redesigned and a web site was launched that year. Back Yard Burgers opened small-sized outlets through co-branding with the convenience stores at gasoline filling stations. The fifth such unit opened in October 2001, with Back Yard Burgers being approached by the convenience stores in each instance.

Principal Competitors

Burger King Corporation; McDonald’s Corporation; Wendy’s International, Inc.

Key Dates:

1987:: First Back Yard Burgers opens in Cleveland, Mississippi.
1988:: First franchise opens in Greenville, Mississippi.
1993:: Initial public offering funds expansion, television advertising.
1995:: The company begins to add indoor seating at restaurants to improve revenues.
1999:: After a period of stabilization, the company renews growth strategy.
2000:: Back Yard Burgers introduces 100 percent Black Angus Beef burgers.