Fast casual faces down slowing sales, lagging traffic

Fast casual faces down slowing sales, lagging traffic

California Tortilla president Bob Phillips says his 37-unit fast-casual Mexican chain closed out the year with same-store sales down a couple of percentage points.

It was, he notes, “a first” for his 14-year-old, Rockville, Md.-based brand.

But, Phillips acknowledges, while it is “not business as usual, we’re OK at that level.”

“We’re working with our managers and franchisees, and the message to them is that it’s all about execution now,” he says. “People have money to spend on eating out, but they’re being a lot more selective and spending less.”

Fast-casual operators, long considered to be in a pricing sweet spot and popular with customers looking for convenient, high-quality menu items, are finding that their sector of the marketplace is not immune to the industrywide problems of eroding traffic and dwindling sales. Even the much-touted revenue windfall that was created by jittery consumers trading down from pricier casual-dining concepts appears finally to be ebbing, experts say.

And while restaurateurs joke darkly that “flat is the new up” in today’s troubled business environment, many have come to accept that there is a painful element of truth in that remark.

In an effort to help offset deep consumer unease and a pervasive resistance to spending, fast-casual operators are exploring a number of avenues, including tweaking menus, offering selective discounts, refining service, debuting new marketing programs, expanding into corporate catering and working with suppliers to bring down costs.

Even the sector’s leading lights, Panera Bread Co. [3] and Chipotle Mexican Grill Inc. [4], have had to make some delicate course adjustments, which included taking substantial price hikes of 6 percent to 7 percent.

But while fast-casual operators recognize the difficulty of operating in this environment, experts nevertheless say the sector appears to be performing better than the foodservice industry as a whole. Ron Paul, president of Technomic Inc., the Chicago-based foodservice research and consulting firm, says the leading fast-casual chains in Technomic’s Survey of Top 500 Chains outpaced the overall industry in 2008.

He says the list of top 10 fast-casual chains—which includes Panera, Chipotle and Panda Express—grew 13 percent as a group in 2008 compared with 2007.

“That’s good,” Paul says. “All-chain growth for the period was around 4 percent.”

While he observes that fast casual is still a fairly small category and not all players are performing as well as others, he expects the sector to continue to do well.

Paul also forecasts that while softness in the marketplace will persist through the first quarter of 2009, “by then we should be close to the bottom.”

“I don’t think there will be any more hits,” Paul says. “People are starting to come back to restaurants. Fast casual still is one of the fastest-growing segments, and it will outperform fast food, casual and fine dining this year. It represents a value compared to casual dining. But I think we’ve seen as much trade down as we’re likely to see. [Casual-dining] chains are getting more aggressive in bringing their customers back.”

Many full-service chains, in fact, have adopted a highly competitive line of attack as they attempt to lure spending-conscious customers back with discounted meal deals.

Nor are casual-dining operators the only ones who are fighting back. Quick-service chains also have become more aggressive in targeting fast-casual rivals, says Jeff Davis, president of Sandelman & Associates, a San Clemente, Calif.-based firm that specializes in consumer research for chain restaurants.

Fast casual “offered better fare, a better dining experience and lower prices,” he says. “They raised the game. But now some fast-food chains are paying more attention to [the dining experience]. Suddenly, Taco Bell [5] and Subway [6] and McDonald’s are looking attractive.”

Yet, even with consumer spending aimed downward and competition ratcheted up, fast-casual operators generally remain a pretty optimistic bunch when compared with the rest of the industry, says Hudson Riehle, senior vice president of research for the National Restaurant Association. According to the NRA’s Restaurant Performance Index for February, 42 percent of fast-casual operators expect sales to be higher in six months, the highest percentage of the five segments polled. At the other end, only 14 percent of fine-dining operators thought things would be better in August.

Fast-casual operators also have the strongest staffing expectations—a reflection of anticipated growth—over the next six months, he says, with 24 percent saying they plan to add new employees within that period. When it comes to capital expenditures, fast-casual players also tend to outpace the pack, with 56 percent saying they are planning to make large purchases within the next six months.

Fast-casual operators also appeared to be slightly less concerned about the state of the economy, Riehle says. Forty-two percent say they believe the economy was their No. 1 challenge, compared to 45 percent of all restaurateurs participating in the RPI.

“Fast casual always does better [than the rest of the industry] because it’s a hybrid—it combines the convenience of quick service with the food offerings of higher-check establishments,” he says. “Even in a recession, the demand for convenience continues.”

