Fatburger Corporation

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Fatburger Corporation

1218 Third Street Promenade
Santa Monica, California 90401-1308
U.S.A.
Telephone: (310) 319-1850
Fax: (310) 319-1863
Web site: http://www.fatburger.com

Private Company
Incorporated: 1990
Employees: 500
Sales: $20 million (2003 est.)
NAIC: 722211 Limited-Service Restaurants

Fatburger Corporation, based in Santa Monica, California, operates and franchises more than 50 hamburger restaurants located in Arizona, California, Colorado, Florida, Nevada, and Washington State. About half are company owned. Although Fatburger—"The Last Great Hamburger Stand"—has been around for over 50 years, and maintains something of a cult following in Los Angeles among celebrities and everyday people, attempts since 1980 to grow the chain have been met with limited success. Now owned by a management group led by chief executive officer Keith Warlick, the company is pursuing an ambitious plan to place Fatburger hamburger stands across the country. Fatburger units maintain a retro 1950s setting, featuring jazz, rhythm and blues, and classic soul on the jukebox. In fact, a "fat" burger is '50s' slang for "supreme," as in Fat Cat and Fat Times. Fatburger offers casual dining but not fast food and generally avoids drive-thru operations. Burgers ranging from a two-ounce Baby Fat burger to the signature five-ounce Fatburger and the half-pound Kingburger—are hand-made from fresh, 100 percent lean USDA ground beef and then cooked to order on an open grill. An abundance of condiments, garnishes, and extras are available, including eggs. In addition, Fatburger makes its onion rings from real onions and milk-shakes from hand-scooped ice cream. Other offerings on the menu include chili dogs, grilled chicken sandwiches, and bacon and egg sandwiches.

First Fatburger Stand Opens in 1952

Fatburger was founded in 1952 in Los Angeles by African-Americans Lovey Yancey and Charles Simpson. According to company lore, their friends so enjoyed the hamburgers Yancey served them in her kitchen, often during the course of late-night jam sessions, that they encouraged her to open her own hamburger stand. She and Simpson decided to go into business together, and, despite a lack of money, they worked out a rudimentary business plan. They coined "Mr. Fatburger" as the name of the restaurant, determined the menu, and found a site at 31st Street and Western Avenue in Los Angeles. Simpson was then able to construct the first building at no cost. He worked for Martin Sheavy Construction Company, whose owner made a habit of dividing leftover building materials with his crews after a job was completed. With these materials and the free labor of his co-workers, Simpson was able to construct the first stand after working hours. When this walk-up restaurant, offering just three stools, opened, Yancey and a helper worked the day shift, while Simpson, after a day of working construction, with the help of his sister, Josie, took the night shift.

The first burger stand proved so successful that Simpson and Yancey opened three more sites. When they decided to part ways, they split the business. Simpson and his wife ran their Mr. Fatburger stands, while Yancey dropped the "Mr." and looked to expand her Fatburger business beyond Los Angeles's inner city. In 1973, she opened a store in Beverly Hills, and then in 1980 she began to grow the business through local franchising of the Fatburger concept. By the end of 1985, the chain had 32 units, four of which were company owned, and was named the number five fastest growing burger franchise chain by Entrepreneur magazine in its annual Franchise 500 list, trailing only McDonald's, Burger King, Wendy's, and Jack in the Box. There was talk in the press about expanding Fatburger beyond Los Angeles to Orange County and San Diego, and the possibility of moving into Ann Arbor, Michigan, and New York. Overseas licensing was also being discussed. Although the chain during this phase would grow to 40 units, many of the locations proved ill-suited to the business, and a number were forced to close. It was also during the 1980s that CEO Keith Warlick first went to work with Fatburger, learning the culture of the chain from Yancey herself.

Founder Sells in 1990

In 1990, Yancey sold out to a group of investors led by Island Trading Co., a New York investment firm connected to Island Records founder Chris Blackwell. Fatburger Corporation was formed to effect the purchase. Yancey continued to operate two of the restaurants, while Warlick joined the new owners as they began to restructure the business and establish new procedures for franchising, which resumed two years later. Before then, however, Fatburger opened a company-owned store in Las Vegas in 1990 on the strip. A second unit opened in Las Vegas in 1992, a move that caused some disagreement within management. Warlick, a supporter of Las Vegas expansion, chose to leave the company at this point. His belief in the Las Vegas market would be justified, however, when these stores became the top grossing units in the chain. He would return to Fatburger in 1995 and a year later emerged as the president, serving under chief executive officer Glen Hutloff. Also during the first half of the 1990s, Fatburger took steps to distinguish itself from fast food competitors like McDonald's and Burger King. Big board menus with pictures were removed, and while orders were made at the counter, the food was brought to customers' tables. In addition, chairs and tables designed to promote turnover were replaced by comfortable booths. Hutloff told Food & Beverage Marketing in 1997, "We want to be a chain that doesn't feel like a chain.… We want to feel like a neighborhood place." As a result, Fatburger was positioning itself into a challenging niche, neither a fast-food operation nor full-service diner.

