Kurt Vonnegut Jr. wrote that “maturity is a bitter disappointment for which no remedy exists,” and so it has been with the coming-of-age fast-casual restaurant segment. For the past year, the segment has faced both the disappointment of soft sales and increased questioning about its strength not heard since its late 20th century beginnings.
Last year was tough, including food safety problems that dogged what had been one of fast casual’s strongest brands, Chipotle Mexican Grill, scaring Wall Street. Then another of the established concepts, Cosi, filed for bankruptcy protection in September. The Wall Street Journal cast Cosi’s problems as the tip of one of the industry’s “biggest restaurant shakeouts in years, as an oversupply of eateries and new rivals offering prepared meals to go claim what is expected to be a growing number of casualties.”
The deepest cut
And then, boom: In March, Chipotle shuttered its ShopHouse Asian Kitchen concept, which, with 15 locations, was larger than many of the fledgling fast-casual brands with dreams of success.
Is fast casual losing sales to an overall economic slowdown, or has it been leaking occasions to supermarkets and c-stores and others with lower prices, especially at lunch? Is a growing gap between the cost of eating or preparing food at home versus away from home making the former more attractive? Is fast casual’s promise of “better” losing its power? Has fast casual fallen behind on giving consumers, especially young adults, the flavors, food quality, value and convenience they expect?
“There’s going to be a shakeout,” Kevin Burke, founder and managing partner of Los Angeles-based investment banker Trinity Capital, says flatly. He points to the rapid growth of “better pizza” concepts and says “only a handful” will emerge with 100 or more stores.
A rising tide
So why aren’t fast-casual chain executives panicking? Because they acknowledge the challenges but believe the segment’s foundations are strong enough to withstand a little turbulence. They see 2017 as a time for chains to make sure they really are delivering on the quality-value-convenience promise. They’re piloting or rolling out new technologies, including online ordering and back-of-house software; exploring increased convenience through better takeout and delivery; introducing more premium-quality LTOs that justify premium prices; and continuing to open new stores.
Chipotle may have closed ShopHouse, but it also opened its Tasty Made burger concept. And Bibibop Asian Grill is acquiring the closed ShopHouses. Cracker Barrel Old Country Store is trying a Holler & Dash fast-casual concept. Whole Foods is opening The Roast, a Brazilian-themed fast casual, in an Atlanta store. The new brands coming into the market increase competition, yes, but they also validate the segment’s
And fast casual can handle the competition.
“I hope that the rising tide lifts all boats,” says Ray Blanchette, president and CEO of Boston-based Au Bon Pain. “As the market continues to expand and there’s more demand for ready-to-eat prepared foods, fast casual in particular ought to be able to compete well in that marketplace.”
“Fast casual is no longer the best-kept secret of the restaurant business,” says Moe’s Southwest Grill President Bruce Schroder. The battle now is for market share, not for acceptance, he adds. “Fast casual has proven itself.”
Competition in Aisle 5
Not that the segment doesn’t have obstacles to overcome. Much of the price worry stems from lower commodity costs that mean supermarket food has gotten expensive over the past year while restaurant check prices have escalated. For the 12 months ended February 2017, the Consumer Price Index for food at home decreased 1.7% while restaurant checks grew 2.4%.
“Because their margins are so thin, supermarkets manipulate prices daily. When food costs go up, their prices go up; when food costs go down, so do their prices,” says Ashley Morris, CEO of Las Vegas-based Capriotti’s Sandwich Shop. “That poses an interesting hurdle for the restaurant business, which traditionally doesn’t follow that logic. They rarely if ever lower prices, and, actually, lowering prices is the kiss of a death for a restaurant.”
If that means some consumers pack a lunch rather than buy it, or pick up a meal at a deli counter, restaurants will just have to compete harder, he says. “But I think that may be short-lived [as a trend]. People go out to eat more than just for food. They go for experience, to be social. Eating at home may be the most fiscally responsible, but it gets boring. There’s only so many things you know how to cook,” Morris says. “You get tired of bringing that same salad to work.”
