Subscribe NowJoin over 30,000 other Vintage Value investors today!

The Snyder Family made IN-N-OUT BURGER

This article was originally published on MastersInvest.com.


Screen Shot 2018-10-21 at 3.42.33 PM.png


logo.jpg

Who doesn’t love a burger? As I mentioned in my McDonald’s post, most, if not all of us have had some interaction with the biggies in the fast food world, and the company with the golden arches is usually acknowledged as the leader in that space. But what if I told you that one chain of Burger restaurants actually outsells the average McDonald’s store by nearly twice over? And they’ve been around as long as McDonalds? And that Warren Buffett would LOVE to own some of it? Would you believe me? I hope you do, because its all true.

In-N-Out Burger is the story of three generations of the Snyder family, who took a small hamburger shop in California way back in 1948, and turned it into a 335-store East Coast American Cult.

In-N-Out arose out of the massive tide of change that was sweeping the US following the Second World War. Automobiles were far more common, the US highway system was growing extensively and women were entering the workforce, paving the way for societal change that would see the demise of the traditional sit-down family meal.

The brainchild behind the chain was Harry Snyder. A man with vision, he saw this tide of change sweeping America and identified the opportunity within. Simply put, he chose to use the highest quality food ingredients available, and invented quick ordering technology, and because of it In-N-Out became a mecca for the rapidly expanding Californian surburbia.

For the next 70 years, the Snyders steadfastly refused to follow industry trends, instead sticking with a simple strategy – Quality Food, Cleanliness and Service. With a recipe that worked, the business has passed down the family tree [via some tragic events] and to this day remains virtually unchanged.

A fascinating article on In-N-Out in Forbes by Chloe Sorvino recently caught my attention. The article draws on an interview with the sole third generation of the Snyder family, the current owner of the business, Lynsi Snyder. Sorvino notes:

“An In-N-Out store outsells a typical McDonald’s nearly twice over, bringing in an estimated $4.5 million in gross annual sales versus McDonald’s $2.6 million. In-N-Out’s profit margin is an estimated 20%. That’s higher than In-N-Out’s East Coast rival Shake Shack (16%) and other restaurant chains that typically own their locations, like Chipotle (10.5%).”

What’s amazing about In-N-Out’s margins is that they’re not a function of higher prices or lower wages. In fact, quite the opposite; In-N-Out’s prices are cheaper than it’s competitors.

“Over the past 30 years, the price of the Double-Double hasn’t even kept up with inflation. In 1989 the sandwich cost $2.15, or about $4.40 in current dollars. It costs $3.85 today. A combo meal (Double-Double, fries, drink) goes for $7.30, compared with $10.94 for Shake Shack’s standard double-burger patty and fries.”

It’s also renowned as the highest payer in the industry. Again, Sorvino notes:

Restaurant workers, or ‘associates’ in In-N-Out speak, make $13 an hour, versus the $9 to $10 or so that’s typical at most national competitors, including McDonald’s and Burger King. Part- and full-time restaurant workers can enroll in dental, vision and life insurance plans through the company, and full-timers can get health insurance and paid vacation, accruing time off after two weeks of employment.”

In part, In-N-Out’s margins benefit from simpler menus and distribution synergies.

So how does In-N-Out maintain its margins? To start, the limited menu means reduced costs for raw ingredients. The company also saves money by buying wholesale and grinding the beef in-house. By doing its own sourcing and distribution, it likely saves 3% to 5% in food costs a year. It cuts out an estimated 6% to 10% of total costs by owning most of its properties—many bought years ago—and not paying rent. In-N-Out picks its locations carefully, clustering them near one another and close to highways to lower delivery costs while also avoiding pricey urban cores. It has just one location within the city limits of Los Angeles and one in San Francisco, while many Shake Shacks are smack in the center of town.”

But In-N-Out also benefits from the power of reciprocation – treating customers, staff and suppliers well – which when combined with a quality, value priced product, an adherence to what they know, some scarcity value and pure simplicity drives what Charlie Munger refers to as a Lollapalooza: a combination of factors which combine together to deliver outsized results.

Having enjoyed the Forbes article I picked up the New York Times bestseller: ‘In-N-Out Burger – A Behind The Counter Look At The Fast Food Chain That Breaks All The Rules’ by Stacy Perman.