By the end of 1997, Fatburger had 29 units, of which 12 were corporate units, but management held ambitious dreams of much greater growth. To help in its efforts to move into suburban areas like Santa Clarita Valley and Orange County, the chain introduced a smaller version of its signature Fatburger, the Baby Fat, which featured a two-ounce patty. The smaller sandwich was intended for children and allowed the chain to attract more families. At this stage, management was talking about growing to 250 units within five years. Fatburger had also established a relationship with basketball-star-turned-entrepreneur Earvin "Magic" Johnson, hoping to piggyback on his move into some 15 cities over the course of the next three years. In the short-term, Hutloff was targeting Atlanta, Houston, and Detroit.

As was often the case with Fatburger, these plans for expansion failed to materialize, although the chain managed to move into two new markets: Arizona and Washington state. In 1999, Texas-based Restaurant Teams International, Inc. announced that it had an agreement to buy Fatburger Corporation for $8 million. RTIN professed even bigger plans for the chain, announcing that it intended to develop nearly 500 franchised Fatburger restaurants over the next five years. A year later, however, the sale was still not completed. Then, in October 2001, Magic Johnson stepped in, after keeping his eye on the chain for the past few years. His Johnson Development Corporation in partnership with GE Capital Franchise Finances bought Fatburger. Other investors included the former president of Motown Records, Jheryl Busby, and Darren Star, the creator and executive producer of the HBO television series Sex and the City. Warlick was also a major shareholder and became the president and chief executive officer of the company.

Fatburgers' new expansion plan called for 100 new restaurants, 80 percent of them franchises, to be rolled out in five years. Possible new markets—with an emphasis on areas where Johnson Development Corporation already had a presence—included Michigan, Indiana, Ohio, Illinois, Pennsylvania, Colorado, Texas, Georgia, New York, and the Carolinas. Franchisees were expected to commit to opening at least ten restaurants in a new market. Franchisees for a single-unit were required to possess a net worth of $250,000 (not including their house and car) and to have on hand a minimum of $150,000 in cash. Franchisees agreed to pay a 5 percent royalty on net sales, earmarked for corporate services, and 2 percent that would go into a national advertising fund. In addition, they were required to spend 1 percent of their net sales on local marketing efforts.

Magic Johnson's involvement with Fatburger created a great deal of excitement about the chain, finally realizing its potential. One of his friends, TV personality Montel Williams, was quick to assemble an investment group, FB Colorado Inc., to acquire the Colorado territory. Johnson had introduced Williams to Fatburgers some years earlier, and he now claimed to visit a Los Angeles Fatburger restaurant roughly twice a week to eat a double Fatburger with cheese, bacon, and chili. Williams had started out his television career in Colorado, often visited the state, and was preparing to buy a house there, making it a natural location for his Fatburger operation. In December 2002, he opened his first Fatburger restaurant in Aurora City Place.

Company Perspectives:

At Fatburger, we've been doing things our own way since 1952. Making custom burgers, one at a time, for individuals like you.

Magic Johnson Sells Controlling Interest in 2003

By the time the Colorado Fatburger opened, however, Magic Johnson had already taken steps to lessen his involvement with the chain, selling a majority interest for an undisclosed amount of money in 2003 to an investment group led by Warlick. Johnson and his partners did, nevertheless, retain a minority, non-voting interest. According to the Los Angeles Daily News, "Friction between the management and Johnson's investment team led them to part ways.… The ambitious plans never materialized, with the chain adding only three restaurants while Johnson Development held it. Ken Lombard, president of Johnson Development, admitted, 'We just found too many times we weren't in agreement with where we had to go.'" According to the Daily News, "Delays in selecting real estate contributed to the slow roll-out, but [Warlick] said deals were in place to open 84 stores in 17 states." Expressing his frustration, Warlick said, "We can't afford to wait 100 years to exploit a hot 50-year-old concept." Johnson Development considered buying out Warlick, but in the end decided instead to accept his offer. Much of the difference between the two parties Warlick related to brand loyalty: "We prefer to control our own brand.… Magic Johnson is a brand itself, and with celebrity groups, their interest is controlling their brand." However, according to the Daily News, "Industry watchers conjectured that financial reasons played into Johnson's decision to sell.… 'I can only think there's one reason to sell: It's not generating the kind of return on (Johnson's) investment he's accustomed to,' said Richard Martin, managing editor of the Nation's Restaurant News. 'When you have people threatening to sue McDonald's over obesity, it's not the best time to be called Fatburger.'"

Warlick made it clear that he had no intention of changing the Fatburger name or formula. Warlick vowed, "We're not going into the salad business, we're staying with what got us here in the first place." Although Fatburger would clearly miss the financial muscle of Magic Johnson, it had a new backer in Portland, Oregon-based Fog Cutter Capital Group Inc., which provided the cash needed to complete the buyout and pledged additional financing to build Fatburger's infrastructure and support management's expansion plans.

There was clear evidence that Fatburger was indeed making a strong effort to establish a national presence. In 2003, the chain moved into Florida, and in 2004 entered the market in Pittsburgh, Pennsylvania, as well as in Georgia, Louisiana, and New Jersey, within the New York City metropolitan area. Moreover, the chain had commitments for the openings of 200 stores in 22 new markets by 2008. This expansion notwithstanding, it remained to be seen whether the long-held promise of Fatburger would finally be realized, more than a half-century after it was founded as a three-stool hamburger stand.