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Fast-Food Fatigue Leads to 'Fast Casual'
Mar 9 4:03pm ET
By Michael Erman
NEW YORK (Reuters) - Say goodbye to the 99-cent burger and hello to the $8 sandwich.
Increasing disenchantment among Americans with traditional fast-food venues has spurred the growth of restaurants offering higher quality food in a similarly convenient setting.
"There seems to be a growing dissatisfaction with the quality aspect of the McDonald's and Burger Kings of the world. People are more focused on quality," said Fitzhugh Taylor, a restaurant analyst at Banc of America Securities.
The industry likes to call the emerging category of restaurants that offer healthier fare than their fast-food counterparts "fast casual" or "quick casual." They're supposed to combine the fast service of a McDonald's with the more sophisticated style of casual sit-down restaurants.
The fast casual category is among the hottest in the restaurant industry, accounting for about 3.5 percent of sales. According to Mitchell Speiser, an analyst at Lehman Brothers, market share is expected to double within four or five years.
A number of quick casual chains already exist, including Noodles and Company, Baja Fresh, Corner Bakery, Cafe Express and Pei Wei Asian Diner, a spin-off of Asian-themed restaurant P.F. Chang's China Bistro Inc.'s .
Some have already shown strong growth. Panera Bread Co. , a market leader, is trading at more than $55, up from less than $8 in May 1999, when the chain sold its Au Bon Pain properties. Panera said on Thursday its fourth-quarter net income more than doubled, reaching $4.8 million, or 32 cents per share, from $2.4 million, or 17 cents per share, in the year earlier period.
Another popular chain, Cosi Inc., is preparing for an initial public offering later this year in hopes of riding fast casual's rising acceptance.
Several recent trends, including surges in sales for organic foods, personal supplements and premium beverages, point toward a growing class of health- and quality-conscious American consumers.
Many analysts also attribute the demand for higher quality to an aging population, including baby boomers who have recently hit their peak earnings years.
"Fast food is not appealing to the baby boomer who is fighting aging like the plague, who is a little more discriminating in the quality of food they eat," Adams, Harkness & Hill analyst Scott Van Winkle said. "A consumer's expectation for food improves, I think, with age."
FAST FOOD TAKES NOTICE
The fast growth of fast casual holds promise, but also a threat, to the established chains. Traditional fast-food giants searching for new growth opportunities, including McDonald's Corp. , Wendy's International Inc. and I.C.H. Corp.'s Arby's, are experimenting with new offerings that could boost their sluggish growth. But if they don't move fast enough, the upstarts will eat up bigger share of the fast food market.
"The fact that fast casual is in its infancy and people are starting to take notice leads you to believe there's quite a bit of growth in that segment. There's not a tremendous amount of growth in traditional quick service. It's more of a market share game," Taylor said.
Speiser estimates that the fast casual sector is growing in a range of 15 percent to 20 percent per year, while fast-food growth is only about 2 percent per year.
Fast-food chains have looked to capitalize on the growth by acquiring fast casual properties and developing healthier product lines. McDonald's has purchased prepared sandwich line Pret A Mange and upscale burrito restaurant Chipotle. Wendy's is offering salads with exotic toppings like mandarin oranges, and Arby's has started a fancier line of sandwiches.
Successful fast casual chains can generate higher returns on investment than traditional fast food. The perception of higher quality allows them to charge more, resulting in higher sales on a similar investment.
KITCHEN SUBSTITUTE
Analysts said longer work hours and an increasing number of two-income households have made Americans more time-conscious, which has contributed to the rise of the sector.
"People are willing to pay a couple dollars more for a better dining experience, yet don't want to sacrifice the convenience of quick service," Speiser said.
"Fast casual combines all the elements of what the on-the-go consumer, which seems to be almost everyone these days, is looking for," he said.
Paul Westra, an analyst at Robertson Stephens, said that fast casual restaurants are becoming "kitchen substitutes," suggesting that for many consumers eating out has become more efficient than cooking.
Westra said a $10 basket of groceries a decade ago would cost a consumer $19 on average if prepared in a restaurant. Now, he said, the same basket of supermarket food would only cost $12.50 at a restaurant.
"The relative cost of outsourcing a meal actually makes sense," he said. |
