The Difference Between Netflix and Five Guys


Last week, we Fool writers were treated to a live interview with Jerry Murrell, founder of Five Guys Burgers and Fries. Besides regaling us with anecdotes from my favorite eatery's history, Jerry also revealed exactly why Five Guys is so successful.

Five Guys works because it's so utterly simple.

Simplicity, explained
Why doesn't the chain sell milkshakes to go with its burgers? Jerry conceded that Five Guys might be the only burger joint in history that didn't offer malts or shakes. But the company didn't know how to make 'em better than a McDonald's (NYS: MCD) McCafe shake, or a Wendy's (NAS: WEN) Frosty. They're all pretty good, but how do you make one that stands out from the crowd? Why open yourself up to mediocre reviews of one menu item when the core fare consistently gets raves? Let people buy their shakes elsewhere; Five Guys has a reputation of excellency to protect.

And it's no skin off Jerry's nose: "McDonald's is the best at what they do," Jerry said. Five Guys just does a different thing, and strives to be the best at this almost totally unrelated model.

Coffee is a different story. The quality of Java brew ranges from delightful to absolutely atrocious, and Jerry explained that his staff probably couldn't be trained to produce a perfect cup every time -- nor would they really care to learn. Before starting Five Guys, Jerry managed a hotel restaurant that didn't serve breakfast. Why not open up a new revenue stream? So the first day, Jerry added a couple gallons of water to the evening's leftover dinner coffee, then let it simmer overnight. That near-toxic brew sold out in the morning -- "The kids loved it!" -- proving beyond a doubt that most people just don't understand good coffee.

So how is this model of brilliant simplicity different from (NAS: NFLX) ?

Like Jerry Murrell, Netflix CEO Reed Hastings has defined a very specific market and caters to it with laserlike precision. The DVD-by-mail business was all about convenient access to all the entertainment you wanted, for a fixed and very reasonable monthly price. Digital streams? The exact same idea, taken to the next level of value and convenience by way of fresher technology.

Gina Keating just published a book on the early history of Netflix, called "Netflixed: The Epic Battle for America's Eyeballs." In it, she reaches the same conclusion: "They do one thing, and they do one thing better than anybody. And I think that that was critical to their success."

But wait -- there's more!
The kinship between Netflix and Five Guys runs even deeper. Jerry Murrell has seen tons of wannabe imitators rise up over the years. They start out as carbon-copies of the Five Guys concept, down to the simple menu and high-quality ingredients, but the model always changes. Add more menu items, cut corners and costs where you can, and suddenly the magic is gone. The upstarts tend to crumble within months, which is why Jerry Murrell doesn't really worry about imitators.

Likewise, nobody does exactly what Netflix does. (NAS: AMZN) comes close with the digital video component of its Prime shipping service, but that concept was born complicated. Figuring out what you can watch with a Prime subscription is a knot of Gordian proportions. For some items, you have to pay up for instant pay-per-view access; In other cases, you can only buy the movie at full retail price. At Netflix, the content is available or it ain't. End of story.

Great minds really do think alike. We've picked apart the Netflix business model in a premium research report. It even comes with a full year of timely updates as Netflix navigates through the hairpin turns of the digital video market. Just click here to claim your edge on the market.

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Fool contributor Anders Bylund owns shares of Netflix and has constructed a bull call spread on top of his shares, but holds no other position in any of the companies mentioned. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of, McDonald's, and Netflix. Motley Fool newsletter services recommend, McDonald's, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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