The end of the ‘better burger’ bubble

June 17, 2011, 4:30 PM UTC

By David Tao, contributor

FORTUNE — Massachusetts native Nick Kesaris isn’t shy about discussing the motivation behind his UBurger restaurant chain. Inspired by established “better burger” joints like Five Guys, Smashburger and The Counter, he and longtime friend Spiro Kouvlis decided to emulate the concept and bring it to New England. They opened their first store in 2006.

Off the grill at The Counter

“It’s standard,” says Kesaris, who currently operates three locations, all in the Greater Boston Area. “You see someone succeed, and you copycat.”

But UBurger isn’t the only new burger on the proverbial American block, and it will be harder to succeed as the specialty burger market becomes saturated. Nationwide, the trend of providing higher-quality alternatives to the major burger chains — hence the “better burger” moniker — has quickly spread from a few pioneering restaurants to dozens of copycats. How long before the burger bubble pops?

Usually a few dollars more than traditional fast food options, boutique and specialty burgers thrived during a recession when lighter wallets sent consumers looking for cheaper gourmet. In many cases, customer appetites were even bigger than early chain founders could imagine. Five Guys grew from five stores to over 750 in ten years. Smashburger went from concept to over 100 stores in half the time, and dozens of entrepreneurs — some with years of experience behind the counter, others with none — are trying to cash in on their success.

Many offer exotic twists on the classic patty and bun, while others highlight their use of organic and local ingredients. Still others seek to attract customers by supplementing the dining experience with extras unique to burgers. Atlanta’s Yeah! Burger, for example, even offers an in-restaurant bar serving beer and cocktails.

While their ascent has been rapid, the boutique chains still represent less than 3% of domestic burger sales, according to Mary Chapman, an analyst with restaurant consulting firm Technomic. Though McDonalds (MCD), Wendy’s (WEN) and Burger King aren’t relinquishing their grip on the $65 billion dollar domestic market anytime soon, Chapman says there’s potential for growth, yet it’s doubtful all aspiring entrants will get a juicy bite. And as those fast food giants roll out their own lines of premium burgers while expanding selections of drinks and other sandwiches, market space for affordable gourmet is getting increasingly crowded.

Chapman likens it to the development of large burrito chains like Qdoba and Chipotle (CMG): a gaggle of like-minded founders open similar chains, a few rise to the top as competition increases, and before long an industry ends up restricting the very entrepreneurial climate that initially fed its growth.

Kesaris, for one, is worried the market for specialized burger joints is becoming oversaturated, especially in large metro areas where similar chains are opening up down the street from each other — and sometimes right across. By the time the newest local chain can consider expansion, there could already be Five Guys or Smashburger within walking distance. While UBurger plans to open up to five new locations in the next three years, Kesaris is cautious with his optimism and believes the small chain owners are perhaps a couple years from having to close down places.

Burgers without borders

Jeff Weinstein, founder and co-CEO of California-based The Counter, thinks the “day of reckoning” for some chains could come even sooner. A relative veteran of the burger wave — The Counter opened its doors in 2003 and now has 32 locations nationwide — Weinstein believes the newest, smallest chains will be the first to feel the crunch of both competition and rising commodities prices.

“Our larger size means we have buying power that other brands might not, and we also have a longer term relationship with vendors,” he says. “The more we can buy, the better off we are.”

Beyond hedging its bets against rising costs and domestic market crowding, The Counter — along with New York City chain Shake Shack — is leveraging its established brand name into international expansion, with upcoming stores planned for Dubai, Bahrain, and Saudi Arabia. As the better burger movement becomes increasingly associated with a handful of larger, slightly older, and increasingly franchise-friendly chains, newer presences — the “me too’s” as The Counter’s upper management calls them — will have a hard time promoting their brands.

But some newer chains are still battling what they see as a winnable fight, hoping that a renewed focus on quality will keep hungry customers coming. Barry Mills, founder of Georgia and Alabama-based FLIP burger boutique, believes his stores can expand across the country due to an emphasis on gourmet options, even if that means higher prices.

“Over the next five years, the better burger movement is going to divide into two separate categories,” he says. “The two left standing will be the cheapest better burger and the best better burger. My goal is to be the best burger in whatever cities we’re in. I really don’t care about cheapest.”

For now, at least, the options for hungry burger enthusiasts are at an all time high. Just don’t expect them to stay that way.