The book chronicles the development of In-N-Out from Harry and Esther Snyder’s original Hamburger Shop until Lynsi’s ownership after her own father’s passing. Harry’s second son Rich took over the business when Harry succumbed to cancer. A tragic plane crash which killed Rich left the business in the hand’s of Rich’s only sibling, his older brother Guy. And when Guy died the business passed to the only third generation descendant, Guy’s daughter Lynsi. Throughout this, Harry’s wife Esther, maintained a deep involvement with the business, always managing the books and taking the reigns at times after the tragic events.

What struck me about the book were the parallels with other great businesses we’ve covered in the CEO Masters series – Walmart, Home Depot, McDonald’s, Panera Breads, etc.

I’ve included some of my favorite snippets from the book below…

Leverage Change

“Harry wanted to serve quality food at reasonable prices, and as quick as possible. ‘We really have to have a place where people can get their sandwiches and go’ he said. Harry and Esther would open a new kind of hamburger stand – the drive through – catering to an increasingly mobile society.

“Harry Snyder’s instinct was a good one. Southern California was the most heavily motorized place on earth.”

1001004009803403.jpg

“The asphalt tributaries developing all over the San Gabriel Valley were a boon for the fledging In-N-Out.”

“This casual new way of dining dovetailed into the rise of car culture and the establishment of the extensive interstate highway system that was starting to crisscross the nation. With better roads people could travel farther. Along the way people would need places to rest, sleep, and above all eat.”

“Harry had anticipated the significant role the car would continue to play in California. American life was becoming increasingly mobile. The exodus from the cities in favour of the suburbs meant that people had longer commutes. More women were working and less and less time was devoted to food preparation in the home. One of the first casualties of the new on-the-go lifestyle was the sit-down meal.”

Competition

“[Harry’s friend Carl Karcher told him, ‘I have always said that competition just makes you stronger. You shouldn’t be afraid of the competition. They make you stay top of your game.. it’s very important to have respect for your competitors. I may have had a different philosophy than some of the others. But I believe that your competitors are really your friends. They keep you on your toes.”

Keep it Simple

““Harry Snyder made a promise to himself that he had no intention of breaking: ‘Keep it real simple’, he always said. ‘Do one thing and do it the best you can’.”

960x0.jpg

“Their philosophy was simple; the product – if it’s a good one – should sell itself, and everything else is smoke and mirrors.”

Harry created the formula that emerged as the standard for running In-N-Out. It informed the company’s identity and was rigidly adhered to over the coming decades. It was not based on fancy management methodology – rather, it grew out of Harry’s own instincts and exacting personality. The system was based on three simple words, ‘Quality, Cleanliness, and Service’.”

“A frugal and practical man in most respects, Harry was profligate when it came to purchasing the freshest, highest grade meat, potatoes, and produce; he refused to sacrifice quality for the sake of profits.

Customer Focus

“From the start, In-N-Out ran a customer-driven shop.

“Harry put a huge emphasis on customer satisfaction. In-N-Out workers were instructed to always smile, look their customers in the eye, and maintain a level of courtesy with every guest. Long before Starbucks, the Snyders called their customers ‘guests’.”

“One of the basic tenets taught at the [In-N-Out] University was called rule number one: ‘The customer is always right’.’.. Rule number two was, ‘If by chance the customer makes a mistake, refer to rule number one’.”

Quality Control

“In order to maintain the chain’s strict quality standards even as it grew, Rich implemented a small army of ‘secret shoppers’. These undercover customers went from store to store on a monthly basis, making sure that associates were properly dressed and clean, orders were correct, food was presented properly, and even that the right amount of change was given.”

[Rich rejected IPO’ing the business], “I think it would be too difficult to maintain quality control’, he explained. ‘I like the fact I can visit all of our locations and they all know me. It’s kind of like what they say about farming – the best fertilizer there is in the field is the farmer’s footprints’.”

Unconventional

Inside the company, franchising was a dirty word. In building In-N-Out Burger, Harry followed no compass but his own. There was no hierarchical management structure, no bureaucracy, and there were no shareholders to answer to.”

“Since In-N-Out never followed the strategies or trends of its competitors, it was barely affected by the cyclical turn of events that first catapulted fast food to success and then savaged the industry.”

“Notably, only store managers manned the grill, unlike most fast-food chains, the company considered a grill position a highly skilled job. After all, it was the altar upon which the whole enterprise rested. It was a very intricate operation, since every single burger was made to order – a beef patty did not go down until an order ticket went up.”

