Fast-Growth Foodservice Segments
Manufacturers can find growth opportunities with partners in foodservice—everywhere from fast casual to fine dining.
It’s a familiar refrain by now: Fast-casual is, yet again, the restaurant industry’s fastest growing segment.
The darling of the foodservice world continued its impressive climb in 2013, with sales for fast-casual concepts on Technomic’s Top 500 Chain Restaurants list (ranked by U.S. system-wide sales) rising 11% last year to $27 billion. That slightly lags behind the 13% increase recorded by the fast-casual segment in 2012. Still, 11% sales growth—and fast-casual’s 8% unit growth to more than 21,000 stores—beats the performance of every other restaurant segment in 2013.
Fortunately, fast-casual isn’t the only bright spot in the industry. Also seeing strong growth: fine dining. The steakhouses and other high-end concepts that make up this segment of the top 500 posted system-wide sales growth of 7.2%, to more than $3.1 billion, last year. That pace is nearly double that of the segment’s unit expansion—an also-healthy 3.7%—indicating that fine-dining brands aren’t over-relying on opening new stores to drive sales higher.
Likely influencing the expansion of both fast-casual and fine-dining is the fact that higher-earning Americans see their financial situation improving. In a Technomic poll this spring of 500 U.S. consumers, 7% described themselves as currently “very well off”—more than twice the 3% who said the same in May 2013.
A plurality of consumers (42%) said they are “getting by;” that share is unchanged from 2013. The proportion of those who identified themselves as “living comfortably” dipped to 39% from 45%. It can be concluded, then, that consumers were more likely to report that their financial situation had improved than worsened in the past year.
Still, the economic recovery is uneven—12% of consumers this year said they are struggling financially, a slight uptick from 11% in 2013. For many lower- and middle-income earners, real income has remained stubbornly stagnant, thanks in part to rising costs for consumer services (education, childcare, etc.) and an exceedingly harsh winter that saw consumers stung by higher utility bills. Therefore, many foodservice operators continue to operate in a challenging take-share environment.
More than halfway through 2014, recognizing how consumers’ foodservice priorities and interests are shifting is a survival strategy as much as anything else. Those foodservice industry segments, sub-segments and brands that are recording the strongest growth are ones that are finding ways to resonate with customers on multiple levels. They’re delivering “value” in terms of not just price and food and beverage quality, but also convenience, ambiance and satisfying service—the factors that combine to make a foodservice occasion truly worthwhile.
Following is a look at the restaurant industry’s strongest performers—what they’re doing; why they’re appealing; and the outlook going forward.
With fast-casual propelling the category’s growth, sales for all limited-service restaurants (LSRs) rose 3.5% in 2013 to more than $231 billion. The top 500 chains, which accounted for nearly 84% of LSR sales, fared slightly better, seeing sales rise 3.8% to more than $186 billion.
Within the still growing fast-casual segment, menu categories that did particularly well in 2013 included burgers (sales up 10.4% for chains in the top 500) and bakery cafes (sales up 9.3%). In fact, four of the top 10 fastest growing fast-casual chains last year were burger concepts: Burger Fi, Mooyah, Shake Shack and The Habit Burger Grill. Smashburger, which came in at No. 11, also had notable success in 2013: The chain closed the year with sales of nearly $215 million, up 32%, and 240 units—an increase of 29%.
The dynamic success of fast-casual, better-burger concepts contrasts with the slow growth recorded by QSR burger chains. McDonald’s, perennially the No. 1 restaurant chain in the country and the world by sales, saw U.S. system-wide sales rise just 0.7% in 2013.
Bakery cafés, for their part, were led by Panera Bread (No. 6 on the Top 500 list), which posted a sales increase of 10.2% to more than $4.25 billion. Bakery cafes’ expanded focus on offering out-of-the-ordinary new breakfast, dinner and snacking options—from quinoa-spelt scones (Le Pain Quotidien) to quiche (Specialty’s Café & Bakery) to functional smoothies (Panera)—has helped them maintain relevance with today’s fickle consumers. The strong flexibility, too, that leading chains such as Panera and Corner Bakery offer customers in terms of mix-and-match menu combos is a powerful incentive for guests seeking to manage portion sizes, choose more-healthful options and/or explore new tastes.
Looking forward, expect to see accelerated fast-casual expansion in smaller urban, suburban and rural markets, as larger markets become more saturated. And, while there’s still room for sales and unit growth for fast-casual burger and bakery-café chains and for the also maturing Mexican menu segment, fast-casual’s pizza and Asian/noodle menu segments are poised to be the category’s next rising stars.
Consider Athens, Ga.-based Your Pie, one of several emerging fast-casual pizza chains, saw sales rise more than 27% in 2013 to $15.3 million. Seattle-based MOD pizza, currently with 16 units, announced in May that it had received $15 million in new funding. And, Pasadena, Calif.-based Blaze Fast Fire’d Pizza, whose investors include LeBron James, Maria Shriver and Boston Red Sox co-owner Tom Werner, was set to open its 25th unit in July and its 60th by this December.
