Technomic: Fast casual will continue to lead industry growth

But even in weak sectors, restaurants with the right combination of factors can win market share.
Scott Mitchell

Limited-service restaurants will continue to lead industry growth in 2018 as consumers continue to shift more spending to off-premise occasions, according to Technomic.

Speaking at the Restaurant Leadership Conference in Phoenix on Tuesday, Joe Pawlak, managing principal with Technomic, said that fast-casual restaurants will grow by 7.5% this year.

Quick-service concepts, meanwhile, will grow by 3.5%. Casual-dining and fine-dining restaurants will grow by 2.7% and midscale restaurants, otherwise known as family restaurants, will grow by 1.8%.

The biggest surprise in this group is the strength of casual-dining concepts, which have struggled in recent years. But, Pawlak said, independents will lead that sector’s growth this year as consumers seek more authentic experiences.

“Independents are very strong here,” Pawlak said. “We still see some softness when we’re talking about chains.”

The industry’s growth has been challenged in the past couple of years despite a relatively strong economy and low unemployment. Sales growth among chains in the Technomic Top 500 last year was 3.1%, to $309 billion. But that growth rate was down from the 5.5% two years earlier.

One potential tailwind this year, however, could be tax cuts that pull up spending.

Tim Quinlan, senior economist for Wells Fargo Securities, said that one of the challenges in the economy in recent years has been wage growth, or the lack of it. It took until 2016 for the economy to create the 9 million jobs lost during the recession, and it took years for workers to feel confident enough to quit their jobs, which can drive wage growth.

Quinlan is “not entirely convinced” that the tax cuts approved last year will generate stronger economic growth. But he did say that the cuts could lead to some short-term consumer spending.

A growing concern going into 2018, however, is the prospects of a recession. Business confidence has been strong for the longest period in 30 years, Quinlan said, and consumer confidence is the highest it’s been since 2001.

Many believe that the economy is due for a recession, given that this is the second longest expansion in U.S. history. “I tend to get nervous in periods where things are at sustained, all-time highs,” Quinlan said. “They don’t tend to stay at these record highs for a long time.”

For now, however, Wells Fargo continues to expect economic expansion, which should be good for a restaurant industry that needs consumers in a healthy state to generate sales.

One big industry concern is saturation. Unit count growth slowed to 1.2% in 2017. It has slowed every year since 2013, when unit count grew by 2.2%.

Arguably, said Patrick Noone, executive vice president of business development for Technomic, “the industry is saturated.”

But, he said, that doesn’t mean companies can’t grow. “If you have the right restaurant, the right location and the right offering, there’s success to be had,” Noone said.

For instance, there is casual and fine dining, where growth was slowest last year. Full-service sales in the Top 500 grew by less than $1 billion last year, to $78 billion from $77.2 billion. By comparison, three quick-service chains each generated more than $1 billion in sales growth last year: McDonald’s, Starbucks and Chick-fil-A.

The 1% sales growth was down from 4.1% two years ago. In particular, growth was slowest at seafood chains; Joe’s Crab Shack filed for bankruptcy and Red Lobster struggled. It was also slow at varied-menu chains, which include bar and grill concepts such as Applebee’s, Chili’s and Ruby Tuesday.

But, Noone said, varied-menu chain Red Robin is posting strong growth, and BJ’s is performing well.

And many full-service chains that focus on “premiumization and authenticity,” or chains that serve a lot of breakfast or have strong combinations of quality food and alcohol, have continued to generate strong growth.

But the strongest growth is still coming from fast-casual chains. The Top 500 sales growth last year was 8.8%, a slowdown from its five-year compound annual sales growth of 10.8%.

The 7.5% that Technomic is predicting is a further slowdown. And traffic in the fast-casual sector has been slower than at quick-service restaurants through February, according to the Technomic Chain Restaurant Index.

Yet companies such as MOD Pizza, Blaze Pizza, Raising Cane’s and others continue to grow. And while fast-casual chains represent just 17% of limited-service sales, the sector represented 37% of its sales growth.

But quick-service brands are growing, too, as companies such as McDonald’s and Chick-fil-A continue to lure customers. Traffic at fast-food chains is up 4% through February, the industry’s strongest performance thus far.

Overall, limited-service growth among Top 500 chains was 3.9%, down from 4.6% growth in 2016 and 6% growth in 2015. Yet the stronger growth at quick-service restaurants illustrates again the trend toward more off-premise dining regardless of the service style.

“Off-premise is exploding, whether through the drive-in or takeout,” Pawlak said. “Delivery is becoming a more common term used in some boardrooms and in many operational meetings.”

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