Smashburger CEO Jim Sullivan Talks Franchising, Cyclospora and Pricing 

**SPEAKER_1** (0:02)
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**SPEAKER_2** (0:07)
Smashburger North America, same store sales grew 2.4% in the fourth quarter. It's also planning to open 12 new locations this year via franchise. Joining us now is Jim Sullivan, Smashburger CEO. Jim, this debate over franchising chains really seems to have picked up some steam with Jeff Smith yesterday. And one of our analysts, for example, basically said, it's hard for a company to kind of switch and get out there and start to franchise. I would love to hear just what your experience is and how difficult it is to get franchising right, because you obviously have a brand and a quality that you also want to preserve.

**Jim Sullivan** (0:43)
Great. Well, first, thank you and good morning. Thank you for having me. I think one, I support what Jeff had to say 100%.
Franchising within the restaurant sector specifically, it's a great way for us to grow. It's a great return on our invested capital.
It is difficult. It's always about making sure you have the right unit economics that are scalable and sustainable. And then it's picking the right partner that are well capitalized and experienced within the space. So it is a challenge, but it's one that's very rewarding when you get the right partner in the right market, and they can accelerate and propel the growth of the brand, which just drives many efficiencies across many channels of the business, whether it be marketing, supply chain, spans of control. So we at Smashburger are completely committed to the franchise model. In fact, we plan to become an asset light model here over the next 18 months. So we're going to double down and really ramp up what we're doing, both from a traditional franchise as well as our non-traditional franchise space.

**SPEAKER_4** (1:43)
As you look to expand, how are you identifying the best places to put in new franchises? The space is crowded. There's a lot of fast food everywhere. How do you pick what's going to be successful for Smashburger?

**Jim Sullivan** (1:58)
You know, it's interesting. It's kind of an art and science. We have technology that we utilize that will help us pinpoint exactly based on performance of existing restaurants within the portfolio. We take those characteristics and then we repeat them through an algorithm. And then we have what I call the art, which is our people on the ground that are actually viewing each of the sites, studying the trade area, studying the competition, understanding how the competition is performing. We benchmark against that and we want to make sure that they index north of 100 of where their national average is. That gives us a good indication that there's a demand for burger within the markets that we want to compete in.

**SPEAKER_2** (2:34)
The other thing that's happening in this space at the moment, Jim, which I'm sure you are acutely aware of, are the various outbreaks, whether it be Silo Spora, Salmonella, how has that impacted you? Have you had to take a good and hard look at your supply chain and is that protected at this moment?

**Jim Sullivan** (2:51)
Yes, we absolutely take a hard look at that every day that we operate.
From the standpoint of the recent outbreaks, one, we don't use iceberg lettuce in our restaurants. We use a green leaf lettuce, a whole head, and we also use one that's a pre-cut. We've taken precautionary measures where we've instituted double washing of our whole head, as well as an additional washing, even though it's a pre-wash product that comes in. That's purely precautionary. There was no need for that. We verified with our suppliers that our supply is safe. As it relates to jalapenos and the recent news that came out, we, one, use it on a very limited basis. Jalapeno for us is what we call a modifier under our Create Your Own menu, where if you want to add jalapeno, you can. We don't feature on any of our core builds. However, we did last night elect that we would voluntarily remove jalapeno for the time being until we further understand the impact.
So for us, we're just taking a precautionary measure to protect our guests and our team members. So we pulled it, but we don't feel that there's any risk to the business. This is purely precautionary.

**SPEAKER_4** (3:54)
Well, have you seen any decline in traffic or any effect on traffic from all these headlines?

**Jim Sullivan** (4:00)
We haven't. We haven't. We continue to drive positive same store traffic, same store sales.
So no, we have not seen an impact from that. But if you think where we're situated, we're burger, right? We do have a lettuce component to what we do, but we're primarily a protein. So we have not experienced that. And quite frankly, we haven't even heard from our guests questioning what it is or what we're doing as it relates to our produce.