Growth concepts pick up the pace: while their quick-service competitors narrow the gap with better decor and menu items, fast-casual operators put expansion plans into high gear with a renewed focus on fresh food and prompt service

Nation's Restaurant News,  Oct 15, 2007  by Gregg Cebrzynski

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If fast-casual restaurants remain true to the practices that have made them a growth segment, they will gain market share in the coming years despite competitive pressure from quick-service chains that have encroached on their territory, fast-casual executives say.

Fast-casual dining has grown rapidly during the past 10 years, luring customers from casual-dining and quick-service restaurants with high-quality meals, prompt service for time-crunched consumers and prices diners don't mind paying, given the caliber of the food.

The fast-casual segment had annual growth of more than 14 percent in 2006, compared with about 6 percent for the U.S. chain restaurant industry at large, according to the Top 100 Fast Casual Chain Restaurant Report by Technomic Inc., a Chicago-based foodservice consulting firm.

Sales for the segment are an estimated $15 billion, according to the report.

The segment appeals to budget-conscious consumers who trade down from higher-priced casual-dining chains and those who trade up from quick-service chains to enjoy what Technomic calls "small, affordable luxuries" for just $2 to $4 more.

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Still, some signs are pointing to a weakening of the segment's robustness. In 2001, 58 percent of consumers said they would "definitely" visit a fast-casual restaurant, but that number fell to 49 percent last year, according to The NPD Group, a global market research firm based in Port Washington, N.Y.

Such quick-service chains as McDonald's, Burger King and Wendy's have been revamping their menus to offer diners more menu options and improving their decors to mimic the fast-casual ambience. If that movement becomes more widespread, fast-casual restaurants are in danger, says Karen Eadon, chief marketing officer for Irvine, Calif.-based El Pollo Loco.

"As QSRs continue to improve, what becomes fast-casual's reason for being?" she says.

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Fast-casual chains that get complacent and allow food quality, speed of service and restaurant decor to deteriorate "will find out they're making a big mistake," Eadon says.

El Pollo Loco, which operates and franchises 380 units, has expanded outside of its core West Coast market and will continue to grow because of its "very unique positioning," she says.

The chain's signature item is citrus-marinated, flame-grilled chicken, which it uses for a number of menu items.

El Pollo Loco plans to open 50 restaurants in the Atlanta market over the next six years and will open a Boston location later this year, Eadon says. Other openings are planned for New Jersey, New York and Virginia.

Site selection has to be approached carefully to ensure that the restaurant will thrive.

El Pollo Loco looks for markets where restaurant use is heavy and diners show "some sophistication of palette," she says.

"Some concepts probably run into trouble when they locate in trading areas that might not support the concept," Eadon says. "A lot of fast-casual concepts will do well in upscale, urban areas and can't do so well in areas that are a little more average or below average in terms of income."

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If anything will limit the long-term growth of the segment, it's the availability of markets compatible with fast-casual concepts, says Darren Tristano, executive vice president of Technomic Information Services.

"They can't go everywhere," he says. "You can put a McDonald's almost anywhere, but when you're thinking about fast-casual, you really have to go to a very affluent area to find a Chipotle or a Panera."

With the rise of high-end strip malls and "lifestyle centers" that cater to more affluent consumers, fast-casual concepts have an opportunity for expansion that they didn't have before, Tristano says.

Or they can expand overseas, as Boston-based Au Bon Pain is doing in Thailand, Japan, the Middle East and North Africa.

"Au Bon Pain's roots are in the urban market," says president and chief executive Sue Morelli. "When you look around the world, what you see in most countries is that the population resides largely in urban centers."

Au Bon Pain has more than 200 units in the United States and abroad, and the chain has been successful overseas because "it's a natural in most countries," she says.

Morelli acknowledges that fast-casual concepts are feeling pressure from quick-service chains in terms of menu offerings and decor.

"Look at McDonald's," she says. "They are probably the poster child for this whole thing."

Years ago no one would have imagined McDonald's serving the salads and premium coffee it does now in restaurants that have more upscale designs and Wi-Fi, Morelli says.

"We would say the lines are blurring more and more," she says. "It will always be survival of the fittest. It think it's inevitable that everyone will follow the trend of what consumers are looking for now."