On the Margin
Pie Five

The fast-casual revolution is over

Blog: Sector is struggling in 2017, and worse problems could be coming

This post is part of the On the Margin blog. 

Earlier today, Pie Five reported that its same-store sales fell 16.2 percent in the quarter ended June 25.

It was the seventh straight quarterly decline. And now the chain’s double-digit declines are coming on top of double-digit declines: Its two-year, cumulative same-store sales are down more than 26 percent.

That’s a huge decline for a chain not facing something like a recession or a weather event.

The results brought down the fast-casual sector’s average same-store sales in the second calendar quarter to an average decline of 3.2 percent — not counting Chipotle Mexican Grill Inc.

This is an ugly period for a sector that not long ago was widely considered to be the restaurant industry’s future. Whatever fast-casual “revolution” there was is definitely over. 

I’ve never been big on the term “fast casual,” because it is essentially meaningless and ill-defined industry jargon. Yet such chains emerged as a supposedly higher quality fast food as consumers yearned for diversity in their restaurants. 

In 2014, investors threw money at anything with a simple menu and counter service. Noodles & Co., Shake Shack Inc., Potbelly Corp., and Habit Restaurants Inc. all went public and more than doubled in value on their first day.

Private equity firms — and a casual dining chicken wing chain — threw millions at concepts with as few as three units. 

As McDonald’s Corp. began having problems, mainstream media kept saying that it was dying and that fast-casual chains were to blame. 

Casual dining chains kept developing fast-casual models. Quick-service chains tried redefining themselves as fast casual, as if consumers would be more likely to go there because of their self-determined market sector. 

But as consumers cut back on dining out, or as they’ve opted for differing options, the surprising result has been a decline in same-store sales at some fast-casual concepts — worse in recent quarters than even beleaguered casual dining chains.

The fast-casual bubble has long since popped. Now it’s just getting worse.

This decline has hit some small concepts particularly hard, even leading entire chains to shut down, a relative rarity in a restaurant business in which investors are routinely willing to take chances on existing brand names. Well over 100 fast-casual restaurant locations have been closed this year alone.

There could be numerous reasons for the decline in sales at fast-casual restaurants, from high prices to quick-service chains’ improved marketing to narrow menus that are easy for consumers to reject. 

The problem is that lease costs remain historically high. So if consumers don’t start spending at fast-casual chains again, many more could be shut down or more fast-casual chains could file for bankruptcy protection to get out of some locations.

In the end, the investors who poured money into this sector could be left holding the bag. And that will make them less likely to invest in these concepts in the future.

None of this is to say that fast-casual concepts are all dying as people return to McDonald’s. But investors and restaurateurs looking the sector hoping to generate growth should think twice.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

TAGS: Finance
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