September, 2010

Research Perspective and Comments & Analysis

Fast-Casual Gains Dollars And Units By Focusing On Healthful Consumer Choices

Q: How do you define Fast-Casual Restaurants (FCR)?

A: Fast-casual is not very well defined in the marketplace. We have a general view, though, and it includes establishments with a limited-service or self-service format, no drive-through, food made-to-order at the counter, often brought to the table, fresh (or perceived fresh) ingredients, innovative food suited to sophisticated tastes, upscale interiors and price points between $7 to $11 dollars per person.


Q: What role does produce play, and where are the opportunities?

A: The way fast-casual has succeeded is with freshness, and produce is a big part of that. Consumers from our research have reacted that fresh is better for you. Produce provides freshness, variety and enhanced flavors; infused in burgers, novel sandwiches, creative toppings on pizzas, and more center-of-the-plate with salads. Vegetarian restaurants are starting to grow in the fast-casual space, as are all chains classified as healthy.

Look for offerings lower in sodium; new gluten-free ingredients, multigrain breads and baked goods; more vegan/vegetarian options; and local produce for use in salads and sandwiches. Additionally, now that laws in some states are requiring restaurants to post calorie counts, more menus will tout lighter, lower-calorie and lower-fat versions of signature entrées.

Local has usurped organic, which was popular for years, and is a trendy term in the FCR arena. Everyone wants to support the local concept, and it’s crazy how strong it’s become. Panera Bread/Saint Louis Bread Co., which doesn’t specialize in salads, is using strawberries right now in its salads, embracing the strategy of rotating seasonal produce into its offerings. Pret a Manger has driven European-style grab ‘n go that is made fresh on the premises.


Q: How has the economy impacted this segment in the context of restaurants overall?

A: The big news is that in spite of the economy and larger fast food chains, fast casual has doubled its share size and continues to grow when a number of chains are struggling and having trouble finding their identity. Consumers want better, more healthful food, so they’re trading up to fast-casual, while trading down from full-service. And the longer it takes to get the economy moving, we’re going to continue to eat at fast-casual.

Restaurants like Panera and Chipotle have skyrocketed in both sales and units; $350,000 can open up a Five Guys Burgers and Fries, so it’s easily franchised and increasingly stealing shares from other restaurants. Still, fast-casual only represents 5 percent of the total industry so it has plenty of room to grow. Limited service is relatively flat; full-service has declined; and yet fast-casual is up 4.5 percent.

Consumers perceive fast-casual as a good value. They can customize toppings on their burgers, pizza, or burritos, and choose fresh ingredients in their sandwiches. Quality of toppings is visible, and they’re interacting with the person making their food. Consumers interpret fresh as better and more flavorful, and in the fast-casual format they can see it is not processed or frozen.


Q: What food categories in fast casual are most popular?

A: Across the board, the biggest growth came from burgers, really driven by Five Guys Burgers and Fries. They’ve become specialists in made-fresh and made-to-order burgers and fries. Traditional fast food lost focus on burgers. Culvers is popular for its frozen custard and butter burgers, which are cooked to order. McDonalds won’t ever get to that point. As far as ethnic trends, we’ve seen a much more traditional approach, and most ethnic chains are Americanized versions.


Q: What advice do you have for produce executives wanting to capitalize on the fast-casual boom?

A: One challenge is how to maintain and promote fresh produce during colder seasons, especially up north, when there is no local produce. Five Guys does it by telling consumers where the potatoes come from in each restaurant, featuring the location in friendly signage, and relaying a bond with suppliers. We’re all willing to pay a little more if we’re comfortable the product is safe and we know its origins.

Sweet potato fries are a trend, but ultimately, creating demand means limiting certain product and not overproducing. Otherwise, you risk the Krispy Kreme affect. When the consumers could only get Krispy Kreme donuts in a few places, they were perceived as special and unique, but when they appeared everywhere people stopped wanting them.


Q: What are your future predictions?

A: Over the next two to three years fast-casual will continue grabbing shares from full service, growing and outperforming the industry as a whole. We’re seeing shifts to that segment from fast food; McDonald’s improved price points and atmosphere. In full service, chains are putting in drive-through windows and creating fast-casual concepts. Those that aren’t fast-casual want to be.

