The fast-casual sector is still booming

The chains are leading the industry's growth, despite some restaurants' struggles, says RB's The Bottom Line.

The Bottom Line

Arguably the most surprising number to come out of Technomic's recently released Top 500 Chain Restaurant Advance Report was the continued strong performance of fast-casual chains, which grew sales by 8.9% last year.

That was a surprise, because many of us expected a smaller number, given challenges at publicly traded chains such as Noodles & Co. and Potbelly.

“We expected a little bit more” of a slowdown, Joe Pawlak, managing principal with Technomic, told me. (Technomic is a sister company of Restaurant Business.)

Indeed, those of you who have followed me over time might recall a few bearish statements regarding the fast-casual sector.

I’m not the biggest fan of the name, but there’s no question that my earlier concerns about the sector’s future were blinded to a degree by the performance of some publicly traded fast-casual chains.

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 & Co. all struggled to generate traffic.

But that mostly speaks to small sample sizes, as well as the presence of a few underperforming outliers among the set of publicly traded fast-casual chains. The broader, fast-casual universe is growing quite nicely.

And it’s growing no matter how you look at the numbers. Fast-casual chains’ unit count grew by 5.4%, easily outdistancing any other sector. The total sales number, minus the increase in unit count, implies a 3.5% average increase in same-store sales. That’s far higher than any other sector last year.

Incidentally, the next best performing sector was quick-service, with an implied same-store sales increase of 2.5%. It’s good to be in limited service right now.

Among the 200 largest chains, only 12 had system sales growth of 20% or more last year, and seven were fast-casual chains. The other five included two family-dining chains, one fine-dining concept, one quick-service chain and one upscale-casual concept.

Only one of those 12 chains, Shake Shack, is publicly traded.

Perhaps not surprisingly, the fastest-growing portion of the fast-casual sector was pizza chains. 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 at Raising Cane’s, were next at 13%.

Growth in the fast-casual sector was spread among both large and small restaurants. While Chipotle and Panera Bread, the two largest fast-casual chains, each enjoyed strong years, total fast-casual sales growth was still 8.3% without them.

The fast-casual sector has emerged as consumers shift more spending toward limited-service and takeout options.

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 into 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 lead to an ultimate crash. The proliferation of copycat concepts in many fast-casual subsectors can damage rivals, while unit growth in so many concepts looking for similar real estate is driving up lease costs.

Last week, for instance, we spoke with operators of Qdoba Mexican Eats, many of whom complained about runaway lease rates in certain large markets where more fast-casual chains are located, such as Washington, D.C. Rising rent is one of the more underrated challenges in the restaurant business.

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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