Success Factors

“When asked to account for the chain’s success, Esther Snyder once said that it has been ‘accomplished only with the dedicated enthusiasm and wholehearted co-operation of the In-N-Out Burger employees and our pleased customers’.”

“The Snyders built In-N-Out by continuously producing quality hamburgers and fries, reinvesting in their employees, and keeping the chain’s growing legion of customers happy: nothing more, nothing less. In-N-Out’s enduring success stemmed from Harry’s capacity to understand what he did best and focus exclusively on it.”

Humility

“Harry didn’t feel that it was beneath him to scrub the floor or pick up the trash.”

Win-Win

Harry treated his suppliers well and never tried to exploit his relationships. Deals were struck on a handshake and lasted decades, often ending only if the supplier went out of business – or failed to meet Harry’s exacting standards.” 

“Like his father before him, Rich Snyder continued to stick by the company’s promises to pay full price for the highest quality ingredients. When prices plunged or spiked, or there were shortages due to weather or other events, In-N-Out always absorbed the cost. As long as the quality remained exceptional, he did not look for cheaper suppliers. It was part of the Snyder’s’ business practice to take care of their purveyors as they did their customers and associates.

Harry and Esther believed in serving the communities in which In-N-Out operated. The Snyders made any number of charitable donations, and their efforts of promotion were often connected to grassroots community and philanthropic endeavours.. the result was that In-N-Out generated a kind of homespun feeling; there was a consistency and authenticity about the chain.”

“[In-N-Out] became good corporate citizens in each community where a new store opened.”

Value Employees

Harry Snyder had picked up the rhythm of human interaction, and his business philosophy was based on it. If you treated people fairly and rewarded them accordingly, he held, they would do likewise.

When In-N-Out first started, California’s minimum wage was sixty-five cents an hour, but Harry paid a dollar an hour, plus one free hamburger per shift. He believed in paying for quality, and that included wages. As Esther later explained, ‘They take your orders and make your food. They’re so important, so you want to have happy, shiny faces working there’.”

“Years before business schools discussed managerial terms like customer relations management, worker empowerment, or profit sharing, Harry Snyder put these and other concepts into practice. He gave associates a measure of ownership in the enterprise and he remunerated handsomely for their ability to meet targets and surpass them.”

“In many ways, In-N-Out Burger was an employee-driven company. The Snyders displayed an uncommon respect for their workers.. they never looked at their workers as just employees but saw them as part of their own growing, extended family. The Snyders made sure to know each individual by name. In fact, they banished the words ‘employees’ and ‘workers’ altogether and instead referred to them strictly as ‘associates’. The result was that from the outset, In-N-Out had the feel not of a workplace but of a joint enterprise in which everyone shared.

“The associates were considered the chain’s front lines. For starters, all were required to keep up a clean-cut appearance. All hires were expected to maintain a friendly attitude toward customers (or rather ‘guests’), smiling and looking them straight in the eye.”

“It is likely that the most important decision that Harry and Esther Snyder made was the loyalty they built between In-N-Out and its associates.”

‘“[A] consultant told Rich Snyder that if he slashed salaries, In-N-Out could save a ‘ton of money’; the very idea infuriated Rich. This contradicted the very foundation of In-N-Out’s philosophy and its success. When Rich sourly recounted the story, he said the suggestion was exactly the kind of advice one would get ‘from a guy who wears a suit and who thinks you don’t pay a guy who cooks hamburgers that much money’.”

“Rich Snyder shared in the belief that running a successful fast-food-business was not about cutting corners or purchasing the right equipment. What it boiled down to was people management.”

“From the start, In-N-Out paid its employees more than the going rate and was an early practitioner of profit sharing. Under Rich, In-N-Out went further, establishing an expansive set of benefits under which part-time workers received free meals, paid vacations, 401(k) plans and flexible schedules. Full-time associates also received medical, dental, vision, life and travel insurance.”

“‘If you lose your workers, you lose customers’, Rich said. ‘I don’t know how others do it, but we just try to keep everybody happy that works for us’.”

Promote Ownership

“Esther once proudly stated, ‘We’re blessed with good employees, who run the restaurants as if they were their own stores’.”

“It was Rich’s belief that his job was the bottom point of an inverted triangle. He was there to support everyone else in the company. When talking to store managers, he was always careful to refer to the shops as ‘your stores’ and never asked them ‘What store do you manage?’. He wanted them to have pride of ownership. Regardless of anyone’s position or length of time with the company, Rich treated everyone equally and as if they were special… As a result, In-N-Out could boast one of the lowest turnover rates in a high-churn industry.

