New Concepts Continue to Boost his Restaurant Segment

November 20, 2013

CIRE-NovDec13-p23a-WEBThe fast-casual food segment may be small, but its growth is outpacing the restaurant industry, attracting new competitors and spurring evolutionary changes from quick-service and full-service brands.

Fast-casual sales were about $31 billion in 2012, up 13 percent from the prior year. That’s a huge increase from 2005, when segment sales were about $12 billion. Fast casual makes up about 7 percent of the $435 billion restaurant industry, but that share will continue to grow. Technomic forecasts a 3 percent nominal increase in restaurant industry sales in 2013 over the prior year but expects fast-casual segment sales to rise by about 10 percent.

Site Selection Factors

Fast casual is generally defined as establishments with a limited-service or self-service format, check averages above $9, food prepared to order, fresh (or perceived as fresh) ingredients, innovative food suited to sophisticated tastes, and upscale interior design. Fast-casual concepts tend to attract more lunch than dinner business, but several chains are courting evening guests with enhanced service, comfortable dining rooms, and adult-beverage menus.

Growing fast-casual brands target the same locations that other restaurants — especially quick-service concepts — do. However, fast-casual concepts generally don’t have a drive-thru, so their units — averaging 2,000 to 4,000 square feet, depending on the brand, location, and other factors — are also suitable for strip centers and city centers. At the same time, their focused menus don’t require the large kitchens that full-service operators need.

Because most of their business occurs at lunch and their customers tend to have higher household incomes, fast-casual chains target areas with both midday traffic and residents with incomes greater than $50,000. But their appeal enables them to thrive in cities, suburbs, and small towns.

The segment has much going for it in today’s economic and social climate. Fast-casual restaurants give casual-dining consumers an opportunity to trade down to lower-priced yet high-quality fresh food. At the same time, they allow quick-service customers to trade up to a “third place” environment that offers affordable food quickly at a cost that is usually only a few dollars more than typical fast food.

Fast-casual consumers tend to be from higher-income groups, and those making higher incomes have been affected less by the recession and slow economic recovery. The segment also attracts younger customers. However, as the segment continues to grow, its customer base becomes more mainstream.

Fast-Casual Evolution

The fast-casual segment has origins in what used to be called “home meal replacement” and “adult fast food.” Chains such as Fuddruckers, Au Bon Pain, and Taco Cabana featured food, atmosphere, and prices that were a step above quick service, in an effort to offer casual-dining quality in a limited-service setting. In the 1990s, fast-casual concepts such as Boston Market, la Madeleine Country French Café, and Einstein Bros. Bagels raised the bar on convenience and efficiency, which made them even more competitive with quick service. Throughout the segment’s evolution, some concepts have adapted to remain relevant, and others have not.

Today, leading fast-casual chains have built on the strengths of their predecessors but have continued to stay ahead of consumer demands for comfortable and contemporary décor, fresh and better-for-you food, and social consciousness.

Looking ahead, there are several areas where tomorrow’s leaders will differentiate themselves. Leading chains are capitalizing on their successful formulas to create new concepts. For example, Chipotle’s ShopHouse Southeast Asian Kitchen features the company’s proven format offering customization of high-quality ingredients, applied to Vietnamese, Malaysian, and Thai flavors served on rice, noodles and bahn mi.

Fast-casual leaders are looking at ways to enhance varying points of service. On one hand, Panera and McAlister’s Deli are testing drive-thrus to up the convenience factor. At the other end of the spectrum, Wingstop has debuted a casual-dining concept, Wingstop Sports, with a sports-bar-and-grill atmosphere, plenty of HD TVs, and a full food and drinks menu.

Some emerging concepts are taking the menu to the next level, aiming to offer fine-dining cuisine in a limited-service format. Tom & Eddie’s, a higher-end better-burger concept developed by two former McDonald’s executives, features menu items developed in collaboration with local college culinary programs. Its $13 average check is slightly higher than the average fast-casual restaurant’s.

And several growing fast-casual concepts are looking for new ways to engage their media-savvy customers with LCD menu boards, HD flat-panel entertainment, complimentary Wi-Fi, social networking, and entertaining but useful mobile apps.

Growth Concepts

A look at growing chains within fast casual finds both national leaders and emerging upstarts. Among the larger chains, Jimmy John’s Gourmet Sandwich Shop opened 231 units in 2012, for a total of 1,560, which was the largest increase in U.S. units for a fast-casual chain in 2012. Chipotle Mexican Grill and Panera Bread netted the next largest increases for the year, adding 174 and 163 units, respectively.

