As Diners Trade Down, Fast-Casual Segment Gains

Regional Chains Benefit From Tighter Spending, but Restaurant Sales Growth Overall Slowed in '08

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CHICAGO (AdAge.com) -- Consumers may be eating more at home, but when they do go out many are opting for so-called fast-casual restaurants -- the kind of place where they walk up to order and pay but the food is brought to their table. The benefit, of course, is to save money, as most are priced between fast-feeders such as Burger King and casual-dining chains such as Applebee's -- and there's no tip necessary.

Jimmy Johns Gourmet Sandwich Shop, with sales up 29% to $497 million, is said to be mounting more aggressive expansion efforts.
Jimmy Johns Gourmet Sandwich Shop, with sales up 29% to $497 million, is said to be mounting more aggressive expansion efforts.
That's one finding in the latest survey by restaurant industry consultant Technomic of the nation's 500-largest restaurant chains. "With the economy, people are trading down because there are a lot of value offerings," said Technomic President Ron Paul. "You can still get a 99-cent burger most places. It's a great value, very convenient, no tipping, there are drive-through windows, and it's kind of the last resort before you end up making it yourself."

Those mainly regional fast-causal chains were the brightest spot in the industry last year, excluding Subway's $5 promotion for foot-long sandwiches. But, overall, total industry sales growth slowed last year to 3.4% for $230 billion, the study found, compared to sales growth of 5% to $224 billion in 2007. Price increases and new locations helped chains increase overall sales despite more meals consumed at home, decreasing restaurant traffic.

Among the gainers in the fast-casual segment were Five Guys Burgers and Fries, which posted the biggest sales rise, a whopping 59% to $302 million, followed by Jimmy Johns Gourmet Sandwich Shop, with sales up 29% to $497 million. Both regional chains are said to be mounting more aggressive expansion efforts. Potbelly Sandwich Works, Noodles & Co and Wingstop rounded out the top 5. Also among the top 10 were Peet's Coffee and Tea, Chipotle and BJ's Restaurant and Brewery.

While the fast-food category also grew during 2008, the rates were slower than fast casual. Of course many of these chains are larger, and may already have higher-grossing business models in place. "Smaller chains have the ability to add more stores [proportionately] than McDonald's," Mr. Paul said, "which in a sense distorts the picture." Mr. Paul pointed to McDonald's 4% growth, to more than $30 billion in sales.

The nation's largest restaurant chain, Subway, also managed explosive growth, with sales up 17% to nearly $10 billion, thanks largely to those $5 foot-longs.

Mr. Paul said the real area of concern is the casual and especially fine-dining segment. Ruth's Cris, Fleming's and Morton's all experienced double-digit declines in same-store sales.

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