Fast Casual Industry, I think I love you man
One of the fastest growing concepts of the restaurant industry over the last decade and in 2016 has been the fast casual restaurant. Though still a smaller part of the overall market than both the fast food and casual dining segments, fast casual concepts are exploding onto the scene and gaining popularity each year. And unlike traditional fast food restaurants, the market for fast casual is far less saturated, and franchise opportunities abound for the entrepreneur.
A Little Bit Healthy, a Little Bit Rock 'N' Roll
So what about fast casual restaurants make them so appealing to consumers? The concept marries the age-old need to eat on the run to the much newer consumer demand for healthier options. Food quality and preparation at traditional fast food restaurants has come under increasing scrutiny in recent years and been shown to have negative health consequences, coincident with a general change in consumer attitudes towards healthy diet and lifestyle.
But the desire to find healthier options does not supersede the need to eat on the go. Consumers are on the move and need to have fast options that can be eaten on lunch break or picked up on the way home. It is at this intersection of higher quality food and the need to be quick that fast casual has found its niche.
A newcomer to the restaurant industry, the term “fast casual” was coined in the 1990’s. Typically restaurants in this category do not offer full table service, but offer a higher quality of food and atmosphere than traditional fast food. Customers order at the counter but typically will get real plates and cutlery, and can often see their order prepared. Food preparation and the use of high quality ingredients take a higher priority in fast casual restaurants and are frequently distinguishing characteristics for particular franchise brands, such as those using only local or organic produce. Healthier options are more prominently displayed than in traditional fast food franchises as well, and food is often presented in a fashion to highlight freshness of ingredients and preparation. Another key difference is the offering of beer and wine at many franchises.
These restaurants offer the quality of casual dining combined with the speed of fast food and have the prices to match this middle ground. Price for a typical meal range from $8 to $15 dollars, but as the fastest growing segment of the restaurant industry, consumers have seemed quite willing to pay for quality.
Leader of the Pack
Fast casual restaurants have been expanding rapidly and sales reached $23 billion in 2010, a 30% increase since 2006. In 2009 there were 600 fast casual concepts in the $580 billion restaurant industry. Growth in the segment led the industry by a wide margin in 2008 when the extremely popular fast casual franchises Chipotle and Wingstop grew 20.7% and 17.8%, respectively, compared to McDonald’s growth of 4.4% and Burger King’s of 6.6% during the same period. The 500 largest chain restaurants in the U.S. only expanded revenue by 3.4% during 2008.
This strength during the recent economic downturn is particularly telling about the strength of fast casual franchises. When consumers became more discerning with their discretionary dollars, they sought to spend them on healthier but still relatively inexpensive restaurant options.
Sales at these franchises are strongest at lunch and have nearly the same share of lunch customers as casual dining. Though still lagging behind traditional fast food franchises in terms of lunch market share, evidence is mounting that its a lack of availability rather than preference. In a survey taken in the summer of 2010, of the respondents that had not eaten at a fast casual restaurant during the preceding month, nearly 30% cited the reason as lack of availability. Consumers are seeking fast, healthy options, and often cannot find it in our fast food nation.
Where do we Grow from Here?
The future looks bright for the sector. A study completed in the first quarter of 2011 found that fast casual restaurants have been experiencing higher sales and higher traffic over the previous year, and restaurant operators are largely planning to increase capital expenditures on renovations and new locations. Most operators surveyed for the study also indicated a need to increase staff to meet demand.
Improving consumer confidence and spending also will allow these restaurant operators to finally pass along rising commodity prices. Over the past year of rising prices, owners and operators have swallowed rising input prices out of fear of losing customer traffic. But 60% of those surveyed indicated a plan to increase menu prices to improve profit margins.
Another positive sign for the sector is the increased consumer willingness to try new types of cuisine. Consumers are more interested than ever before in modern, authentic cuisine that is affordable for the family. Local and sustainable concepts are also in high demand as citizens become more socially and environmentally responsible.
There are many franchise opportunities to choose from, and the market has a tremendous amount of space for new entrepreneurs. Franchises offering healthier or higher quality offerings of such things as pizza and burgers compete with salad bars and pita-shops. Fast casual Mexican and Asian concepts are experiencing double digit growth in sales and small chains offer such novelties as home-made sodas. Consumers are becoming more discerning and the economy is continuing to improve, and fast casual restaurants are primed for profits!
Matt Sena is a co-founder of FieldLens, a former portfolio manager, research analyst and trader. He holds the Chartered Financial Analyst designation and earned his MBA in Finance from Kellstadt Graduate School of Business while working at Goldman, Sachs & Co.