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In-N-Out Burger: Building a Succession-Proof Business

Jan. 08, 2011 3:46 PM ET
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“Keep it real simple.  Do one thing and do it the best you can.”

– Harry Snyder, co-founder of In-N-Out Burger

In-N-Out Burger requires no introduction for residents of California, Nevada, Arizona, and Utah as well as dedicated fans in other states who often make a special point to visit one of the chain’s 246 locations whenever possible.  From its humble origins in 1948 at a tiny location in Baldwin Park, California, In-N-Out reached cult status through its slow growth approach of providing “quality, cleanliness, and service” to customers while maintaining an unusually good relationship with employees and suppliers.  However, nothing proves the power of In-N-Out’s brand more clearly than a series of disasters that left the company without good succession plans.

Stacy Perman’s book, In-N-Out Burger, is the definitive account of the chain’s remarkable story spanning a period of over sixty years.  Although company executives did not cooperate in the process, Ms. Perman was able to interview nearly 100 individuals who had intimate knowledge of the company and the personalities involved.  The book is also an interesting study of the growth of the fast food industry in post-war America and the manner in which In-N-Out bucked nearly all of the prevailing industry trends.

From Humble Origins to Cult Icon

The last thing on Harry Snyder’s mind in 1948 was the idea of building a brand worth billions of dollars.  A man who flirted with communism in his youth and merely wanted to start a business to support his family was an unlikely business mogul, but from the outset, he had a special knack for spotting major trends in society and positioning his business to thrive by meeting the needs of customers.

Family owned hamburger stands with car hops were a common sight in Southern California at the time, but Mr. Snyder could only afford a tiny plot of land on which to build his original store in Baldwin Park.  As a result, he pioneered the concept of the drive through after tinkering with electronics and putting together a rudimentary two way speaker system.  An obsessive focus on serving food of the highest quality in a clean environment to motorists pressed for time proved to be a winning formula that facilitated modest expansion during the 1950s and 1960s.  Mr. Snyder’s insistence on owning the land where he built his stores and taking on no debt naturally limited the scope of his expansion.  In-N-Out had only 18 locations at the time of Mr. Snyder’s death at age 63 in 1976.

Attitude Toward Employees and Suppliers

While the customer always came first for Mr. Snyder, he had an unusual attitude toward his employees and suppliers.  Always referring to employees  as “associates”, Mr. Snyder made a point of paying above market wages and promoting individuals who demonstrated strong abilities.  In fact,  Ms. Perman states that Mr. Snyder’s motivation for opening additional locations was partly driven by a need to provide new management jobs for employees who had exhausted opportunities within existing locations. Calling employees “associates” is a common management fad today and is usually an utterly empty statement matching other meaningless executive jargon.  However, actions speak louder  than words and In-N-Out still gets hundreds of applications for each new store that opens.

Squeezing suppliers is a favorite cost control technique for executives eager to optimize short run profitability, but Mr. Snyder instead chose to develop long term relationships with suppliers that have  lasted many decades.  Given his insistence on offering only high quality ingredients, squeezing suppliers could encourage degradation in quality which would have been unacceptable to Mr. Snyder regardless of short term profitability.  Life has an interesting way of rewarding those who conduct themselves well in business and In-N-Out’s suppliers went above and beyond the call of duty in 1978 when the company’s warehouse and distribution center burned down.  Suppliers rallied around the company and made deliveries directly to stores.  An event that could have killed many similarly sized businesses didn’t even slow down the company’s rapid expansion.

Succession-Proofing a Business

When Harry Snyder died in 1976 from lung cancer at the age of 63, In-N-Out Burger already had a nearly three decade history and the company’s 18 locations were extremely popular.  However, the company did not have a solid succession plan in place.  It would be more accurate to say that no one thought of the obvious successor:  Esther Snyder, Harry’s wife and constant business partner throughout In-N-Out’s history.  Mrs. Snyder had been involved in the business since its inception and focused on all financial matters.  She was effectively the CFO of the company but no one seriously thought that she would step in to run the company.  Instead, the top job went to Rich Snyder, the couple’s 24 year old son.

Rich Snyder eventually grew into the job and pursued a much more aggressive expansion than his father would have preferred.  However, putting a 24 year old in charge of a major enterprise was a risky move.  An incredibly local group of managers and a culture embedded into the operating DNA of the business gave Rich Snyder the time required to mature on the job and eventually grow the chain to around 90 locations by the time of his death in 1993.

Rules, Exceptions, and Probability:   What Were the Chances?

Succession planning again proved a stumbling block for In-N-Out.  Rich Snyder died in a plane crash along with two other top executives including his right hand  man and logical successor.  The company had a policy of executives not traveling together but a delayed commercial flight caused an exception to the rule.  Instead of a smooth succession, Guy Snyder, Harry and Esther’s other son, took over the top job as Chairman.  Guy Snyder had an executive position with In-N-Out but also had a serious drug problem and had only been marginally involved with the business.  Again, no one seriously considered Esther Snyder for the position.

One of Ms. Perman’s sources was quoted as saying that Guy Snyder knew well enough to leave a successful formula in place and did not make radical changes to the business.  By all accounts, the company’s rapid growth continued unabated for the next six years until Guy Snyder’s death in 1999 from a drug overdose.  Again, the firm was in the midst of a succession planning dilemma.

Guy Snyder’s sole heir, Lynsi Snyder, was only eighteen years old at the time of her father’s death and was not in a position to run the business.  Esther Snyder stepped in as President but was already at an advanced age at the time and in mourning due to the loss of both of her sons in tragic deaths. In-N-Out’s professional management team proved able to continue the chain’s growth until Ms. Snyder’s death in 2006.  During the same timeframe, there  was a great deal of controversy (and numerous lawsuits) involving In-N-Out’s management team as well as the complex web of relationships between executives and the family’s financial trusts.  Ultimately, the company continued to thrive throughout the succession drama and in early 2010, Lynsi Snyder (Martinez) took her place as President of In-N-Out.

Building a Moat

One can view the succession situation at In-N-Out like barbarians at the gate of a medieval castle.  The fast food industry is intensely competitive and larger companies have far greater financial resources than In-N-Out.  Any weakness or missteps in running the company would be quickly seized upon by competitors to gain an advantage.  Why did this not happen to In-N-Out in 1976, 1993, 1999, or 2006?

The answer to the question involves the company’s durable moat keeping the barbarians away.  The company culture was such that any attempt to lower quality or cut corners would have been vigorously contested much like a healthy human body fights off the effect of a common cold.  The loyal customers (or “cultists” if one prefers) stood by the company throughout all of these periods due to the knowledge that high quality and service would not be sacrificed.  Even at times when Guy Snyder was absent from the company during 1990s due to drug problems, the status quo was good enough to keep the moat intact.  Not many businesses could  have survived the traumas afflicting In-N-Out, much less continue to thrive and expand.

In-N-Out recently announced a major expansion into Texas which involves a new distribution center due to the company’s commitment to use only fresh ingredients.  There is no sign that the company intends to begin franchising or to take the company public.  Instead, the slow growth approach that has worked so well over the past sixty years appears to be set to continue for decades to come.  Ms. Perman’s book is a valuable contribution and should be required reading for anyone interested in how great brands are built.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: No public companies discussed in this book review.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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