Make a swot analysis for In-N-Out using the case blow as reference. What does this analysis tell you?

 

Founded in 1948, In-N-Out was a small but very successful fast-food chain that was primarily based in California, with locations in six other states. In-N-Out had always been family-owned and had constantly rejected franchising and pressure to become publicly traded throughout its history. The company focused on consistently delivering quality with its limited menu, which helped it develop a cult following with a rabid fan base. The company often received recognition for its products and its brand. For instance, in 2020, the Harris Poll EquiTrend Study, which measured brand equity by examining three factors—familiarity, quality, and purchase consideration—named In-N-Out its brand of the year in the burger restaurant category. It was not the first time that the company had received this honour, as In-N-Out had been named brand of the year by the Harris Poll in both 2015 and 2016. CEO Lynsi Snyder was interested in continued growth for In-N-Out in 2020, but not at the cost of sacrificing the quality of its products or the unique way in which the company operated. How could she grow the company without altering its identity?

ABOUT IN-N-OUT

In-N-Out was founded by Harry and Esther Snyder in Baldwin Park, California, in 1948. The company's first restaurant had no indoorseating, and customers ordered through a two-way speakersystem that was connected to the kitchen. In the late 1950s, a second location was opened in Baldwin Park, while the third and fourth stores were opened in Pasadena and Covina, respectively, both also in California. When co-founder Harry Snyder passed away in 1976, the company had 18 stores, all located in the Los Angeles metropolitan area. Upon Harry's death, his son Rich took over the company. In Rich's nearly 20 years of leadership, the company grew significantly, to a total of 93 restaurants. This included the opening of the company's first location outside of California—Las Vegas, Nevada—in 1992. Following Rich's sudden death in a plane crash in 1993, his brother, Guy Snyder, assumed control of the company. In Guy'ssix years at the helm, he expanded the company aggressively, growing the number of total restaurants from 93 to 140. After Guy's death in 1999, Guy's mother and the company's original co-founder Esther Snyder assumed day-to-day control of the business, doing so until her death in 2006. Marc Taylor then became the company's president until 2010, when Esther and Harry Snyder's only grandchild, Lynsi Snyder (Guy's daughter) became chief executive officer(CEO). By 2020, In-N-Out had 347 locations, most of which were in California. However, the company also had restaurants in Nevada, Utah, Texas, Arizona, Oregon, and, beginning in 2020, Colorado. All of these locations were company-owned, as In-N-Out had not franchised or sold stores to the public. By 2020, the company had distribution centresin Baldwin Park and Lathrop, California; Phoenix, Arizona; Draper, Utah; Dallas, Texas; and Colorado Springs, Colorado. In-N-Out's products had not changed much since the company opened its doors in 1948. In 2020, In-N-Out still operated a very limited menu with fewer than 15 items—hamburgers, cheeseburgers, the Double-Double (two patties and two slices of cheese), fries, fountain drinks, milkshakes, and hot chocolate with marshmallows. In-N-Out also had a secret menu, which included two variations of the Double-Double: the 3 × 3 (three patties and three slices of cheese) and the 4 × 4 (four patties and four slices of cheese). The company also featured the Flying Dutchman (two patties and two slices of cheese only—no bun, vegetables, or condiments), the Protein Style burger (a burger wrapped with lettuce leaves instead of a bun), the Animal Style burger (a burger that was cooked in mustard), Neapolitan shakes, and grilled cheese sandwiches. In 2020, In-N-Out also had very low prices. In fact, its prices had not even kept up with inflation. In 1989, a Double-Double was $2.15, which equated to $4.40 in 2020 dollars. Yet, a Double-Double was $3.85 in 2020. In-N-Out was able to keep its prices low for a few reasons. First, the company's limited menu kept the costs of raw ingredients low. Second, the company saved between 3 and 5 per cent in food costs yearly by doing its own sourcing and distribution. Third, the company saved approximately 6 to 10 per cent of its total costs because it owned its properties. Further, locations were carefully selected and were strategically located close to highways (and thus away from pricier urban areas) in order to reduce delivery costs. In-N-Out's store design had not changed significantly since the company opened its doors in 1948. The company's stores featured a red-and-white colour scheme for its exterior design, along with a large yellow arrow. The interior typically featured chrome tables, vinyl chairs, and pictures of palm trees on plates and walls. Bible verse citations had been featured on burger wrappers and cups since 1985. In-N-Out was also an employee-centric business. Associates (i.e., restaurant workers) made $13 per hour in 2018, significantly more than comparable workers made at other national chains. All employees were able to enrol in dental, vision, and life insurance plans, while full-time employees received health insurance and paid vacations. The average store manager had been with the company for 17 years and made $163,000 per year, which was more than the average California dentist, accountant, or financial advisor. Further, managers were enrolled in a profit-sharing plan. In-N-Out engaged in a limited amount of traditional promotion. The company relied on billboards to attract customers. For instance, in Dallas, Texas, the company featured billboards with the tag line "No Microwaves, No Freezers, No Heat Lamps." In-N-Out had also used radio commercials with the jingle "In-N-Out, In-N-Out. That's what a hamburger's all about," as well as several television commercials. In addition, In-N-Out had benefited from significant, positive word of mouth, often from celebrity fans. Chefs such as Gordon Ramsay, David Chang, and Thomas Keller were all enthusiastic supporters of the brand. Anthony Bourdain said that In-N-Out was his favourite fast-food restaurant and called In-N-Out "the best restaurant in Los Angeles." Ina Garten commented, "I have to say, I don't eat fast food at all, with one exception. When we're in California doing book tours, we always have to go to In-N-Out Burger." Further, the rapper Donald Glover used In-N-Out in his lyrics. In 2006, Paris Hilton explained a driving under the influence (DUI) charge with, "I was just really hungry and I wanted to have an In-N-Out burger." In general, "they [In-N-Out] have a loyalty and enthusiasm for the brand that very, very few restaurants can ever obtain," commented Robert Woolway of FocalPoint Partners.