In terms of ownership structure, among the top 150 fast casual chain restaurants, 47 percent of the units are company owned and 53 percent are franchised. Ninety-seven, or 65 percent, of the top 150 fast-casual brands have at least one franchised unit.

The growing fast-casual chains reveal some menu-segment potential. Niches like bakery cafés, fresh Mexican, and so-called “better burgers” are already well represented by leading brands such as Panera, Chipotle, and Smashburger. However, the ongoing success of these brands, as well as the reasons that consumers like them, indicate that there still may be plenty of opportunity in those menu segments.

In the ranks of the fastest-growing fast-casual chains with less than $50 million in U.S. sales, three categories are represented most often: burgers (Bareburger, Umami Burger, Mooyah, Elevation Burger, and Jake’s Wayback Burgers), Mexican (Hot Head Burritos and Lime Fresh Mexican Grill) and healthy (Fresh Healthy Café, Muscle Maker Grill, and The Veggie Grill). Technomic is watching other segments that have significant growth potential and don’t currently have a leader with national coverage, in particular, Mediterranean, made-to-order pizza, barbecue, upscale chicken, and “green” fast-casual concepts.

Technomic expects that fast-casual growth will continue to outpace industry growth, and that ongoing innovation and new development will come from both category leaders and upstarts.


How a Fast-Food Chain Plans to Bulk up on Quinoa, Smoothies

November 19, 2013

AR-310199982.jpg&maxw=368&q=100&cb=20131119093150If Matt Matros has his way, Protein Bar’s quinoa bar-ritos and protein smoothies might just become the next burger and milkshake.

Spurred by a $22 million investment by private-equity firm Catterton Partners, Mr. Matros’ four-year-old healthy fast-casual restaurant chain is poised to go national and aims to hit 40 locations by the end of 2015. At least one analyst says Protein Bar eventually could have between 300 and 1,000 stores across the country.

Since opening his first restaurant across the street from Willis Tower in 2009, Mr. Matros, 34, has grown the chain to 12 locations throughout the Chicago area and Washington. The 400-person company projects nearly $20 million in sales this year.

By the first quarter of next year, Protein Bar will open two more Loop outlets, another in Streeterville and one in Lincoln Park. Protein Bars will also debut in Evanston and Schaumburg, as well as in Denver and Boulder, Colo.

The chain will hire about 15 corporate operations staff and about 25 to 40 employees per new store, according to Mr. Matros, founder and CEO.

“We were the starting pitcher (in the healthy fast-casual game), but it’s still only the second or third inning,” he says. “It’s a long game, and we’re not the only player who’s going to be successful, but we like to think we’re well-positioned.”

The need to expand quickly is paramount, agrees Darren Tristano, an executive vice president at food consultant Technomic Inc. in Chicago. “You cannot hide a successful concept like Protein Bar very long,” he says. “You’re going to see other burrito-inspired brands start to pull in its aspects.”

Two older competitors also have built their presences in Chicago and elsewhere. Freshii, a New York-based chain launched in 2005, boasts 13 area locations, while Palm Springs, Calif.-born Native Foods Cafe, a vegan fast-casual concept that has been around for two decades, has opened three Chicago outlets in recent years.

The urgency is heightened by the fact that growth in the overall market for fast-casual dining—which offers a higher-end selection and atmosphere than typical fast food—while still robust, is slowing down.

Chipotle Mexican Grill Inc., which helped create the category, opened its doors in 1993. Two decades later, fast-casual restaurants will generate about $35 billion in sales this year, according to Technomic estimates, up from $31 billion in 2012.

‘THE NEW STARBUCKS’

Protein Bar, Mr. Tristano says, differentiates itself by creating healthy food that tastes good. The chain charges premium prices—about $10 for a salad, for example—with ingredients such as antibiotic-free chicken and a salad mix that includes kale and spinach.

“They pull in an affluent corporate customer, as well as the millennials who feel that they’re entitled to it,” he says. “Protein Bar is the new Starbucks—it’s all about status.”

Those loyal customers, who often line up out the door of Protein Bar’s Loop locations between noon and 1 p.m., is one reason that Greenwich, Conn.-based Catterton invested. The firm previously has taken stakes in restaurants including Noodles & Co., which went public in June, and P.F. Chang’s, as well as health-focused brands such as Core Power Yoga and O.N.E. coconut water.

