One of the most surprising numbers to come out of Technomic’s Top 500 report was the continued strong performance of fast-casual chains, which grew sales by 8.8% last year. Many anticipated a smaller number, given challenges at publicly traded chains such as Noodles & Co. and Potbelly. “We expected a little bit more” of a slowdown, says Joe Pawlak, managing principal with Technomic.
In the first quarter of 2015, publicly traded fast-casual chains, outside of Chipotle and Panera Bread, rose 7.2%. By the third quarter of last year, those concepts were the industry’s worst performers, with an average decline of 4%. Chains such as Pollo Tropical, Pie Five and Noodles struggled to generate traffic.
But that mostly speaks to small sample sizes, as well as the presence of a few underperforming outliers. The broader fast-casual universe is growing, no matter how you look at the numbers.
10 years of fast casual
Fast-casual chains’ unit count grew by 5.4%, easily outdistancing any other sector, and its implied 3.5% increase in same-store sales was far higher than any other segment last year. The next best-performing sector was quick service, with an implied same-store sales increase of 2.5%. Still, fast casuals make up just 14.5% of Top 500 limited-service units, so overall limited-service growth was balanced with lower QSR stats.
Among the 200 largest chains, only 12 had system sales growth of 20% or more last year, and seven were fast-casual chains. Only one of those 12, Shake Shack, is publicly traded.
Perhaps not surprisingly, the fastest-growing portion of the fast-casual sector was pizza. Fast-casual pizza concepts, led by MOD Pizza (80% system sales growth) and Blaze Pizza (49%), had total sales growth of nearly 34% last year, based on Technomic data.
Specialty chains, including salad chains such as Sweetgreen and Chop’t and barbecue concepts such as Mission BBQ, grew by 15.6%. Fast-casual chicken chains, led by the 30% growth for Raising Cane’s, were next at 13%.
The fast-casual sector has emerged as consumers shift more spending toward limited service and takeout.
Fueling this demand: an unprecedented flood of investment dollars from private-equity groups and strategic buyers, all vying for a piece of the growing pie. Investors have made more than 70 investments in growth chains since 2012, about two-thirds of them directed at fast-casual chains.
The performance last year doesn’t completely dismiss concerns about the sector’s rapid growth and its potential to ultimately lead to a crash. The proliferation of copycat concepts can damage rivals, while unit growth in so many concepts looking for similar real estate is driving up lease costs.
Still, it’s clear that consumers still love fast-casual chains. And investors will keep fueling this demand as long as it’s growing.
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