THE IN-N-OUT WAY

In-N-Out was a chain that went against most trends. By 2020, many chains in the fast-food and fast-casual industry had embraced social media, engaged in significant menu expansion, attempted to expand both nationally and internationally, embraced franchising and external investors, and often engaged in price wars. In-N-Out, on the other hand, had little presence on social media and a stagnant menu that had changed very little throughout the years. The company had expanded slowly and deliberately, had continually rejected franchising and initial public offerings (IPOs), and had refused to engage in price wars. Yet, by 2020, In-N-Out had been a great success. In over 70 years of operations, the company had survived numerous recessions, various consumer fads, and a great deal of competition. In 2018, a typical In-N-Out restaurant generated approximately $4.5 million in gross sales, which was almost twice as much as a typical McDonald's outlet in the US ($2.6 million in sales in 2018). Further, the company's profit margin (earnings before interest, taxes, depreciation, and amortization) was 20 per cent, which was higher than competitors such as Shake Shack (16 per cent) and chains that tended to own their own locations, such as Chipotle (10.5 per cent). In-N-Out had always been family-owned and had continually resisted offers to take the company public. For instance, when Rich Snyder ran In-N-Out, he had no appetite for an IPO: "I would be prostituting what my parents made by doing that. There is money to be made by doing these things, but you lose something, and I don't want to lose what I was raised with all my life," he commented to Forbes in 1989. Current CEO Lynsi Snyder seemed to feel the same way. She mentioned to Forbes in a 2018 interview that she had rejected several large offers to take the company public: "There's been, like, princes and different people throwing some big numbers at us where I'm like, really? It's not about the money for us. Unless God sends a lightning bolt down and changes my heart miraculously, I would not ever sell." Arnie Wensinger, In-NOut's long-time general counsel, echoed Lynsi's sentiments: "We will continue to politely say no to Wall Street or the Saudi princes. Whoever will come." These sentiments seemed surprising since an IPO had the potential to be extremely profitable for the company, as it offered the possibility to raise approximately $100 million for the company. Shake Shack, a comparable company, went public in 2014, and by 2018, its shares had traded at approximately 100 times its earnings. It was not unreasonable to think that a potential In-N-Out IPO could have similar success. Damon Chandik, a banker and the head of Piper Jaffray's restaurant mergers and acquisitions team, commented, "I get calls all the time on In-N-Out. It would be the hottest IPO out there." In-N-Out was a company that favoured a measured expansion approach; it was interested in growth, but it grew slowly and deliberately. There seemed to be a few reasons why the company favoured this approach. The first reason was related to the company's dedication to serving quality product. In-N-Out wanted to ensure that its food was fresh and of high quality. The company made its own patties and had no microwaves, freezers, or heat lamps in its stores. To help ensure freshness, all restaurants had to be located within a day's drive (approximately 300 miles) of one of the company's distribution centres. "At In-N-Out Burger, we make all of our hamburger parties ourselves and deliver them fresh to all of our restaurants with our own delivery schedules. Nothing is ever frozen. Our new locations are limited by the distance we can travel from our patty-making facilities and distribution centres," explained Carl Van Fleet, In-N-Out's vicepresident of planning and development. In-N-Out took its commitment to quality very seriously. In 2018, the company closed its 37 locations in Texas for one day because its hamburger buns were not up to the standard of quality that the company demanded of itself. In-N-Out explained its decision to temporarily close its Texas restaurants with this statement from its executive vice-president, Bob Lang Jr.: "At In-N-Out Burger, we have always served the highest quality food with no compromise. We recently discovered that our buns in Texas do not meet the quality standards that we demand. There was and are no food safety concerns. We decided to close all of our Texas stores until we are confident that we can serve our normal high-quality bun. A new shipment of buns is on the way and we expect to reopen within 24 hours. We apologize for any inconvenience this closure may cause for our customers." A second reason why the company's leadership eschewed expansion was related to exclusivity. In-N-Out was only operating in seven states, which made it exclusive. When something was not widely available, it became more appealing and more desirable. A third reason was related to franchising. As detailed earlier, In-N-Out was not interested in franchising or going public, which made it difficult to engage in a largescale expansion project without significant upfront capital investment.

