Article

Despite sales growth, is tough sledding ahead for the fast casual segment?

The fast casual segment continues to outperform other segments of the restaurant industry. But will it be able to keep up the pace?

February 20, 2015

by Victor Fernandez, executive director of Insight for TDn2K

Fast casual continues to be the leading segment in the chain restaurant industry when it comes to sales and traffic. However, keeping the same rate of growth for same-store sales has been increasingly difficult in recent years.

According to TDn2K’s Black Box Intelligence, the segment’s same-store sales growth during January was 5.3 percent, while same-store sales growth for the three months since November was 4.6 percent. As a comparison, the growth rate posted by the entire restaurant industry during the last three months was only 3.5 percent, showcasing the strength of the fast casual segment.

Although fast casual results are impressive, averaging 2.6 percent year-over-year same-store sales growth for the last 12 months compared with just 1.3 percent for the industry overall, the  notable sales growth experienced during December and January by the segment (as well as the overall industry) are the outcome of two main factors.

The first factor, the economy, is encouraging and expected to last. The US economy is doing much better than a year ago in terms of employment, consumer confidence and income growth potential and this has definitely translated into incremental restaurant spending. Secondly, and this is a short lived bump, the winter has been more mild and restaurant spending has not been as negatively affected as it was in 2014. The result is easy comparable sales which yielded the robust sales growth rates seen since December.

In terms of future growth in same store sales, the great success of the segment in recent years is precisely the reason for concern now. During the recovery years after the recession, fast casual became ideal in terms of expansion. The segment posted same-store sales growth rates of 4.0 percent and above in 2011 and 2012, fueled by same-store traffic growth around 2.0 percent during those same years. To put this success into perspective, the overall industry has experienced six consecutive years of negative traffic growth since 2009. Fast forward to today, all this growth has caught up with fast casual. Traffic has been flat for the segment during 2013 and 2014, and same-store sales slowed to 2.2 percent in 2014, basically a result of increasing average guest checks.

Fast casual has grown through rising same-store sales. At the same time, growth has been fueled by aggressive expansion of new store openings, as well as new brands coming into the market. As a result, fast casual has consistently been the winner in the market share battle being waged in the chain restaurant industry since the recession. According to Black Box Intelligence’s market share research, covering a sample of over 150 brands and about 110,000 individual restaurant units, fast casual’s share of overall restaurant sales during the first three quarters of 2014 was 7.5 percent. Although still relatively small when compared with the largest segments in the industry (casual dining and quick service), fast casual was the only segment that significantly gained sales market share at a rate of 0.5 percent year-over-year. Of course it is precisely from these two largest segments that fast casual has stolen most of its market share gains.

The rapid expansion of fast casual has created consequences on the labor front. November and December of 2014 posted job growth for the segment in the 10-11 percent year-over-year range, according to TDn2K’s People Report. This scenario is very different for the overall industry, which has exhibited strong growth but at a much lower rate of 4.0 percent for the last few months.

As the economy continues to improve and the labor market tightens, staffing challenges are expected for the fast casual segment, which needs a steady stream of new employees to fuel its rapid growth. Further complicating this situation is the fact that both restaurant manager and hourly employee rolling-12-month turnover rates are trending upwards for the segment as well as the industry overall. This means employees are seeing more opportunities out there and are increasingly electing to leave their current jobs to pursue other employment. The percentage of employees who are leaving their jobs voluntarily has risen to the levels reported before the recession and is an obvious source of concern.

In addition to these labor pressures, labor costs are also expected to increase for the segment throughout the year. Wage hikes will materialize in the form of increasing minimum wages and companies having to boost their starting hourly wages and salaries in response to the tightening labor market. The implementation of the Affordable Care Act is also expected to play a part in rising labor costs in 2015.

Restaurant guest satisfaction, measured by TDn2K’s White Box Social Intelligence, based on three key operational metrics, shows fast casual significantly outpacing the rest of the industry when it comes to percentage of online mentions that discuss food with a positive sentiment. In fact, fast casual is the highest performing segment in the industry regarding percentage of positive food mentions (43 percent of all mentions). Of all service-related mentions, 38 percent are positive for fast casual, just slightly higher than for the industry overall.

The only operational attribute in which fast casual is lagging behind the industry is percentage of positive intent to return mentions. Fast casual posted 58 percent of positive intent to return mentions, however this is about 3.0 percent lower than the percentage of positive mentions for the industry as a whole. Another important insight is that when customers talk about fast casual brands online, of these three attributes food is what is most commonly discussed (70.7 percent of all mentions in January), followed by intent to return (17.6 percent during the same month) and service (11.7 percent of mentions).

As for the rest of the industry, TDn2K is predicting a year of positive same-store sales growth for fast casual during 2015. However, to retain its leadership position within the industry, the segment will need to succeed when facing three challenges: creating more fast casual dining occasions to return same-store traffic to positive growth, providing a compelling employee value proposition that harnesses the vitality and excitement behind the segments’ brands and managing increasing labor costs within the constraints of continuing to offer great value to consumers. If the recent past is any indication of the future, fast casual is well positioned for additional growth by continuing to steal share from others. Good luck in 2015! 

Featured image credit: Bundesarchiv Bild 183-09740-0004, Oberhof, II. Wintersportmeisterschaften, Bobfahren" by Bundesarchiv, Bild 183-09740-0004 / CC-BY-SA. Licensed under CC BY-SA 3.0 de via Wikimedia Commons.