Feasting on Fast-Casual
This expanding market niche attracts the appetites of consumers and investors.
Amid high fuel
and energy costs, rising interest rates, and wages that aren't keeping pace,
consumers' disposable incomes are waning and the restaurant industry is
suffering because of it. "Dining out frequency has long been considered a
leading economic indicator, even though restaurants represent only about 5
percent of consumer disposable income," says Michael Sanson, editor of
Restaurant Hospitality. "The decline in the casual sector signals a
weakening of the economy."
Casual dining restaurants saw earnings decline during
summer 2006: Systemwide comparable sales fell 4.7 percent for Outback
Steakhouse in the four weeks ending Aug. 26, 2006, and 2.7 percent for
Applebee's International. It's the worst restaurant slump since the early
1990s, experts say in a Wall Street Journal report. But amid the doom and
gloom, one sector is thriving as consumers looking for more-affordable meals
trade down from casual dining to fast-casual.
Fast-casual restaurants including Panera Bread, Chipotle
Mexican Grill, and Café Express have become a familiar sight on urban streets
and in shopping centers across the U.S. There are approximately 100,000
fast-casual concept restaurants in the U.S. today, estimates Fast Casual
magazine. Serving everything from hot submarine sandwiches and organic salads
to sushi and pork-stuffed burritos, fast-casual restaurants are whetting the appetites of both
consumers and investors.
Photo caption: One way that fast-casual concepts such as Raving Brands' Mama Fu's Asian House, differentiate from fast-food restaurants is by serving alcoholic beverages in addition to soft drinks.
Photo: Raving Brands
A Growing Sector
Fast-casual hasn't always been such a strong contender
for American stomachs and wallets. Historically the restaurant industry has had
three main sectors: fast-food, casual dining, and fine dining, each with
corresponding price points - $5 to $6, $10 to $12, and $20 and higher,
"Fast-casual really hit the radar over the last
three to four years," says Paul G. Fetscher, CCIM, president of Great
American Brokerage in Long Beach, N.Y. "There was a gap in the
[restaurant] market. People were spending $4 to $5 at [fast-food] restaurants
or $10 at sit-down places."
This gap has allowed fast-casual to carve a substantial
niche in the market. While the exact definition of fast-casual is hard to pin
down, a commonly accepted one is based on a $7-to-$10 price, five-to-eight minute order time, made-to-order preparation, nice ambience and décor, and a food delivery system where customers make
menu selections at a counter and the food is brought to customers' tables,
according to Fast Casual.
Fast-casual customers are seeking a different experience
from fast-food in terms of service and quality, but at a better price point
than casual dining. "People are seeking the best in quality and more
specialized offerings. They want their products quickly, with premium service,
and often take it to go," says Janet Astor, vice president of real estate
and store development for Minneapolis-based Caribou Coffee.
Fast-casual captured $11 billion in sales in 2006,
accounting for a small but growing restaurant industry sector. The nation's
approximately 925,000 restaurants were expected to reach $511 billion in sales
in 2006, according to Fast Casual. Fast-casual outlets account for
approximately 9 percent of the restaurant industry, but are expected to grow at
double the rate of the restaurant industry overall. In fact, fast-casual is
expected to increase between 10.8 percent and 12.5 percent each year through
2009, according to a report by Technomic, a Chicago-based food industry consulting
and research company.
Fast-casual's quick acceptance indicates America's
growing taste for high-quality food prepared quickly. And there are plenty of
investors that want a piece of the pie. Big chains such as Chipotle and Panera are
experiencing yearly same-store increases of 33 percent and 29.7 percent
respectively, according to Technomic.
Some fast-casual concepts seek investment capital from or
are sought out by larger fast-food companies. This relationship offers
additional money, the ability to buy more property, and a wealth of real estate
knowledge, say restaurant industry watchers in a BusinessWeek report.
McDonald's bought into Chipotle in 1998 when Chipotle founder and CEO Steve
Ells asked for financing. Since then, McDonald's has sold its shares, but the
backing allowed Chipotle to expand. Other big-time backers of fast-casual
chains include Wendy's International's investment in Baja Fresh Mexican Grill,
Café Express, and Pasta Pomodoro; McDonald's ownership of Boston Market; and
Jack in the Box's ownership of Qdoba Mexican Grill.
Still, most fast-casual concepts start out as privately
owned companies, and many choose to stay that way, seeking local investors and
experienced franchisees. One of the most attractive aspects of fast-casual is
the propensity to make a lot of money in a small space, Astor says.
"Typically the space requirements for this sector are small but the
concepts bring high customer counts, making this sector favorable to nearby
tenants in retail developments," she says. Fast-casual's ability to draw
customers to a mall or area makes them a popular tenant with landlords as well.
But smaller sites mean smaller rents. While large
companies such as Atlanta-based Raving Brands and Panera have the capital to build
locations, most fast-casual concepts lease existing space. Guy M. Parker, CCIM,
president of Parker Real Estate Properties in Jackson, Miss., works with
McAlister's Corp., a fast-casual company based in Ridgeland, Miss., that runs
McAlister's Deli and launched a new concept in 2006 - Newk's Express Café.
"As with any client, they are rent sensitive. But they are willing to pay
in the high teens to low $20s per square foot in the Jackson marketplace. Rent
will vary based on the city and location and will have to be evaluated on a
case-by-case basis," Parker says.