“Many folks have tried to do ‘better for you,’ but no one has combined that with the taste and crave-ability that Matt and his team have achieved,” Catterton partner Jon Owsley writes in an email. “We think that is a winning combination that will be tough to beat.”

As the company expands into Chicago’s neighborhoods, Protein Bar will have to move beyond its primary lunch business and prove that it can lure customers for dinner—long the Achilles’ heel of fast-casual chains.

Mr. Matros says Protein Bar’s stream of new menu items is up to the challenge.

“Our job is to stay in front of the consumer by continuing to introduce them to nutritionally relevant items,” he says. “We want to exist in the sweet spot between . . . foods you’ve never heard of” and ingredients that are ubiquitous.


For American Restaurant Chains, the Future is Mexican

November 15, 2013

1025_fast_food_mexican_630x420Yum! Brands’ (YUM) most profitable fast-food chain in the U.S. isn’t Pizza Hut or KFC–for years, it’s been Taco Bell. With the success of Doritos Locos Tacos, the upscale Cantina Bell menu, and breakfast (available nationwide next year), Taco Bell’s comparable sales have been up for seven consecutive quarters, including a 2 percent increase in the most recent period.

The chain’s financial results are just one sign of the growing popularity of Mexican food in the U.S. Data from food researcher Technomic show that sales at Mexican-style restaurants grew 9.3 percent in 2012, outpacing the 5.8 percent increase among all limited-service restaurants. In fact in the U.S., tortillas outsell burger and hot dog buns, tortilla chips eclipse potato chips, and salsa tops ketchup, according to an Associated Press report.

“We know that for the U.S. to have a successful year, it’s important for our most profitable U.S. brand to do well, and we certainly have a lot going in our favor at Taco Bell,” said Yum chief executive officer David Novak during a recent earnings call. The late-night gordita joint now accounts for 60 percent of Yum’s operating profits in the U.S. There are 5,704 Taco Bells in the U.S., about 32 percent of Yum’s total in the country.

The burger-and-fries business, meanwhile, has seen better days. McDonald’s (MCD) same-store sales grew only 0.7 percent last quarter, Wendy’s (WEN) was up 0.4 percent, and Burger King (BKW) fell 0.5 percent.

Mexican quick-service restaurants offer “high value and appeal with millennial consumers and affluent groups,” says Darren Tristano, an executive vice president at Technomic. Popular burrito purveyor Chipotle (CMG) has led the way, and the 1,525-store chain just reported a same-store sales increase of 6.2 percent in the last quarter.

Even casual-dining giant Chili’s Grill & Bar (EAT), where comparable sales fell 1.9 percent last quarter, is looking for a rebound via its Mexican menu. “When you look at tacos, quesadillas, fajitas, that category represents really the biggest category that we have at Chili’s. Bigger than burgers,” said Wyman Roberts, CEO of Brinker International, Chili’s parent company, during an earnings call on Wednesday. Chili’s Mexican food, he said, will give the chain an edge over casual-dining rivals.

The plan for Chili’s is to focus on that part of its menu. A spokesperson for the restaurant chain wrote in an e-mail: “Mexican is a menu category our guests have given us all the permission in the world to expand, and with Southwestern ingredients already a part of our flavor profile, it is the natural next step in Chili’s menu innovation.”

So while burger and pizza chains remain the most popular in the U.S., diners and those trying to capture their attention are increasingly moving in a south-of-the-border direction.


Olive Garden Shrinks Meals for Millennials

November 14, 2013

CHICAGO – Olive Garden, purveyor of the Never Ending Pasta Bowl, has discovered portion control.

In an effort to attract millennials and boost flagging sales, Darden Restaurants Inc.’s Italian restaurant chain is introducing small plates, including Parmesan asparagus and grilled-chicken tapas. This amounts to a 180-degree turn for a chain that has long sold big portions to eaters who like a deal.

The challenge for Olive Garden will be encouraging diners in their 20s and 30s, many of whom shun chain restaurants, to drop by for nibbles without alienating loyal customers who convene for family feasts.

For millennials, “social occasions generally don’t tend to be large meals in a traditional sense,” said Darren Tristano, executive vice president at Technomic Inc., a research firm based in Chicago. “They’re looking for items they can share, sample, that allow them to graze.”

Small plates may not be “a clean fit” for Olive Garden, given its focus on families and boomers, he said.

Olive Garden created the tapas recipes about six months ago and began testing the food earlier this year in Atlanta, Los Angeles and Grand Rapids, Mich.