Within the Asian/noodle menu segment, Panda Express, Noodles & Company, Leann Chinn and WaBa Grill all posted double-digit percentage sales growth in 2013. Panda Express ranks at No. 30 among the top 500, and the fact that—similar to what was seen with Panera—the 30-year-old chain managed a sales increase of nearly 11% last year; and, unit growth of almost 5% shows upstarts aren’t the only concepts warranting attention in fast-casual. Panda also recently embarked on a plan to roll out online ordering system-wide; test an in-restaurant tea bar; and trial new menu items, such as bao and grab-and-go, options.
It’s this kind of big-picture thinking, taking into account what consumers want to eat and drink right now—as well as when and how they want to make their purchases—that will position both large chains like Panda Express and smaller players for continued growth.
While fast-casual remains the limited-service category’s undisputed growth leader, some QSR segments and brands are seeing noteworthy success, too. Take Papa John’s, which in June tied with Pizza Hut for No. 1 in customer satisfaction among LSRs, according to the 2014 American Customer Satisfaction Index: The chain’s sales rose 4.2% to nearly $2.5 billion in 2013. Domino’s Pizza, still enjoying rising sales from a menu overhaul that began four years ago, and an increased emphasis on offering easy-to-use mobile and online ordering/payment options, posted a U.S. sales increase of 8.6% to $3.8 billion.
Coffee cafés are another highlight of the limited-service category. Segment leader Starbucks, the No. 3 U.S. restaurant chain overall, grew sales 10.6% in 2013 to more than $11.7 billion. Dunkin’ Donuts, increasingly positioning itself as a destination for savory breakfasts/lunch and indulgent snack beverages, recorded a sales increase of 7.6% to north of $6.7 billion.
Targeting customers for between-meal occasions—as Starbucks is doing with its La Boulange baked sweets and with the Starbucks Evenings adult-beverages-and-snacks program being rolled out in select markets—is helping these chains grow incremental sales and remain top-of-mind with consumers throughout the day.
Steakhouses are a standout within the full-service restaurant category, with their more-affluent customer base less affected (at least in terms of dining-out behaviors) by economic fluctuations than other menu segments’ core audiences. Industrywide, steak concepts’ sales rose 6.5% in 2013 to $16.8 billion—well ahead of the tepid 2.4% growth recorded by all full-service restaurants.
Two noteworthy performances in the steakhouse segment were turned in by Del Frisco’s Double Eagle Steakhouse and Mastro’s Restaurants. Sales at Del Frisco’s Double Eagle Steakhouse climbed a whopping 16% in 2013 to $144.6 million, while units were flat at 10. Mastro’s Restaurants sales rose 10% to $154 million, also without any accompanying unit expansion.
More broadly speaking, the success of steakhouses and fine-dining isn’t only about the good fortunes of these concepts’ core customers. A high-end meal on the town represents an accessible (if occasional) indulgence for many consumers who don’t enjoy top-1% status. These consumers may not be able to afford a luxury automobile or exotic vacations, but a several-hundred-dollars meal—highlighted by unforgettable food and beverages and top-notch service—is an indulgence within reach. This is true not just for middle-aged and mature consumers—Millennials and younger Gen Xers keen on treating themselves to a memorable dining experience are an increasingly important contributor to fine-dining concepts’ bottom line.
Other leading growth segments within full-service were Mexican (sales up 3.4% industrywide, although only 0.8% for chains in the top 500) and varied menu. Varied-menu concepts, such as Applebee’s and T.G.I. Friday’s, have faced significant headwinds in the past several years, as consumers seeking high-quality fare in a more-convenient and often less-expensive setting have turned to fast-casual for some of their dining-out occasions.
Aggressive price promotions, such as Applebee’s Two for $20 (two entrées and one appetizer for $20), have been one go-to strategy for varied-menu concepts looking to stem this tide. More notable, though, is an increased focus on beverage programs: Varied-menu concepts, such as those at Yard House, Cooper’s Hawk Winery & Restaurant and The Rock Wood Fired Pizza & Spirits, are realizing growth through an emphasis on out-of-the-ordinary, regional and/or exclusive-to-the-chain adult beverages—craft beers and on-tap wines, in particular. Sales at Cooper’s Hawk, currently No. 284 on the Top 500, rose more than 26% in 2013 to $91 million. Darden Restaurants-owned Yard House saw sales climb 17.5% to $370.1 million.
A Look Ahead
What will the remainder of 2014 hold for the restaurant industry? More challenges, certainly. In late June, Technomic revised its industry forecast to 3% growth for the year, down from its initial projection of 3.5% growth. This shift resulted largely from a sluggish recovery following the severe winter of 2013-2014.
Both the limited- and full-service restaurant categories will be challenged to build traffic and sales through a combination of differentiated menu offerings and more convenient ways for guests to buy and enjoy their favorite fare. Operational and menu innovation, and a commitment to delivering new ways for customers to access and use a brand, will be vital for all concepts looking to speed growth through the rest of this year and into 2015.