McAlister's Deli has grown to more than 200 stores since
the first location opened in an old gas station 15 years ago. The company is
expected to earn $260 million in 2006 and continues to seek multi-unit
franchisees. "Due to the success of the McAlister's Deli operations, [the
new concept] is very appealing on a local scale to investors. So far they have
franchisees in several other cities ... [they have] a very proven, very solid
operator, so investors in our market [Jackson, Miss.] are very, very interested
in working with them and bringing them to their centers," Parker says.
Raving Brands, a restaurant conglomerate that owns
several concepts including Moe's Southwest Grill, Planet Smoothie, Mama Fu's
Asian House, and Doc Green's Gourmet Salads, also has no trouble finding
investors. "Finding franchisees is not our problem at all. We have to get
better and better real estate," says Martin Sprock, owner of Raving
Brands, in an interview with QSR Online.
Photo caption: Moe's Southwest Grill is Raving Brands' flagship concept and features one of the most popular fast-casual concepts -- Mexican specialties such as burritos.
Photo credit: Raving Brands
The Right Site
Location can mean the difference between lunchtime crowds
or empty tables for a fast-casual concept. Restaurants that value freshness
must locate in areas that get enough traffic to sell items quickly to ensure
they remain fresh, Fetscher says.
This means locating on busy street corners and in
high-traffic shopping centers. "Fast-casual looks for a lot of the same
things in site selection as fast-food," says Terry L. Conley, CCIM, MCR,
president of the Location Connection in Cassville, Ga. "But there are some
differences. Fast-food needs to be right in [consumers'] faces, but people will
make an extra turn or two for fast-casual."
Still, most fast-casual concepts look for end-cap
locations in shopping centers or free-standing properties. Nothing But Noodles,
a Scottsdale, Ariz.-based fast-casual concept specializing in made-to-order Asian, European, Mediterranean, and American
pasta dishes, looks for 2,800 sf to 3,600 sf with good street visibility and
plenty of parking, as well as easy entry and exit for customers.
Easy coming and going, in addition to ample parking are
key elements throughout the sector. "Location has been very key,"
says Parker. "Newk's needs either a free-standing building in a high-traffic location or a very prominent end-cap location
with the ability to have outdoor seating. Also, 85 to 100 parking spaces is a
necessity based on their volume; in addition they need two to three designated
'grab-n-go' spaces - that constitutes 35 percent of their business," he says.
Raving Brands employs an eight-person in-house management
team that works with a network of 400 real estate brokers nationwide to scout
and lease locations, according to a Restaurant Hospitality report. With 500
locations, Raving Brands plans to add 25 percent more restaurants by the end of
2008, which would bring their total to between 1,200 and 1,500 locations. The
company often buys more than one location in a shopping center because they
have several brand concepts to choose from. "This satisfies landlords'
desire for large deals instead of multiple small ones," according to the
Raving Brands corporate Web site.
Photo caption: Panera Bread's more than 930 bakery-cafes located in 37 states offer comfortable chairs and a welcoming atmosphere to encourage customers to linger.
Photo credit: Panera LLC
Attracting a Crowd
Like any commercial real estate investment, fast-casual
concepts must consider local demographics as well as physical location when
selecting sites. "The White Castle customer isn't going to go for
fast-casual," Fetscher says. While fast-food customers are interested in
price over value, fast-casual's customers have different priorities.
Eighteen- to 34-year-olds tend to buy the most fast-food,
but they are choosing fast-casual in increasing numbers and now represent 37
percent of that market's consumers, according to an NPD Group study. Most
fast-casual concepts also look for a consumer base that falls into the mid- to
"In Atlanta, fast-casual is moving into suburban
areas around the I-285 freeway that circles the city. There are still a lot of
deals happening downtown in urban infill areas where redevelopment is
happening," Conley says.
Nothing But Noodles considers sites near "high-rise,
downtown, or light industrial office parks, hospitals, high-tech employers,
white-collar employers, and colleges and universities ... [A dinner crowd]
mandates middle- to upper-middle-class families with children, with a high
percentage of some college plus young professionals residing nearby in multiple
housing apartments and condominiums," according to the company Web site.
The lunch crowd also necessitates adjacent offices or
work places. "[Fast-casual] is eating into lunch sales at full-service
restaurants, and it's going to pull some sales from [fast-food]. A lot of
people just don't have enough lunchtime for table service, but don't want to do
the drive-thru," says Bill Hulkower, a Mintel International market analyst.
Caribou Coffee looks for markets with similar
characteristics, as well as a steady stream of traffic throughout the day.
"The right demographic make-up - typically higher income - convenience,
commuter routes, appropriate tenant mix, and generators for all day
parts," are all things Caribou considers, Astor says.
With so many concepts to choose from, Raving Brands
claims it can make almost any location work, from a downtown central business
district to suburban strip malls to stand-alones. The company's aggressive real
estate strategy often allows them to lease several locations in one area. For
example, four of Raving's concepts opened in Atlanta's Atlantic Station
mixed-use complex this year. Although locating several concepts close together
may raise concerns about cannibalizing, it actually can be a good strategy in
terms of negotiating leases and it gives consumers the impression that the
company is growing quickly.
For Raving Brands - and the fast-casual industry overall
- this assumption would be true. The business of serving high-quality
food faster than casual-dining restaurants will continue to grow. With
consumers spending 44 percent of their food budget on eating out, a proportion
that is expected to rise to 53 percent in the next four years, according to a
National Restaurant Association study, fast-casual will continue to crop up as
a valuable investment opportunity in markets across the U.S.