But while fast-casual operators continue to benefit from those areas of strength, none have been immune to the recent seismic shifts that have shaken the restaurant industry along with the rest of the economy. Even the more robust performers like Panera and Chipotle have been forced to adjust to changes in the marketplace.

Panera, which hiked prices at company-owned stores by 6.1 percent in the fourth quarter of 2008, is taking action on a number of fronts, including launching several new menu items and combo deals designed to drive purchases. The Richmond Heights, Mo.-based chain is testing a You Pick Four offer, an extension of its popular You Pick Two option, which would allow patrons to order a soup, salad or sandwich, a beverage and a baked good for an attractive price.

The chain also expects to test its first TV advertising in three markets as well an online advertising program.

Denver-based Chipotle, another of the segment’s more muscular brands, ended 2008 with a systemwide menu price hike of about 6 percent to 7 percent, which helped offset the negative impact of falling traffic in the fourth quarter. In addition, Chipotle says it plans to fine-tune its marketing message to attract new customers and install new menu boards to help simplify the ordering process for first-time visitors.

However, Chipotle says it would not compromise its quality and remained committed to its Food with Integrity program. The chain plans to continue to increase the amount of naturally raised, hormone-free meats and dairy products and organic and locally grown produce.

Maintaining quality and brand integrity during tough times, in fact, is a key to survival, observers say. Malcolm Knapp, president of Malcolm M. Knapp Inc., a New York-based restaurant consultant, cautions fast-casual operators that they must maintain brand promise to remain relevant to consumers.

“It’s easy to cut quality and service now,” Knapp says. “But customers will pick up immediately that you have degraded your product or service. In good times, they may give a pass, or maybe four or five passes, before they decide you’re not living up to your promise. But when things are difficult, like now, they might not give you another chance.”

The chains “that did the right things [in this environment] will profit,” he says. “The other guys won’t.”

Phillips says California Tortilla is working to keep its customers engaged in an effort to help retain brand relevancy during the recession. The chain offers a menu specializing in a range of California-Mexican selections. Each location features a “Wall of Flame,” which contains nearly 75 different hot sauces.

To communicate with customers, California Tortilla produces a promotional newsletter called Taco Talk that goes out to 80,000 subscribers. The newsletter is published eight to 10 times a year and features entertaining information about the brand as well as promotional information. For example, the March issue advertised California Tortilla’s Burrito Elito double-points promotion, which enables patrons to collect points for future purchases. Phillips says the chain also revamped its website.

While Phillips says it’s important to create promotional opportunities for customers, the brand also is focusing on maintaining a high level of execution.

“People have money to spend on eating out, but you have to execute wisely,” he says. “We’ve spoken to our managers and franchisees, and our training department is out in the field working.”

The brand also is continuing to expand its reach in 2009. Franchisees will open four new California Tortilla locations this quarter, including one at Bolling Air Force Base in the District of Columbia.

But as with the rest of the foodservice industry, expansion for fast-casual operators hinges on the availability of capital, which has been in short supply.

“We have had a pretty good pipeline, but we can’t get financing at the moment,” Phillips says. “Expansion is definitely slower, but we’re generally OK with that. I’m fairly conservative. It’s not good to have too much debt.”

Larry Reinstein, president and chief executive of Fresh Concepts LLC, the parent of the 16-unit Fresh City and four-unit Souper Salads [7], notes that sales at the Needham Heights, Mass.-based chain have declined about 5 percent. Reinstein attributes the decline largely to lower check averages and more sluggish weeknight traffic.

To help reverse the downward trajectory, he says the brand has adopted several measures, including introducing $5 daily specials.

“We introduced [the specials] four weeks ago, and we don’t know precisely what it is going to do yet,” he says. “But it sends the right message. If somebody is looking for something inexpensive, we have it. Hopefully, it will drive traffic.”

He allows that costs are being reduced in some areas, “but not where they would have any effect on the guest experience.”

The chain also is working to expand its corporate-catering business. Reinstein says it is becoming a more important component of the business, accounting for anywhere from 5 percent to 25 percent of sales, depending upon the location.

Fresh City also has been doing more with its Web-based eClub, which it is using to promote new items and special offers.

“We revamped our website over the past few months,” he says. “It’s stronger and more user-friendly than it previously was.”

In addition, the fast-casual concept is working to upgrade the dining experience for its guests, he says. The chain is recertifying employees, making certain that all managers and staff members are trained for every station and able to provide a higher level of service.

However, not all fast-casual players are reporting declines. James Greco, chief executive of the bakery-cafe concept Bruegger’s Bagels, says the 290-unit chain posted its 19th consecutive quarter of positive same-store sales for the period ended December 2008.

