Annual sales at fast-casual restaurants are growing at three times the average industry rate. Why? What is the magic formula that has people flocking to Chipotle Mexican Grill, Shake Shack, and Five Guys Burgers and Fries?
Fast-casual as a segment is notoriously difficult to define—but most concepts do not offer table service, do not offer large menus, do not offer comfortable seating, and do not encourage tipping. You can see how they are different from, say, Chili’s Grill & Bar or The Cheesecake Factory, which are part of the casual dining category, specializing in all of the attributes just listed.
Fast-casual restaurants are different in that they are designed, above all, to offer high-quality food along with fast, mostly counter service. They also offer a clean, modern environment, plenty of social media engagement—and frequently a mobile app for online ordering.
Fast-casual fits in the middle between quick-service fast-food places, like McDonald’s, and affordable full-service restaurants.
Quality food and fast service are the two most important ingredients for restaurants in the fast-casual segment, says Gerry O'Brion, a business coach and former marketing executive for Coors Light, Quiznos, and Red Robin. It is also the combination that gives people exactly what they want, and nothing they don’t want.
The large chains that offer sit-down service, O'Brion says, are doing too much of what people don’t want, and that is why they are not as popular.
It is a simple argument, and for those who don’t believe it: Did you know that people are paying nearly the same for a meal at Chipotle ($11.30) as they are at a place like Applebee’s ($12.42), despite the former’s lower standard of comfort and limited service?
The reason, says O'Brion, is that—whether we are aware of it or not—we instinctively assign value to every aspect of the dining experience. This includes food, service, ambiance, bathrooms, and so on. If we perceive value, we will pay for it, and at fast-casual joints that means we place a premium on the quality of the food.
More importantly, we mentally subtract value when there are things we don’t want. Many of us don’t like outdated environments, the risk of mediocre food and service, and the burden of tipping.
The Millennial Mindset
This what-I-want mentality is best exemplified by the millennial generation of 12- to 35-year-olds (born 1980 to mid-2000s), who grew up with the Internet and are used to getting what they want nearly instantaneously.
Millennials have been hugely influential in shaping the fast-casual segment, which did not become popular until the early to mid-1990s when the first of the cohort began to eat out on their own. As these early millennials expressed their preferences, they helped fast-casual operators define the category’s unique ethos.
Fast-casual dining is known for quick service and fresh, quality food, but it is also known for clean, modern environments, active social media interaction, and online ordering options. The category grew 11 percent annually, according to a 2014 press release by Technomic, handily beating the rest of the industry’s growth rate of 3.8 percent.
And within fast-casual, there is a subsection of restaurants that offer customizable menu ordering, which is growing even faster—at 22 percent, according to Technomic. Here, customers can choose which salad, pizza, or sandwich toppings they want, versus choosing from preselected menu options.
Some of these choice items may be costly, but customers do not mind paying more if they can be in control of the decisions, says O'Brion.
O'Brion says he is watching two fast-casual pizza chains, both of which offer customization in different ways. Pieology, the first option, offers a crispy-crust pizza with an unlimited number of customizable toppings for a set price—78 billion pizza possibilities, according to the company’s website.
The second one is Colorado-based Pizzeria Locale, which sets a base price with options that add to the price of the pizza.
Social Causes
Fast-casual dining chains almost all have an appealing story about their values and why the business exists. Almost invariably, that story has something to do with community, local and sustainably sourced food, or engagement in social causes.
For example, Pieology states on its website: “We didn’t set out to create just another make-your-own pizza place. We’re here to feed our community, nourish creativity, and bring people together. It’s a bigger vision. One filled with love and purpose. For Pizza. People. Passion.”
A study by Bentley University’s Center for Women and Business found 84 percent of millennials say that helping to make a positive difference in the world is more important than professional recognition.
O'Brion says while the restaurant’s story is incredibly important, increasingly they look like “cut and paste.” Really, “it is a land grab to see who can execute it the best,” he said. And the stakes are high in terms of getting it right.
According to Millennial Marketing research, 37 percent of millennials will pay more if they can support a cause they believe in. It also found that 70 percent feel a responsibility to share feedback with companies. It is understood that if something is not right, or the company violates trust, millennials will switch allegiances easily.
This may explain why sales were down 14.6 percent and profits plunged 44 percent for Chipotle in the fourth quarter of 2015, according to the company’s most recent earnings statement. Customers fled after a food-borne illness outbreak. Ironically, the health scare has forced the company to backtrack on its promise to use local farm suppliers, which has been so important for Chipotle’s success up to now.
For this reason, it remains a question of whether customers will return with the same frequency as before, despite a drastic overhaul of its food safety protocols.
After all, there are many great fast-casual restaurants to choose from, with more opening each day.
Among the many successful and growing chains in America that you may not have heard of are the New York-based Taim falafel and smoothie bar, Dos Toros tacos, and indikitch, which offers customizable Indian meals made with all-natural, non-GMO ingredients.
Recently, on Feb. 2, CNBC’s “The Profit” serial investor Marcus Lemonis aired a story about his investment in Little Greek, which he helped set up as a fast-casual chain franchise model. When it filmed, there were four locations. Today, there are already 26 locations listed on its website. Lemonis said on-air that he wouldn’t be surprised if there would soon be 500 locations.
Which chain will become the next smash success is anybody’s guess, but those who succeed will surely do so by giving customers more of what they want.
