June 25, 2015    5 minute read

The Growth of Fast Casual Dining

   June 25, 2015    5 minute read

The Growth of Fast Casual Dining

The restaurant industry dates back to the 18th century, where it is believed that early pioneers such as Antonie Beauvilliers brought together the key elements of restaurant dining, consisting of an elegant atmosphere, regimented waiters, a fine cellar and superior cooking. It was in the midst of the 1960’s when Peter Boizot broke the restaurant mould in London with the introduction of the fast casual dining chain, Pizza Express.

What is fast casual dining?

The fast casual dining market acts as a hybrid market, hitting the sweet spot in between a full service, casual dining and a fast food experience. The key ingredients behind the success of chains such as Chipotle, Shake Shack and Gourmet Burger Kitchen consist of a larger more custom menu with healthy, fresh and high quality ingredients, placed in an ambient environment. When combined with a waiting time of up to 10 minutes varying on the type of outlet, the user is able to engage with the core competencies of both dining experiences. As a result this draws in customers from many generations. By strategically pricing items between fast food and restaurant prices this enables the chain to optimise profits.

The models behind this disruptive force in the restaurant include the regular order and drop, used by the likes of Nando’s, the assembly line used by Chipotle and the order and snack model used by Panera Bread, Paris Baguette and itsu. The assembly model in particular offers a high degree of customisation as it effectively brings the kitchen to the customer as one has the ability to see everything from the production method and products, enabling them to identify and manage the quantity of the fillings and toppings, which isn’t available at a regular fast casual diner. Thus proving to be highly innovative.

Growth potential

Over the past three decades, this emerging sector has increasingly grown its slice of the restaurant industry, now acting as the fundamental driver of growth. According to Mintel, the combined sales of American fast-casual outlets rose by 10.5% last year, compared with 6.1% for fast-food chains. In particular, sales of Del Frisco’s Grill and Shake Shack increased by 84% and 40% respectively over the past year. This well reflects the shifting consumer habits and taste towards a more efficient dining sector.

Although the forecast for growth seems promising, several chains have failed to maintain sales to suffice the market’s appetite. Stock prices of Noodles & Co (NASDAQ:NDLS) and El Pollo (NASDAQ:LOCO) have now decreased by 55% and 13.3% respectively, compared to their opening price, where on the first day of trading they increased by 104.2% and 43%, further suggesting that these stocks may have been overvalued from the outset. However, this isn’t an industry wide trend, as Shake Shack’s (NASDAQ:SHAK) stock price has increased by 51% since its first day of trading. Despite only having 66 outlets (34 in the USA, 32 internationally) Shake Shack has been able to continue to grow due to their conservative approach to spending on marketing and unrivaled commitment to customers by providing them with a dedication to quality and customer service, supplementing the growth of demand. As claimed by The New York Times, this effectively makes Shake Shack an “anti-chain chain”.

Challenges for the industry

Whilst this market seems like an epicentre for growth, Starbucks has recently announced that it will shut down all 23 of its stores in the bakery chain, La Boulange, which it acquired in 2012 for $100 million in cash. Despite La Boulange’s delicacies accounting for a significant portion of Starbucks’ 16% increase in food sales over Q2 2015, the hope to build a premium artisanal bakery brand has quickly diminished. Starbucks claim that they are closing the stores as they “aren’t sustainable for the company’s long-term growth” hinting that the merger of management cultures and that growth opportunities are not sustainable in the long run. This may impede Starbucks’ growth as it may prove to be difficult to be new chains with the scale it has reached with its cafes.

Although the sector is relatively small in comparison to casual dining and fast food, it’s strong growth has fundamentally been fueled by the expansion of new stores and new brands entering this industry. Black Box Intelligence’s research confirms such as the fast casual’s share of overall restaurant sales from Q1 to Q3 of 2014 was 7.5%.

With relatively low barriers to entry, potential challenges that the industry faces include market saturation. The rapid expansion of this segment could lead to a lack of brand diversity and an over-saturation in key markets. Traditional fast food restaurants that have a significant brand identity are also acting as a threat as they are shifting more towards their fast-casual counterparts. Quick service restaurants are starting to provide customers with a larger menu offering healthier and better quality options. By strategically pricing these items at a lower price point will prove to be the fast casual segments greatest fear yet.

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