The Habit Burger Grill CEO and President Russ Bendel says, “You know, I wish that no one sold food besides us, but competition comes from different places at different times, and that’s OK. Only the strong survive, and competition is good—it keeps the best of us focused on addressing the needs of the consumers.”
“It really boils down to the experience we create inside our four walls,” says Kendra Shier, interim chief experience officer at Tampa, Fla.-based Burger 21. “We can’t prevent supermarkets’ and c-stores’ attempts to grab consumers, but we can focus on creating that experience that the guest believes sets us apart from the competition. All competition.”
Paul Macaluso, president of Atlanta-based McAlister’s Deli, says consumers have “an emotional connection, a sense of belonging” with a favorite restaurant that grocers and c-stores simply lack.
The way to blunt retail’s convenience edge is with even more convenience. Many fast casuals have online ordering, online payment, expedited pickup and delivery platforms in place or are working on them.
Panera Bread CEO Ron Shaich recently told analysts that 24% of sales in its company cafes are placed digitally. And increasingly those orders go out the door, not to tables. Dave Boennighausen, interim CEO of Noodles & Company, recently reported that 45% of its meals are consumed somewhere other than in its restaurants.
“Online ordering, delivery and catering are now qualifiers for being in the fast-casual segment. You have to have an online ordering service; you have to have a mobile ordering platform; you’ve either got to deliver or have third-party delivery,” says Brooksy Smith, chief brand officer for West Palm Beach, Fla.-based multiconcept operator Hurricane AMT. It recently opened a second unit of its new burger-taco-wings fast-casual concept Hurricane BTW and expects to have as many as 10 open by year-end.
“Those [third-party delivery] customers are incremental,” Smith says. “We find they go to the delivery site first and find BTW second. If we weren’t on that platform, we wouldn’t have gotten anything. And if you’re competing to sell franchises, you’d better have those [online ordering and delivery] boxes checked for prospective franchisees or they’ll find someone who does have them checked.”
But not everyone is convinced about the delivery market or whether consumers outside high-density cities want it. “I think we’ll see more consolidation coming among the third-party delivery services, but we don’t know who the winner will be. UberEats has the fleet and Amazon Fresh has the eyeballs, but I don’t think we know who comes out on top,” Schroder of Moe’s says.
Bendel says Habit Burger is looking at adding drive-thrus (noting that Panera is doing the same) and more efficient takeout (which accounts for a third of sales now). Adds Habit Burger Chief Marketing Officer Matt Hood, “Our guests will find a way that’s convenient for them. What we want to focus on is execution inside the four walls so the food’s great when they pick it up,” he says. “We don’t want to layer on the additional expense with delivery companies and affect our value equation.”
Price and prejudice
Morris of Capriotti’s sees the fact that people pay “through the nose” for delivery as a sign fast-casual pricing is not out of line. “I think most brands have more price elasticity than they realize,” he says. But he adds that such elasticity has limits.
“For QSRs, that psychological [price] barrier is probably about $8; above that, and consumers are going to feel you’re really expensive,” he says. “With fast casual, that number is about $12.50. Above that, you’re probably priced out. So if you’re above it, you should expect to weed out a lot of your customer base.”
In fact, there is no consensus about what fast-casual restaurants can or should charge. The result may be a continuing stratification of the category into low-price (drawing sales from QSRs), midscale (replacing midprice full-service restaurants) and premium-price (competing with casual dining).
The view from the high end
Souvla, a Greek concept with two San Francisco stores, is in the premium tier. A lamb sandwich with harissa-spiked yogurt, cucumber, radish, pickled red onion and feta cheese is priced at $13 ($14 as a salad). Greek Fries are $4. Owner Charles Bililies sees his menu as priced below comparable casual- or fine-dining options, not above most fast casuals.
