This Franchise Chatter Guide was written by Brian Bixler.
If you have taken a good look at a newly constructed or recently remodeled McDonald’s lately, you have seen the effect that fast-casual restaurants have had on fast food franchises, which are incorporating some fast-casual concepts into their models in order to meet the competition.
The newest McDonald’s units have coordinated artwork on the walls, modern lamp fixtures and shades, a variety of seating and even kinetic sculptures. It’s no coincidence that many of those interior design elements are the same one might find in a fast-casual restaurant, a segment that has been gaining ground in food service over the last few years.
Technomic, the leading research firm for food service, defines fast-casual as establishments with a limited-service or self-service format; check averages generally between $8 and $12; food prepared to order with fresh (or perceived as fresh) ingredients; innovative food suited to sophisticated tastes; and upscale or highly developed interior design. Alcohol may be served.
In its 2014 Technomic Top 500 Chain Restaurant Report, the firm provides sales forecasts by menu category, an update on franchise and international activity, market share by category and the outlook for the future, noting that the fast-casual segment is thriving.
“The fast-casual segment continues to lead growth within the restaurant industry,” Technomic states in a company release. “With an 11 percent increase in 2013 sales and nearly 8 percent increase in units, fast-casual concepts among Technomic’s 2014 Top 500 Chain Restaurants comprise many of the fastest-growing restaurant chains.”
Among those fast-casual concepts in the Top 30, Panera Bread, Chipotle Mexican Grill and Panda Express posted healthy sales gains of 12, 17 and 11 percent, respectively, according to the report.
Copying Chipotle’s Concept
The world has yet to see a Chipotle franchise because all of its units are company-operated. But that hasn’t stopped other franchisors from copying its concept and molding it to their own businesses. The Chipotle model of allowing customers to “build their own” entree by choosing as little or as much of the fresh ingredients displayed before them on a service line has become one of the concepts most associated with fast-casual.
Darren Tristano, executive vice president at Technomic, says the concept has been around for some time with Subway operating this way for years. He estimates that about 20 percent of fast-casual restaurants have a made-to-order format similar to Chipotle, but that will likely grow in coming years.
“I think we’ll see more concepts using this contemporary approach to assembly,” Tristano said in an interview with Franchise Chatter.
The fast-casual approach has led to companies in the segment and industry observers using the word “better” to describe their products over regular, limited-service (fast food) purveyors.
Starbucks has certainly influenced coffee franchises, and limited-service brands such as Dunkin’ Donuts and McDonald’s have augmented their menus to compete.
Behind the brands slinging “better burgers” and “better coffee” are those “better sandwich” franchises such as Jimmy John’s Gourmet Sandwiches, Firehouse Subs and Jersey Mike’s Subs.
There is also a “better pizza” coming from the hottest franchise concept of 2014, the fast-casual custom pizza space with chains such as PizzaRev, Blaze Pizza and Pieology.
Influencing Other Menus
Menu categories such as chicken, bakery cafes, Asian/noodle and Mexican food are also being impacted by the fast-casual trend, which has given way for new brands such as Zaxby’s, Au Bon Pain, Moe’s Southwest Grill, Pei Wei Asian Diner and others.
Technomic isolated the various clusters, identifying the leaders according to menu. The specialty menu category saw the fastest sales growth in 2013, up 16 percent, followed by chicken, which was up 12 percent.
The sandwich and specialty clusters experienced the highest unit growth, increasing outlets by 13 percent and 11 percent, respectively, according to Technomic’s Top 150 Fast-Casual Chain Restaurant Report released separately this month.
Here are the leaders in each cluster:
- Bakery café led by Panera Bread with estimated sales of $4.1 billion.
- Mexican led by Chipotle Mexican Grill with estimated sales of $3.2 billion.
- Sandwich led by Jimmy John’s Gourmet Sandwich Shop with sales of $1.5 billion.
- Chicken led by Zaxby’s with sales of $1.1 billion.
- Asian/Noodle led by Panda Express with sales of $2 billion.
