Restaurants: Fast casual perks up taste buds

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Despite capturing roughly 2% of all restaurant traffic and dollars, the impact of fast casual on the $269.4 billion restaurant category is increasingly impossible to ignore. Restaurants seemingly as disparate as Chipotle, Fazoli's and Boston Market, all or partly owned by McDonald's Corp., are leaders among this emerging segment.

"Fast casual is having an impact from a perceptual standpoint," says Neil Stern, partner at McMillan Dolittle retail consultancy. "You're creating this new category, but overall the numbers are pretty small. It's a reflection that the fast-food category is tired."

Only a year ago, industry executives were still dubious about how fast casual, a hybrid of quick service and casual dining, would shape their business. Now, marketers in both segments alike are morphing their own restaurants to emulate the customer experiences and revenue growth associated with fast-casual concepts. Fast casual has become so influential that leading restaurant researchers Technomic and NPDFoodWorld have officially begun tracking the segment. Technomic has classified 19 chains among its top 200 restaurant companies as fast casual. Technomic further estimates the total revenue impact could be as high as $7 billion, depending on how the concept is defined. Its 19 chains accumulated $3.38 billion in revenues in 2001, up 16.6%.

the $6 to $9 check

Technomic's working definition for fast casual include restaurants with limited-service or self-service formats, check averages between $6 and $9, made-to-order food, sophisticated menus and upscale decor. But that leaves a wide range of interpretation. NPDFoodWorld adds to the mix bagel and sandwich chains specializing in more portable hand-held foods.

What they both agree on is the appeal these new chains have to baby boomers and younger consumers. The NPDFoodWorld study shows that 37% of visits at fast-casual chains were by 18- to 34-year-olds. No other major restaurant segment can claim such a large percentage of any age group.

"Generation by generation gets more cuisine literate," says Dennis Lombardi, executive VP, Technomic. "You've got 15-year-old kids now who know what a panini is. As their food experiences accelerate what they'll want from menus will accelerate."

Casual-dining chains are also well aware of the encroachment. "The fact you now have Chili's Too tells you something," says Mr. Lombardi. "I think it [movement into or borrowing concepts from the segment] will be like an Oklahoma land rush and there will be lots of concepts running out and there will be a fair amount of consolidation."

Moreover, fast-feeders have unanimously acknowledged that to drive growth, they must jump on the fast-casual bandwagon. With fast-food sales rising at a rate of 4.6% annual compounded rate, the 16.6% sales pop of the fast-casual segment has whet the appetites of the industry's biggest chains. The total industry is forecast to grow by 5.2% annually through 2006, with casual-dining growth now slowing to 10.9%, from 11.1% in the last five years.

Share leaders in the top 10 restaurant companies are quickly gobbling up fast-casual chains. No. 1 McDonald's Corp. will expand its Chipotle and Diner in a McDonald's concepts and it bought a stake in Fazoli's Italian sandwich and pasta chain with an option to buy the rest.

No. 2 Tricon Global Restaurants changed its name to Yum Brands after swallowing Yorkshire Global Restaurants and its Long John Silver's and A&W Root Beer chains. This month, Yum opens in San Francisco the first of its Yan Can fast-casual wok and grill Asian concept.

Even No. 4 Wendy's International anted up with its purchase of Baja Fresh Mexican Grill and will expand its Canadian-based Tim Horton's coffee, donut and sandwich chain to 3,000 units within three years, including 35 stores in the U.S. Horton's bears elements of fast casual.

sprucing up

In addition, most fast-feeders have updated their menus and decors, and some are creating line extensions. Numerous McDonald's units have been converted or built with snazzy interiors typically seen in coffeehouses. McDonald's added its New Tastes Menu, Yum's Taco Bell added grilled quesadillas and burritos and is testing a Taco Bell Grill format; KFC upgraded food quality, added wraps and is testing WingWorks.

One thing chains in the Top 10 restaurant companies did less of in 2001 was to advertise, according to Taylor Nelson Sofres' CMR. Only Doctor's Associates' Subway Restaurants and Applebee's International's Applebee's Neighborhood Bar & Grill boosted 2001 ad budgets. Diageo's Burger King Corp. spending fell off nearly 23% to $303 million, as Diageo prepares to spin off the unit.

This year, Wendy's International vowed to boost its media advertising by 30% and McDonald's in July will deliberate over whether to restore its 1.85% franchisee contribution, according to executives with knowledge of the situation. McDonald's franchisees last year reduced from 1.85% to 1.5% the proportion of their gross sales contributed to the national ad program.

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