“We categorize Souvla as ‘fine casual.’ There are important distinctions between what we do and other restaurants. We spent a lot of time and effort and energy designing a beautiful space and engineering the guest experience in such a way that you feel like you’re in a fine-dining restaurant even though you order at a counter and you take a seat,” he says. “The litmus test always was asking ourselves, ‘Is this nice enough to take a date to?’”
Bililies intends to open more Souvla stores, and expects more high-end fast-casual entrants. “I truly see our format as the future, especially in high-cost cities like San Francisco, New York and Los Angeles, where you’re battling high labor, rents, etc.,” he says. “This is a model that works. I see more fast-casual moving upmarket. The basic unit economics are far better.”
Finding the middle
“I think the guest now understands that fast casual doesn’t mean $6 anymore. It means high-quality food at an affordable and reasonable price,” says Ben Jacobs, co-owner of Tocabe, a Denver-based concept focused on Native American foods. “People are spending $10, $11, $14 because they know what they’re getting and that it’s produced with quality ingredients.”
But others are working on different price paradigms. Schlotzsky’s has been successful this year with a line of brisket sandwiches, each priced at the top its price curve at about $7. “We feel we can bring out bring premium products like the brisket and that we have customers willing to pay for them,” says Kelly Roddy, president of the Atlanta-based chain. “I think we’ve carved a place where people expect a premium product and expect us to deliver premium, bold flavors.”
Hood of Habit Burger says, “We’ve found that our charburger, with an entry price of about $3, is a great value. And that lets us introduce LTOs at the higher end of our menu: upper $6 to lower $7 for salads and upper $4 to lower $5 for sandwiches.”
Indeed, fast casual may have priced itself out of the reach of some customers, but there are still lower-price fast-casual options for that market.
A better definition of ‘better’
As pricing has evolved, so has the “quality” positioning. Schroder of Moe’s believes Chipotle’s food safety problem has brought increased interest from diners about where food comes from and how it was grown or raised. “Quality hasn’t gone away as an issue,” he says. “The quality discussion has migrated back to the fundamentals as well as all-natural or non-GMO.”
“We’ve seen an explosion in quality food in this country in the last decade or so,” Smith of Hurricane BTW says. “Consumers’ expectations have become pretty high, and deservedly so. ”
Fast casual’s promise of a “better for you” meal still rings true with consumers, Blanchette of Au Bon Pain says; but “it’s about nourishment now and not about dieting,” he says.
Melissa Gallagher, vice president of marketing for “better for you” fast-casual brand Freshii, says, “We believe calories don’t count; it’s more about the nutrition we’re putting into our guests’ bodies.”
Freshii has developed an interesting hybrid idea that’s equal parts customization, delivery and meal-prep service. Called Meal Boxes, these kits include three meals and two snacks and target “the ready-to-be-better consumer who wants to eat better on the go, but can’t do it alone,” Gallagher says. Unlike many meal kit services, Freshii’s can be purchased for one day, three days or 30.
Have it whose way?
The Meal Box may be the ultimate in customized foods. But is the customization mania losing steam? Clearly, many will continue to embrace it, and many won’t.
“Customization always has been somewhat important,” says Blanchette. “But I think because the food IQ is high, people are willing to let you take them somewhere. You want to take the time to consider what flavors go well together and put them together for consumers.”
He cites Au Bon Pain’s Good Egg breakfast sandwich, finished with a citrus aioli. “Consumers might not think, ‘Maybe a citrus note would be good on my breakfast sandwich,’” he says. “We have to help them there go there.”
But Bendel of Habit Grill insists “People want the ability to customize.” Failing to provide it is “where fast food lost them and fast casual took hold,” he says.
Morris of Capriotti’s agrees: “I think customization is such an attractive, quick, convenient process that I don’t think it will ever go out of favor. But if what you choose from isn’t high quality and real and working toward being sustainable and on trend, then it’s going out of favor.”
The food wins
So where is fast casual headed? Likely not far from where it is now, near-term. But the segment knows it always must seek to be a better version of itself.
“Fast casual has become the way people understand food,” Jacobs of Tocabe says—and it is consumers who will define what fast casual becomes.