Can The Produce Industry Rely On Fast Casual To Boost Consumption?

The fast casual phenomenon is, to some extent, a matter of creating a new category so that one can lead it. So Five Guys is not an infinitesimal burger chain behind McDonald’s, Wendy’s, Burger King and a dozen others but, instead, is a leader in “fast casual.” Equally, the growth of fast casual is impressive, but only because it starts from such a low base.

One reason fast casual is the focus of so much attention is because its emphasis on fresh, varied ingredients, more upscale décor and higher price points than fast food corresponds perfectly with the aspirations of journalists, professors and other knowledge-class workers anxious to differentiate themselves from the hoi polloi buying lunch at Subway or McDonald’s.

This is not to say that there isn’t a market here and, of course, produce vendors should pay attention and competitors should look at what these chains are offering. Still, we would see the development of these chains as akin to the growth of alternative retail formats. Just as a supermarket’s competition today is not just another supermarket but dozens of new formats and old formats featuring food that takes a slice of the business, so McDonald’s doesn’t just have to compete with a Burger King but has to deal with chains hitting it both on the premium and discount point.

At just 4.5 percent of the market, even if these chains over-index on produce usage by, say, 20 percent, they still would account for only just over 5 percent of produce usage in the restaurant business.

We did find Darren Tristano’s comments on Five Guy’s potato program intriguing, as they pointed to the way authenticity — the notion that these potatoes came from the right place — could outweigh any demand for local. Indeed, even the fact that Panera and others were adding strawberries to a summer salad menu struck us less as about consumer demand for local than about the desire to type the salads as seasonal and fresh.

The ubiquity of a product — note the rapidly expanding sweet potato category — strikes us as less likely to reduce demand than the product’s potential quality problems. Krispy Kreme donuts developed a cult following because each store had a neon sign advertising that the hot donuts were “hot now.” So Krispy Kreme offered a product — hot donuts just out of the oven — that other donut chains did not. So when the chain expanded, we doubt that the problem would have been excessive availability of delicious hot donuts. What happened was that they started selling donuts in supermarkets and they no longer had any competitive advantage.

Though fast casual will grow, it can’t grow too much. This is because other competitors would look to seize market share if that price point grows to a much bigger share of the market. If fast casual continues to grow, the best bet would be that chains both more economical and more expensive would edge into this middle category. Look at McDonald’s efforts to seize the gourmet coffee business with its McCafé line as a clue to what might happen here.

The point that new laws may lead restaurants to offer and highlight more produce-rich items is undoubtedly true, but whether it will lead consumers to order these items is another thing entirely. Having McDonald’s offer salads is a win for the produce industry, and helps McDonald’s divert criticism that it is a casual link in the growing girth of Americans. Still, it is a sobering thought to remind ourselves that if the highest selling salad was a burger, it would be discontinued for inadequate sales.

Although doubtlessly true, we might qualify the notion that consumers classify fast casual as a good value. We might say that those consumers who choose to eat at fast casual restaurants see them as offering good value. The vast majority of consumers who shop at limited service restaurants seem to think the value meal at the fast food places is a good value.

Although consumers report — and Technomic confirms — that consumers value fresh produce, we hear a different story from most operators. We continue to hear from mainstream restaurateurs who track consumer comments and purchasing that scarcely any of those comments refer to side dishes. It is the quality and quantity of the protein component of the meal that attracts lots of compliments, criticism and purchasing.

This leads to the two-spears-of-asparagus and-a-cherry-tomato phenomenon. Basically, because protein is the focus for Americans, this is where the food cost budget is typically placed. Then, although produce is less expensive than protein, starches are less expensive than produce. So, with the food budget busted on protein, menu planners turn to starches to fill up the plate. This relegates produce to an accent and provider of color. Thus, one often receives a large steak, a mountain of mashed potatoes and two asparagus spears with a cherry tomato.

There are exceptions, of course, and some chains seize that niche that values fresh produce. The question now is how the industry can grow that market. In all likelihood, that growth will come through more produce usage in larger market segments not counting on niche concepts to seize the mass market.