- Burger led by Five Guys Burgers and Fries with sales of $1.1 billion.
- Pizza led by Donatos Pizza with estimated sales of $174 million.
- Specialty led by Dickey’s Barbecue Pit with estimated sales of $331 million.
The conclusion of Technomic’s report is that the fast-casual segment continues to steal share from full-service chains and drive limited-service growth, making up 15 percent of the $231 billion limited-service restaurant segment. Fast-casual sales increased 11 percent in 2013, while all limited-service chains (which includes fast food) grew by only 3.5 percent.
Which is why investors are seeing some of the major quick-service brands either adapting their models or testing fast-casual concepts themselves. For example, in addition to improving the ambiance in its units, McDonald’s has been tinkering with its menu to offer items that are perceived as being healthier, as well as offering its McCafe line of coffee beverages, smoothies and shakes.
The company is currently testing a “build-your-own burger” concept at locations in Southern California, including providing tablets on which people can tap out the bun, patty, cheese and toppings they want on their burgers. Tests are also being conducted under the golden arches on a do-it-yourself seasoning for what it calls Shakin’ Flavor Fries that come with a choice of seasoning packets in three flavors—Garlic Parmesan, Zesty Ranch and Spicy Buffalo—which customers are instructed to sprinkle over their french fries.
Wendy’s is also taking measures to compete by remodeling its restaurants for a more upscale feel including the addition of fireplaces in some units. “Wendy’s mantra for a while now has been fast-casual quality at quick-service prices,” Bloomberg Businessweek reported this month. “…there’s little doubt fast food is gradually getting fancier, and Wendy’s is pushing ahead with that change more than its burger rivals.”
Not Just a Better Burger
And it isn’t just the burger giants that are wading into fast-casual waters. Other franchisors across the country are looking to perfect their own fast-casual models. Among some recent strategies by other limited-service players who aspire to be fast-casual:
- Taco Bell, a unit of Yum Brands Inc., introduced a “Cantina Bell” line of Chipotle-like burritos and salad bowls made with fresh avocados and cilantro dressing developed by celebrity chef Lorena Garcia. Yum is also launching the U.S. Taco Co. and Urban Taproom to attract a younger set that wants more than what Taco Bell can offer. Being tested with two units in Southern California, the new brand will serve 10 different kinds of $4 tacos, fries, milkshakes and craft beer.
- Yum is also venturing into the fast-casual segment with two other experiments. The new fast-casual chicken concept under its KFC brand is called KFC Eleven, which offers rice bowls, salads and grilled chicken instead of fried chicken in a bucket. KFC slipped last year to the second spot in sales behind Chick-fil-A, which may be the reason Yum has also opened a new restaurant in Arlington, Texas, called Super Chix, marketed as “The Last True Chicken Sandwich.”
- Red Lobster, which was purchased last week by Golden Gate Capital for $2.1 billion, has tested a fast-casual concept called Seaside Express at two of its restaurants in Florida without success. The Seaside Express concept was designed to allow customers to order and pay at a counter for a quick-service lunch. Customers could choose between traditional sit-down meals or the quicker ones.
- Chipotle Mexican Grill announced last December that it was partnering with restaurateurs Bobby Stuckey and Lachlan Mackinnon-Patterson to launch a new fast-casual pizza concept called Pizzeria Locale after a successful test run of the new brand in Denver.
Fast-Casual Attracts Franchisees
The fast-casual segment is creating as many new choices for potential franchisees as it is for consumers. It may even sway them from investing in traditional fast-food chains. The Technomic Top 150 report identifies the fastest-growing brands by sales and number of units, separating those earning more than $50 million in annual sales and those earning below that mark.
This top-performing fast-casual has humble beginnings: Shake Shack started out as a hot dog cart in Madison Square Park in Manhattan. Created by Danny Meyer’s Union Square Hospitality Group (USHG), it was established to support the Madison Square Park Conservancy’s first art installation.