“[Fast casual] has been a good space to be in, given the events of the last 15 months of recession,” he says.

While Greco did acknowledge that some locations were reporting a slowing of comparable-store sales, he believes Bruegger’s is well-positioned to ride out the recession. In addition to offering guests quality menu selections at an affordable price point, Greco says the brand has created a guest experience “that people are not willing to easily let go.”

The chain also has examined its pricing strategies. For example, it added the popular Bruegger’s Duo about 18 months ago, which allows guests to order half a sandwich, a half-portion of soup and half a salad for a discounted price.

At the same time, Bruegger’s has been focusing on a “high-low” pricing strategy, which allows patrons to shop at either end of the pricing spectrum.

“We have inexpensive breakfast sandwiches at $2.99 or lunch sandwiches at $4.99,” Greco says. “But at the same time if someone is interested in something with more ingredients or more variety, we have new paninis, priced around $6.”

The chain also plans to step up its marketing efforts this year, which includes the broadcasting of radio spots.

Chicken finger specialist Raising Cane’s Inc. also is performing well in the face of the downturn, says Clay Dover, president and chief marketing officer of the 80-unit chain based in Baton Rouge, La. Year-to-date same-store sales are up 6 percent, he says, adding that the company saw “a strong January and a good February.” Average unit volume is about $2 million, although some stores generate as much as $3.5 million, he says.

He says the brand took a price increase the day after Thanksgiving, but it has not had a negative impact on traffic.

Dover says that Raising Cane’s plans to steer clear of discounting and continue to focus on product quality. “No dollars off, no ‘buy one, get one free,’” he says. “When the economic woes come, we’re not going to go to battle with 99-cent value meals. Somebody can always charge less. We’re going to focus on quality products served by a cool crew.”

Dover notes that while food costs have decreased since last year, purchasing remains a problem, particularly because the 80-unit chain doesn’t have a lot of buying muscle to flex. However, he says that given the economic environment, suppliers have become more willing to work with chain officials.

“My recommendation to anybody out there is to ask your suppliers for help,” he says. “We’ve been finding that our suppliers are willing to work with us.”

Labor is another area of opportunity operators can look to during the downturn, Dover says. Although there is another U.S. minimum-wage increase on the horizon this summer, many talented people are beating the bushes for work. When Raising Cane’s advertised for job candidates for its recently opened Dallas office, it received 10,585 résumés for 32 openings.

“This is a great opportunity for strong brands to strengthen ranks,” Dover says.

In the meantime, a growing number of brands with roots in other segments are taking a hard look at opportunities in the fast-casual sector. Family-dining chains including Denny’s [8], Friendly’s [9] and IHOP [10] are testing fast-casual-style concepts, while casual-dining brand Uno Chicago Grill debuted two Uno Due Go locations in the Dallas-Fort Worth airport late last year.

Although the concept features the casual chain’s signature deep-dish pizza, it also offers a range of other health-and-nutrition-oriented selections across multiple day-parts, says Jamie Strobino, senior vice president of new concepts for the West Roxbury, Mass.-based Uno Restaurant Group [11].

For example, breakfast items include a salmon and egg bagel, croissants, fresh fruit, yogurt and “power juices.” The lunch menu features paninis, flatbread pizza and deep-dish pizza, salads, organic teas, and other beverages. The dinner menu also offers pizzas and sandwiches such as lavash wraps that contain about 500 calories.

The concept’s marketplace format is generating an all-day check average of about $9.25. Open now for five months, the two Uno Due Go locations—one with 700 square feet of space and the second with 1,700 square feet—are generating “north of $1,000 a square foot,” Strobino says.

Strobino says many full-service companies are trying to break into the fast-casual segment, but some believe they can enter simply by offering a scaled-down menu in a smaller box.

“It’s really the same old same old,” Strobino says. “What you’re doing needs to be different and resonate with the consumer. While your brand DNA needs to permeate everything you do, people want something new and fresh. Uno gave [Uno Due Go] a lot of thought. You just can’t strip out some menu items and think you’re creating a different experience for the guest.”

Strobino says the company—which also is expanding its 140-unit quick-service Uno Express concept—would like to open about 40 company-operated and franchised Uno Due Go outlets over the next two years as part of its multitiered strategy.

“Ideally, we’d like to see franchisees of Uno Chicago Grill open Uno Due Go and Uno Express operations in their regions,” he says. “Where a market might not support two casual-dining restaurants, it probably would be able to support a combination of concepts.”