After offering the dishes for a limited time last month, the chain plans to add them to the permanent menu in December. It’s also trying out more small plate varieties such as garlic hummus, chicken meatballs and tortelloni stuffed with cheese, to gauge customer response before introducing them nationwide.

Olive Garden has been struggling in the aftermath of the downturn as Americans eat out less. Efforts to lure cash-strapped diners with such deals as three-course dinners and $6.95 lunches haven’t helped much.

As a category, sit-down restaurants are lagging behind fast food and fast casual joints. Sales at full-service restaurants will rise 2.9 percent this year to $208.1 billion, compared with a 4.9 percent gain for fast-food eateries, according to National Restaurant Association estimates.


MANGIA! Eataly is almost here, with its cornucopia of gourmet foods. Big deal? Yes, very much.

November 13, 2013

Eataly—New York’s celebrity-sponsored food emporium that is the definition of excess—is almost ready to devour River North. But will the neighborhood’s frequent-diner residents and tourists slaver over it?

Part restaurant, part gourmet grocer and all show, Eataly is set to open off North Michigan Avenue at the end of November. It will sprawl over 63,000 square feet—roughly the footprint of five Trader Joe’s markets and bigger than its Manhattan predecessor—on two floors and boast eight Italian-themed restaurants plus fresh produce, seafood, meats and cheeses; prepared foods and sandwiches; an in-house brewery; wine and cocktail bars; and specialty items like cured boar’s meat and $227.80 bottles of balsamic vinegar.

Unlike in New York, this Eataly will offer fried foods and a “Nutella station,” too. A customer might spend $2 for a slice of fresh focaccia or $200 for a truffle-based dinner.

“We think we can add to the landscape of food,” says Adam Saper, an Eataly partner. “We have very high hopes, and we think this is going to be an unbelievable site.”

Eataly’s partners chose River North on purpose. The neighborhood is home to 52,000 residents, nearly a third of them between 25 and 34 years old. The median income is $62,803. During weekdays, the area also is crowded with office workers. Eataly expects 70 percent of business to come from people who live or work nearby. And, of course, there are all those tourists, whom Eataly is counting on to pack its markets on weekends.

CELEBRITY CACHET

Eataly’s domestic owners, who include celebrity chef Mario Batali and restaurateur (and “Master Chef” judge) Joe Bastianich, scored with that same customer mix when they opened their first U.S. location in New York’s Flatiron district in mid-2010. It pulled in $70 million its first year.

Chicago has one other thing going for it: The city is close enough to New York that Eataly can use the same suppliers for both imported and domestic products. “If we went to the West Coast, we would have to redo our logistics,” Mr. Saper says.

But while no one place has what Eataly will have, River North and nearby neighborhoods hardly lack for high-end restaurants or upscale supermarkets. Within just a few blocks of Eataly’s East Ohio Street location are a Trader Joe’s, a Whole Foods Market, a Jewel and a Dominick’s. Go a little farther and there’s Whole Foods Market Inc.’s Lincoln Park flagship, which is even bigger than Eataly—and comes with free indoor parking. (Mr. Saper plans to announce customers’ parking options soon.)

“The big challenge is to get patrons in River North to change their habits from where they are going now,” says Darren Tristano, an executive vice president at restaurant consulting firm Technomic Inc. in Chicago. “Unless Eataly has a better experience and better value, patrons are going to go back to what they are accustomed to.”

Brendan Sodikoff, the restaurateur behind River North’s Gilt Bar and Bavette’s Bar & Boeuf, welcomes the new eatery. “Nothing good ever hurts,” he says. “It does make competition stiffer. (Other restaurants) will have to be on their game.”

Eataly was founded in 2007 when Oscar Farinetti opened one in Turin, Italy. There are now 18 stores in Italy and Japan, which are owned by a separate partnership, with plans for more U.S. locations. Chicago was a no-brainer given that it is a big tourism destination, a transportation hub and a rising restaurant capital, Eataly partners say. The Michelin guide made Chicago its third U.S. city for ratings in 2010, behind New York and San Francisco.

Mall developer Macerich Co., which owns Eataly’s new site, has gone out of its way for the new tenant. It sued to evict Texas de Brazil after the steakhouse’s next-door neighbor, Walt Disney Co.’s ESPN Zone restaurant and bar, closed in 2010.

Eataly’s New York location has been a boon to its neighborhood, helping to boost rents as much as 15 percent in the past two years. River North rents span $50 to $150 a square foot based on proximity to Michigan Avenue. If Chicago’s Eataly takes off, landlords will hope to hike rents in River North, too.