For three consecutive summers, fans couldn’t get enough of the food. Then, in 2004, USHG won a contract to open a permanent kiosk in the park and Shake Shack was born. Today, the chain has more than 20 units and earned more than $62 million in sales in 2013, according to Technomic estimates.
Shake Shack calls itself a “modern day ‘roadside’ burger stand” with a menu of burgers, hot dogs, frozen custard, shakes, beer and wine. The brand has not indicated plans to franchise.
This concept, founded in 1995 by Zoë and Marcus Cassimus in Birmingham, Ala., has grown to more than 100 units nationwide. Typical menu items include chicken-orzo soup, hummus, Greek and chicken salads, sandwiches, kabobs and other entrees.
In March 2014, the parent company, Zoe’s Kitchen Inc., filed for an $80.5 million initial public offering of stock, cementing the company’s reputation as a leader in the fast-casual segment. The company is still majority owned by private-equity firm Brentwood Associates and is based in Plano, Texas.
The recent IPO may be an indication that Zoës Kitchen will accelerate its franchise program. At the end of 2013, the company had 94 company-owned Zoës Kitchen restaurants and eight franchised units according to Nation’s Restaurant News. Average unit volume was near $1.5 million, the company said in its filing.
Hot Head Burritos
While this chain was No. 1 on Technomic’s list of fastest-growing companies by percentage of change in sales from 2012 to 2013, it lagged in number of units compared to others in the field. Hot Head Burritos saw a 48 percent increase in sales year-to-year, raking in some $50.4 million in 2013.
The brand was founded by Cynthia and Raymond Wiley. Ray Wiley had been a franchisee of a major restaurant chain for more than 25 years and managed his own multi-unit restaurant company. He joined his wife, a paralegal, in creating Hot Head Burritos, opening the first store in 2007.
The number of units is growing, despite Technomic’s year-end list. According to the company website, there are now 55 Hot Head Burritos open and many more in development. Existing units are located primarily in Ohio, but also Indiana, Pennsylvania, Michigan, Kentucky and Florida.
Dickey’s Barbecue Pit
The brand has been around since 1941 with its roots in Dallas, Texas, where Travis Dickey opened the first restaurant. Brothers Roland Dickey and T.D. Dickey, Jr. took over the business in 1967, expanding to become a well-known staple in North Texas.
And even though it began franchising in 1994, Dickey’s Barbecue Pit has only recently reached its stride as a national brand. Roland Dickey, Jr. became president of the company in 2006 and it has achieved many accolades including being named one of the top fastest-growing companies by Inc. magazine.
Dickey’s differentiates itself in the market by smoking all of its meats on site at every location. According to Technomic, Dickey’s ended 2013 with 370 units, a 29 percent increase from the previous year. Sales hit $331 million.
Habit Burger Grill
Habit Burger Grill also has a long history. The first restaurant opened in Santa Barbara, Calif., in 1969, as a small stand serving char-grilled burgers t0 visitors at Goleta Beach. When one of its young employees, Brent Reichard, and his brother Bruce Reichard, eventually bought the business, they made some changes, including offering daily-baked buns that were also grilled, as well as fresh, locally sourced produce for toppings.
Other beach-inspired menu items included a fresh-grilled albacore sandwich made with line-caught tuna; a chicken sandwich topped with crisp bacon and velvety avocado; and crisp salads made to order.
Habit Burger Grill has grown to more than 85 units by the end of 2013 with sales of $113 million. It has recently branched out from its base in California to open units in Arizona and Utah.
Ones to Watch
Technomic’s report not only identified fast-casual leaders, it also pointed out those concepts whose appeal may be starting to wane with customers. Among those brands that saw the largest system-wide decreases in sales in 2013 were Paradise Bakery & Cafe, Così and Taco Bueno, while those that saw decreases in units were Qdoba Mexican Grill, Atlanta Bread Company and Straw Hat Pizza. Still, fast-casual seems to be the new way to invest in food-service franchises and analysts predict growth will continue for the foreseeable future.