A CULT FOLLOWING

In-N-Out had achieved a cult following, according to many observers and industry experts. A few factors were important to the company becoming a cult sensation. One key factor seemed to be the company's secret menu. Making certain items a secret helped the brand develop social currency with its followers. It allowed its customers to help the brand grow through word of mouth, as it gave people something to talk about and pass on to others. In fact, a Google search of the company's secret menu items revealed numerous fan pages and blogs that discussed the secret menu items. Not only did this likely increase word of mouth, but it may also have increased fans' positive feelings towards the brand. As a general rule, In-N-Out had not publicly commented on its secret menu. Further, the company typically had not commented on many other aspects of its operations. For instance, the company had not mentioned why it planted twin palm trees in front of its stores; it also had not commented on its secret sauce (referred to as "spread" by the company) or the Bible verses that appeared on its products. Additionally, In-N-Out rarely talked to the media; CEO Lynsi Snyder rarely gave interviews, and other members of its executive team also rarely spoke to the media. Many thought that the company's inaction had likely generated a significant amount of mystique and popularity. "In-N-Out is a brand that advertises itself. You're chasing them, not the other way around," commented Willa Zhen, a socio-cultural and food anthropologist. A second key factor seemed to be the company's relentless focus on quality, freshness, and consistency of experience. In-N-Out made its own burgers; the ingredients were from its own farms, and it processed its own meat, used fresh produce, and baked its own buns. Fries were hand-cut in stores, and milkshakes were made from real ice cream. Stores had to be located within a day's drive of one of the company's distribution centres. In-N-Out's main focus seemed to be consistently delivering a quality experience and ensuring that customers were satisfied with that experience. "Time and again, they've delivered on their promise and that consistency can't be discounted," noted Bonnie Riggs, a restaurant industry analyst. Another factor that likely helped In-N-Out to develop a cult following was its insistence on taking care of its employees and being a good corporate citizen. In-N-Out had routinely paid employees higher wages than industry norms; associates earned $13 per hour, which was significantly more than the $9 per hour figure for similar work at most other national chains. This and other benefits helped the company attract capable and motivated employees and probably garnered a favourable impression amongst its fans and the general public. "It's always been clear that the company is more focused on keeping its brand promise to consumers and employees than in growing in EBITA (earnings before interest, taxes, and amortization)," noted Dennis Lombardi of the restaurant advisory firm Insight Dynamics. In addition to taking care of its employees, In-N-Out, as stated above, was a good corporate citizen because the company focused on supporting the communities in which it operated. On its website, In-N-Out stated that its goal was to "assist all communities in our marketplace to become stronger, safer and better places to live." Further, In-N-Out's social media handles often made posts that showed support for both local and national causes, and it documented its sponsorship of various causes and charities, such as the company's three-to-one matching of customers' contributions to child abuse prevention charities. A final factor was In-N-Out's strong brand identity. In-N-Out tried to capture the culture of Southern California in its branding and tried to create strong brand associations to the West Coast. This was done through both the exterior and interior of its locations. The exterior of its restaurants typically featured two palm trees in the shape of a cross, which the company started doing in 1972. The interior of its locations typically featured retro Los Angeles-style neon signage, which tied the company to its origins. Additionally, in 2020, In-N-Out was available in only seven US states, all of which were close to its California origins. This helped the company maintain its California roots. Further, the company's focus on quality and consistency, as well as listening to its customers and valuing its employees, had helped its branding become highly concentrated in the seven states in which stores were located.