Maintain Smallness

“Rich imbued the family firm with his effusive personality and nimbly transformed the restaurants into a big business without damaging the integrity of the small burger chain that his parents had built.”

Culture

‘[In-N-Out had a] corporate culture operating in stark contrast to the competitor’s systems of burger flippers and vat fryers, floor moppers and cashiers who put on their paper hats and grease-stained aprons in what society calls McJobs and economists refer to as the requisite churn of capitalism. It was a place where people genuinely enjoyed getting up in the morning and going to work. Rich explained it this way: “We try to maintain the highest quality level possible, and to do that you need good training and good people. That’s why we pay the highest wages in the industry’. He added, ‘It means we tend to keep employees longer than at other places, and the reduced turnover helps us maintain consistency in our products’. Notably the philosophy did not trade on or lead to either higher prices or lower-quality food’.

Corporate Debt

“… the suburban network of In-N-Outs that followed alongside the new highways also happened to dovetail nicely with Harry Snyder’s third criterion for placing his stores; he abhorred debt.”

“Harry insisted on using cash, not credit, to open each new restaurant. Harry followed the old rules. He built one store, saved money, he built a second store and saved more money. He didn’t open another until he could afford to and had trained managers to run it – that was the Harry Snyder way. He didn’t take out a loan. He didn’t take on debt. He was beholden to no-one.”

Summary

Its fascinating to hear how this family-owned and run chain has maintained its ideals across three generations. Lynsi Snyder, the current owner, has held to her father’s and grandfather’s models faithfully, ensuring the success story continues more than 70 years later.

In a recent interview with Drew Kluger, Lynsi remarked on why she did not adopt the modern technology of on-line ordering: “We we would probably have a faster operation, and you know, which equals more people going through. I mean you’ve got the potential to make more money. But I would not consider it because we’re going to lose one of the things we do best, and that’s our customer service and the interaction we have and and the relationship. I mean, I really see a relationship between the customer and In-N-Out because we have such a history, and you know our history involves treating the customer like they’re number one. They’re our most important asset, and how are we going to do that if it’s just gone to, you know, basically like a text? That relationship is going to change a lot; and I don’t want to give that up.”

I love how she sees the value of the customer relationship as sacrosanct. If you’ve been reading the MastersInvest blog posts in recent times, you’ll no doubt recognise this trait as a common reason for success for many of the businesses we’ve reviewed. And its not just in customers that we see the parallels. All of those same companies, Walmart, Panera Bread and Home Depot treat customers with respect, empower and reward their staff, have effective cultures and keep business practices simple – you don’t have to have the the lowest paid workers nor squeeze your suppliers to be the most successful brand in town.

“We have a special culture at this company. I really believe that it’s my job, and the job of the whole management team, to make sure we nurture that culture and keep In-N-Out the unique place to work it has been for all our Associates — from the 30-year veterans to the ones putting on their aprons for the first time. The simple answer to keeping Associates with us is to treat them the right way.” Lynsi Snyder

And all this hasn’t gone unnoticed. I mentioned earlier that Warren Buffet would love to own some of this business and I meant it – according to the UCLA business school website, Buffett told a group of visiting students back in 2005 that he hungered to own the chain.

He actually wrote to In-N-Out with that idea in mind but never received a reply. Keep in mind that Buffet rarely if ever does this – he would much prefer that valuable companies pay court to him.

With three generations and over 70 years of success, I have to assume that they did not want to dilute the ownership of their brand with outside ownership. They seem to have succeeded despite the revolutions that have swept their way through the fast food market and done it on their own.

Given all this success, I wonder whether the Snyders would swap In-N-Out for a holding in the S&P500? I think the answer is simple: NO WAY! And would they sell because of some concern over a Trump tweet or a trade war? NO WAY!

This is another example of a quality business that just keeps getting more valuable – no wonder Buffett is hungry for a piece, and not just because he’s a burger aficionado.

Sources/Further Reading –
In-N-Out Burger – A Behind The Counter Look At The Fast Food Chain That Breaks All The Rules’ Stacy Perman, 2010.
Recipe For Success: Why Employees Made In-N-Out a Best Place to Work’ Emily Moore, GlassDoor, 2017.
Tell Me What to Say – Drew Kugler: Lynsi Snyder

 Keep learning on Twitter: @mastersinvest

TERMS OF USE: DISCLAIMER

Read more awesome articles like this one on VintageValueInvesting.com!