On the Margin
Shake Shack restaurant

Fast-casual sector comes back to earth

This post is part of the On the Margin blog.

When Chipotle Mexican Grill Inc. same-store sales began to slow last year and then fell off a cliff following a series of foodborne illness outbreaks, many wondered who would benefit.

After all, Chipotle customers still have to eat, and they’ll want to eat somewhere, right?

The early money was on other fast-casual chains that were most likely to be located near Chipotle units and which, at least in theory, have similar customer bases.

But that has not been the case, at least so far. Fast-casual chains’ same-store sales increased 2.5 percent on average in the fourth quarter, based on the companies’ most recent earnings reports.

That’s not too bad, considering that Chipotle skewed the numbers with its 14.6 percent decline. Indeed, take Chipotle out of the equation and the average same-store sales increase was 4 percent, which would best all sectors but coffee shops and beverage chains.

Plenty of fast-casual chains enjoyed a strong quarter, including Shake Shack Inc., where same-store sales rose 11 percent, and Zoe’s Kitchen Inc., which reported 7.7 percent growth.

At the same time, however, slowing sales were not uncommon. Qdoba, a theoretical benefactor of Chipotle slowness, reported only 1.8-percent same-store sales growth in its quarter ending Jan. 17. If any fast-casual chain were to benefit from Chipotle’s slowness, it would be one of its primary competitors in the fast-casual burrito segment.

Another theoretical benefactor would have been Noodles & Company. But its same-store sales fell 0.9 percent in the quarter ended Dec. 29. It is now sending out mass coupons to get customers in the door.

When sales fall at a restaurant chain, the theory is that they’re losing customers to similar concepts. And so it only goes to reason that a sudden sharp decline at sales at Chipotle would benefit concepts with similar price points or menu items.

But the fourth quarter sales numbers show it’s not quite as simple as that. Indeed, the market research firm NPD Group noted that “no particular outlet or chain” has been the real winner of the Chipotle lost customer sweepstakes. Rather, the customers scattered to a bunch of quick-service and fast-casual concepts.

In addition, the quarter demonstrated that fast-casual chains are no different than any other sector, at least when it comes to sales cycles.

The fast-casual sector has been the beneficiary for years of a belief among some that the sector can do no wrong.

Longtime industry observers, however, know that slowdowns and declines are inevitable because customers are fickle and the restaurant industry is really competitive.

The fourth quarter simply proved that these restaurants are no different.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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