 

 

COMPETITION

While In-N-Out faced competition from standard fast-food companies such as McDonald's, Burger King, Wendy's, Carl's Jr., and Jack-in-the-Box, as well as from fast-casual companies such as Five Guys and Panera Bread, two new competitors had emerged in recent years: Shake Shack and Whataburger.

Shake Shack

Shake Shack was founded by Danny Meyer in July 2001 in New York City. The company began as a hot dog stand in Madison Square Park in New York City in 2001 before it expanded its menu to become a fastfood operation in 2004. At this time, the company opened a kiosk in Madison Square Park. With its East Coast roots, many people considered Shake Shack to be an East Coast version of In-N-Out. While Shake Shack began as a regional brand, by 2020, it was one of the fastest-growing fast-casual companies in the industry. Shake Shack had grown significantly, both on a national and international scale, despite the fact that the company had never intended to expand beyond its original location. By 2014, Shake Shack had entered In-N-Out's main territory of California, as well as Connecticut, Delaware, Florida, Georgia, Illinois, Maryland, Massachusetts, New Jersey, Nevada, Pennsylvania, Texas, and Washington, D.C. Late in 2014, the company decided to go public. Its IPO debuted on January 29, 2015. By 2020, Shake Shack had also developed a strong international presence, with restaurants in Bahrain, China, Japan, Saudi Arabia, Kuwait, Mexico, Oman, the Philippines, Qatar, Russia, Singapore, South Korea, Turkey, the United Arab Emirates, and the United Kingdom. By January 2019, Shake Shack had 208 outlets, with 136 locations in the United States and 72 restaurants in various international markets. The company planned to have 320 restaurants by 2020. As compared to In-N-Out, Shake Shack had a larger menu. Like In-N-Out, Shake Shack offered hamburgers, fries, milkshakes, and soft drinks. Shake Shack was particularly famous for its milkshakes, which were considered to be amongst the best in the industry. The company's most popular burger wasthe Shack Burger, which had one or two patties, American cheese, lettuce, tomato, and secret sauce. The company also offered hot dogs, frozen custards, and even beer and wine, customized to the local flavours of the particular city. Prices at Shake Shack were typically higher than In-N-Out's prices, which were on the low side.

Whataburger

Whataburger was founded by Harmon Dobson and Paul Burton in Corpus Christi, Texas, in 1950. Like In-N-Out, Whataburger was a family-owned business. However, in 2020, the majority of the business was sold to a venture capital company. Whataburger operated mainly in Texas; as of April 2018, Whataburger had approximately 824 locations, with about 670 of those in Texas, and approximately 150 restaurants in the southeastern and southwestern United States. In-N-Out entered into competition with Whataburger when In-N-Out expanded to Texas in 2011. As compared to In-N-Out, Whataburger offered a more extensive menu. The company offered a wide range of burgers, which included the signature Whataburger and the Whataburger Jr. Further, Whataburger offered a wide variety of chicken-based products, such as the Whatachick'n sandwich, the Whatachick'n strips, a grilled chicken sandwich, and a chicken fajita taco. In addition, Whataburger had an extensive breakfast menu and also offered salads. The company sold a variety of beverages, such as soft drinks, shakes, coffee, tea, orange juice, and milk, as well as several desserts. Prices at Whataburger were higher than those at In-N-Out. In general, Whataburger's prices were considered to be comparable to those of most national fast-food chains.

A CLOSER LOOK AT IN-N-OUT'S BUSINESS MODEL

In-N-Out generated an estimated $908 million in revenues in 2017 and an estimated $1 billion in revenues in 2018. Comparatively, McDonald's generated $21.02 billion in revenues in 2018. Among other competitors, Wendy's generated $1.7 billion in revenue in 2019, and Burger King generated $1.4 billion in revenue in 2018. These revenue figures were only marginally more than what In-N-Out generated in 2018, despite the fact that Wendy's and Burger King had significantly more restaurants than In-N-Out— Wendy's operated 6,788 restaurants worldwide in 2019, and Burger King operated 17,796 restaurants worldwide in 2018. In contrast, In-N-Out operated only 347 restaurants in 2018. Further, In-N-Out achieved these revenues with lower prices than its competitors. While In-N-Out had high revenues, it had also managed to keep its costs low, which allowed the company to have high profit margins. As detailed earlier in the case, In-N-Out kept its food costs low through its limited menu, as well as through keeping its sourcing and distribution in-house. In contrast, major competitors such as McDonald's, Wendy's, and Burger King had much more extensive menus, and their sourcing and distribution were not in-house. As a result of these factors, these competitors had added food costs that In-N-Out had not incurred. Furthermore, In-N-Out owned all of its store locations, which meant that the company had no rent or lease expenses. Major competitors such as McDonald's, Wendy's, and Burger King had mostly franchised restaurants and thus also had rent or lease expenses at the corporate level. Each franchisee was required to pay a 4 per cent royalty fee for the right to be a McDonald's or Wendy's franchisee and a 4.5 per cent royalty fee to be Burger King franchisee. In-N-Out's competitors spent significantly more on advertising than In-N-Out. McDonald's spent approximately $2 billion in advertising in 2017 and 2018, while Wendy's spent $338 million on advertising in 2019. Burger King spent $337 million in advertising in the United States alone in 2018. In contrast, In-N-Out spent an estimated $10 to $15 million in advertising in 2018. With lower food costs, much lower advertising expenses, and no royalty fees for its individual stores, In-N-Out likely had more money to dedicate to employee wages and benefits than its major competitors, meaning that the company could afford to pay higher wages and offer better benefits while still maintaining excellent profit margins. Furthermore, the company's ability to save money in key areas such as advertising and real estate allowed it to pass on some of these savings to consumers in the form of lower prices.

