The key indicators are looking good: Gross domestic product and disposable personal income are up; unemployment is down; and gas prices and food costs have been relatively stable. Improvement is still slow, but consumers are starting to regain confidence.
While consumer confidence is improving slowly, restaurant industry growth is accelerating -- particularly among the Top 500 restaurant chains. Top 500 sales grew by a nominal 5.1% in 2012, to reach $245.1 billion. The number of units among the Top 500 totaled 211,435, an increase of 2.0%. The Top 500 chains represent 58% of the restaurant industry.
Looking beyond the Top 500 at the whole restaurant industry, Technomic measures a 5.2% nominal increase in sales in 2012 over 2011, to a total of $435 billion. This year, it expects growth to continue, though at a slower pace of 3.8%. Operators will continue to face a battle for “share of stomach,” due to consumers’ ongoing caution. And, unit expansion, rather than average unit volume, will drive the majority of sales growth.

Fast-growing Fast-casual

Fast-casual is the bright spot in the restaurant industry. Among the Top 500 companies, fast-casual sales rose by 13.2% over 2011. The segment includes concepts that offer a limited-service format, with per-person check averages generally between $8-12; food prepared to order; fresh (or perceived as fresh) ingredients; innovative food suited to sophisticated tastes; and upscale or highly developed interior design. 
Indeed, the top five fastest growing chains with sales over $200 million in 2012 were fast-casual: Dickey’s Barbecue Pit (which increased sales by 47%), Firehouse Subs (34%), Jersey Mike’s (26%), Raising Cane’s (26%) and Jimmy John’s (25%).
Enabling fast-casual’s growth in part is that its consumers tend to be from higher income groups, and those making higher incomes have been affected less by the recession and slow recovery. The segment also attracts younger consumers.
Fast-casual price points are attractive to consumers. For example, one can purchase a half-pound cheeseburger, fries and soft drink at Farmer Boys for $9.77, which is only slightly more than a similar meal at Wendy’s ($7.79), and significantly less than at Ruby Tuesday -- especially once a 15% tip is included ($15.62).
Technomic’s Consumer Restaurant Brand Metrics, an ongoing consumer study that measures attitudes on more than 60 attributes of specific restaurant brands, finds that fast-casual restaurants compete with the casual-dining segment on food quality, craveability and innovation. Health and nutrition are also strong fast-casual selling points -- no surprise, as “fresh” helps define the fast-casual segment. The study also shows that fast-casual outperforms midscale and quick-service restaurants, when it comes to décor, atmosphere and ambiance.

Menu Segments Rise

The effect of fast-casual is evident in the limited-service menu segments that are seeing the most movement. The segment with the highest growth rate in 2012 was Asian/noodle, which increased sales by 15%. Leading the segment were Panda Express, whose sales were up 19.8% to $1.8 billion, and Noodles & Company, for whom sales rose 18.5% to $355 million. Asian/noodle concepts appeal to consumers who are seeking authentic ethnic dishes or those that have been “Americanized.” Technomic sees opportunity for continued growth in this segment, particularly concepts that emphasize dishes and preparation methods that consumers can’t make at home.
The bakery-café subsegment is another area where growth -- 10% in 2012 over 2011 -- is outpacing the industry. The category is led by Panera Bread, which totaled $3.7 billion in systemwide sales, up more than 12%. Some smaller bakery-café chains (Specialty’s Café & Bakery, La Boulange Café & Bakery and Kneaders Bakery & Café) also posted enviable double-digit sales growth. 
Mexican, too, grew by 10% in U.S. sales over 2011. Category leader Taco Bell increased sales by 8.3% to $7.6 billion, thanks in part to its successful Doritos Locos Tacos. Meanwhile, Chipotle Mexican Grill’s sales are up 20.2% to $2.7 billion. Many Mexican chains have been taking advantage of consumers’ growing propensity for snacking, debuting both sweet and savory items that can also be sides, desserts or combo-meal options.
Other limited-menu segments with larger gains than the industry overall included chicken (Chick-fil-A, Popeyes Louisiana Kitchen and Zaxby’s each had notable increases); coffee cafés (category leader Starbucks increased sales by 8.7% in 2012); and sandwich (giant Subway grew by 6.1%).
Within the full-service segment, steak emerged as the fastest growing subsegment (6%). While Outback, the category leader, increased sales by 3.0% to $2.4 billion, Texas Roadhouse grew sales by 12.4% to $1.5 billion, and LongHorn Steakhouse grew sales by 12.1% to $1.2 billion. Lunch menus, happy hours and differentiated menu items are some of the ways these chains are driving sales, despite the increasing price of beef.
The seafood subsegment increased sales about 5%, thanks in large part to Bonefish Grill (sales up 11.2% to $512 million) and Joe’s Crab Shack (up 16.8% to $419 million). Category leader Red Lobster increased sales by a healthy 4.5%, to $2.6 billion.
It’s worth noting that while some menu segments are growing faster than others, all segments have their share of concepts that are succeeding and concepts that are losing sales and closing stores. For the most part, the U.S. restaurant industry is still in a “take share” market -- restaurants gain buzz and traffic primarily at the expense of others that can’t compete as effectively. 
Yet, it’s far easier to build sales and market share in a growing economy than in a declining one. Operators and the suppliers that serve them must seize the day and act boldly to position themselves for growth. 
Consumers are drawn only by strong differentiation, together with an exceptional value proposition. They’re looking for fresh, better-quality ingredients; a contemporary décor and ambiance; and interactive service formats to enhance their dining experience. 
Concepts can succeed in any menu category, if they offer a crystal-clear brand identity; a commitment to menu quality, craveability and continuous innovation; a commitment to ensuring that units are attractive, welcoming and comfortable; and a willingness to invest serious money.

Bumps in the Road

There are many opportunities ahead for the foodservice industry, but there are potential threats, as well. Here are a few that may cause consumers or operators to put on the brakes:
  • Commodity costs may require price increases or a decrease in the value promotions upon which customers have come to rely.
  • In some parts of the country, such as states with a large military population, sequestration cuts will hit hard.
  • Changes in healthcare have both employers and employees confused, and uncertainty about costs may cause consumers to reduce spending.

Beyond Restaurants

Restaurants comprise roughly two thirds of the total foodservice industry. In addition to restaurants, the foodservice industry also encompasses meals away-from-home that are prepared in establishments other than restaurants, such as schools, hotels and hospitals. Foodservice is an ancillary function at these establishments, rather than the primary activity.
Like restaurants, the “beyond restaurants” segment is further divided into subsegments. These subsegments are defined primarily by the location of the operation. The largest subsegments and Technomic’s growth expectations are listed in the above chart.
Subsegments expected to outpace the industry as a whole include retail hosts. Convenience stores and supermarkets have been raising the quality and freshness of their prepared food items and emphasizing variety, speed of service and portability. Healthcare foodservice is also growing faster than other subsegments, thanks in part to an aging population and in part to facilities’ ongoing improvement in food offerings to appeal to guests and employees alike.