“Eataly will definitely draw some attention,” says Jason Gustaveson, vice president of Stone Real Estate Corp. in Chicago. “Rents in that area are not going down, that’s for sure.”


Hearty Appetite for Fast Casual

November 7, 2013

The Potbelly restaurant on State Street still hummed with customers, long after a recent lunch hour had ended.

Tyler Andersen, a 20-year-old accounting student at nearby Harold Washington College, paid $10 for chips, a drink and a Wreckingball, a fusion of the restaurant’s popular Wreck sandwich — made with roast beef, turkey, ham and salami — and a meatball sandwich. He said he prefers dining at Potbelly over other sandwich shops like Subway and McDonald’s.

“I’d rather spend one-fifty or two dollars more because I like the product better,” Andersen said. As for fast food, “I can’t justify paying six or seven bucks. I’d rather spend 10 bucks here than four bucks at McDonald’s.”

Whether investors will retain their appetite for Chicago-based Potbelly remains to be seen.

Shares more than doubled in value in their debut Oct. 4, rising from $14 apiece to close at $30.77. Not bad for a company that started out in 1977 as an antique shop on Lincoln Avenue and began offering sandwiches to increase sales. It now counts 280 company-owned shops in the United States.

But shares have slipped since then; they closed Monday at $26.21, down nearly 6 percent, or $1.60 a share. Analysts point to a report over the weekend by Barron’s that questioned the shares’ lofty valuation.

Potbelly competes in the fast-growing restaurant segment known as fast casual, where made-to-order offerings like a Subway sandwich, Panera salad or Chipotle burrito are drawing busy, money-strapped consumers from more expensive casual dining restaurants like Chili’s and Olive Garden as well as less expensive restaurants like McDonald’s and Burger King.

“The millennial generation really likes fast-casual restaurants and are willing to spend a few more dollars,” said Darren Tristano, executive vice president at food industry research and consulting firm Technomic. “They are not as frugal as Gen X or boomers.”

Tristano said the fast-casual sector represents $35 billion in annual sales and has quickly grown, even through the recession. Tristano expects a 10 percent annual growth rate for the sector to continue for at least the next five years. The typical Potbelly check averages between $8.50 and $12, compared with $3 to $8.50 at a fast-food restaurant, according to company documents.

Company officials declined to comment.

Analysts had been comparing demand for Potbelly’s initial public offering to that of Colorado-based Noodles & Co., also in the fast-casual sector. Shares of Noodles & Co., the first U.S. restaurant IPO this year, also more than doubled in value in their trading debut in June. The stock was priced at $18 and closed Monday at $48.30. Noodles serves globally inspired noodle dishes ordered at the cash register.

Francis Gaskins, director of research at Santa Monica, Calif.-based Equities.com and founder of IPOdesktop.com, said he expects Potbelly to use the net proceeds from its offering to grow into a national brand. Potbelly operates in 18 states and the District of Columbia.

“I personally think it’s got to grow into its valuation,” Gaskins said. “If they can’t open profitable stores on a consistent basis, that’ll be a problem for the stock.”

Gaskins said the challenge for Potbelly will be to distinguish itself from the myriad sandwich chains with which it will compete as it expands.

R.J. Hottovy, senior restaurant analyst for Morningstar, notes that Potbelly is in a market saturated with sandwich competition “and that is something investors have to be mindful of.” Aside from well-known brands Subway and Quizno’s, there’s Jimmy John’s, Jersey Mike’s, Schlotzky’s, Jason’s Deli, Firehouse Subs and smaller chains.

This year Potbelly plans to open 32 to 35 shops, the company said in a regulatory filing. That compares with 31 stores in 2012 and 21 in 2011.

Revenue in 2012 rose 15 percent to $274.9 million, up from $238 million in 2011. Aided by a tax benefit of $16.9 million in 2012, net income was $24 million. That compares with earnings of $7.2 million in 2011.

Potbelly prides itself on its ambience. A potbelly stove usually is prominently displayed, and live music is provided at most stores during lunch. Its rustic decor is reminiscent of its roots as an antique shop.

Customers in the Potbelly on State Street listed ambience as a factor that draws them back.

“It’s open, and they play music, and it’s really relaxed and has cool stuff on the wall,” said Karen Chavez, a vegetarian who usually stops at Potbelly’s once a week. She says she picks up a Potbelly meatless sub and a canned drink for $5. Cookies and shakes also are a draw, she said.

“I feel like the ingredients are better and the options are better,” she added.