NOSTALGIA MARKETING

Nostalgia referred to a desire to reconnect with the past. This manifested itself in numerous ways, such as a longing for a past place or experience, the idea that a bygone era was better than the current era, or the thought that the past was better than the present. Experiencing nostalgia had a number of positive effects on people, as nostalgia was linked to an improved psychological well-being. Further, it resulted in higher self-esteem, a better mood, and stronger relationships, and it reduced boredom, anxiety, and stress. By 2020, many companies had attempted to incorporate nostalgia into their promotional campaigns, which made nostalgia marketing campaigns quite common. Nostalgia marketing could potentially be used to market any product in any industry, and it was a particularly useful tactic in engaging millennials. The key to effective nostalgia marketing seemed to be to generate positive emotional responses that were tied to the past. Nostalgia marketing could be accomplished by bringing back logos or prior versions of products and labelling them as throwback or retro options. Coke and Pepsi had done this to great effect by reintroducing packaging from the 1980s and 1990s, as well as by reintroducing certain products. For instance, Pepsi reintroduced Crystal Pepsi for a brief period in 2016, and Coke reintroduced its Surge drink for a limited time in 2014. Nintendo, also used nostalgia marketing to its advantage when the company launched the Nintendo classic mini, a miniature version of the original Nintendo. According to the company, the Nintendo classic mini was supposed to allow gamers to re-experience why they fell in love with Nintendo in the first place. Furthermore, it allowed consumers to once again enjoy the games of the past and to be taken back to a time when they were young—a time when the world seemed a better, safer, and simplerplace. Reintroducing an old product or an old design was only one way to incorporate nostalgia in a marketing campaign. Another way to incorporate nostalgia in a company's marketing efforts was to associate a product with the past to elicit positive emotional responses from consumers, which would spill over onto the product. For instance, a restaurant that was fitted with a retro appearance—chrome booths, fluorescent lighting, blackand-white checkered floors, a jukebox, or colour schemes from bygone eras—would likely be associated with authenticity, history, and a better, safer, and simpler time. These positive feelings of nostalgia would likely spill over onto the product, meaning that consumers would be more likely to frequent the restaurant in question. Another way of associating a product with the past was by reviving past promotional materials or by reviving celebrities or spokespeople from a bygone era. In 2010, Wendy's accomplished this by remaking its iconic "Where's the Beef?" advertising campaign from 1984. Remaking this commercial not only allowed Wendy's to trigger consumers' nostalgia for the mid-1980s, but it also had the effect of positively associating Wendy's with people's nostalgic recollections of this period. These positive associations typically spilled over onto the product or brand, which often resulted in increased sales. Other companies had utilized the same strategy. For instance, in 2009, Heinz reintroduced its famous "Beanz meanz Heinz" ads from the 1970s. A British company, Hovis, used the same approach. This company re-created an advertisement from 1973 that featured a boy riding a bicycle through various tumultuous eras of British history. The implicit message of the advertisement was that Hovis was always there for its customers, regardless of how difficult times were. This message was successful in 1973 as well as when it was reintroduced in 2009, as the company experienced an 11 per cent sales increase. Even luxury brands such as Louis Vuitton had incorporated nostalgia into their promotional materials. One advertisement from the early 2010s featured glamour symbols of old Hollywood like Sean Connery and Catherine Deneuve, while another ad featured astronauts from generations past like Buzz Aldrin, Sally Ride, and Jim Lovell. These celebrities from bygone eras likely generated positive emotions from the past— nostalgia—which spilled over onto the product and resulted in elevated sales.