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QSRs want slice of fast casual pie

Quick-serve restaurants move to upscale dÃ©cor, menu to attract customers.

October 13, 2008

In today's weakening economy, the fight for consumer restaurant dollars is tougher than ever. Yet the fast casual segment is still growing — and that success has other segments taking notice and even borrowing some of its elements to their own ends.

Darren Tristano, executive vice president of foodservice consultants Technomic Inc. said the fast casual segment is feeling pressure from full service, which is continuing to lose ground, as well as from supermarkets retail meal solutions. Quick-service restaurants also are fighting to maintain their share of the market.

QSR sandwich giant Subway is one such chain testing the fast casual waters. But according to the area developer debuting the fast casual concept Subway CafÃ©, it was born to meet real estate needs rather than consumer trends.

"We saw the need when trying to move into certain locations and (property owners) were saying, â€˜We need something a little more upscale,'" said Larry Feldman, chief executive officer of Subway Development Corp. (SDC) of Washington, D.C. "So that's what really set the wheels in motion."

The Subway CafÃ©, which opened in early September in Alexandria, Va., is designed to fit into Class "A" office buildings. The dÃ©cor, with patterned club chairs instead of plastic booths, is definitely fast casual. The menu is too.

Yes, there's the traditional Subway line, plus paninis, Seattle's Best coffee, specialty salads, gourmet sandwich specials and Thomas' Bagels and English Muffins anchoring its breakfast sandwiches.

For landlords who see the concept, the reticence Feldman had encountered in the past is overcome. For customers, having the name recognition of Seattle's Best and Thomas' has elevated Subway's breakfast, a daypart where the chain has traditionally been weak, Feldman said.

"The opportunity to have those brand names . . . has enhanced the perception of our breakfast sandwiches," he said.

Breakfast has been a tough market for Subway because it's stores don't have drive thrus. The Subway CafÃ©, located on the ground floor of a multistory office building, makes breakfast accessible.

"Now it becomes a very different situation because now you stop and see us on your way up before you hit the elevator," Feldman said.

SDC will test five to 10 more units in the Washington, Virginia and Delaware area. If that goes well, the concept will likely open to the rest of the country. Subway already has different designs in the works, including one with fireplaces, Feldman said.

Feldman said he expects positive results to come back quickly on the test because the Subway CafÃ© is meeting a need. He anticipates the fast casual concept likely will do well in large metropolitan area where office buildings also have migrated to the suburbs.

And he is counting on Subway's name recognition to help it compete with established fast casual brands.

"Because we have that history, we have that recognition, and now we bring it to a new level," Feldman said, "we now can compete with them head on."

Move to upscale dÃ©cor

Tristano said that it's becoming more common for quick-serve restaurant brands to reposition themselves for in-store dining with upscale dÃ©cor or to add higher quality menu offerings.

"Everyone's recognizing the bar has been raised, and if you want to become more relevant to your customer or remain relevant, you have to change your image to meet the evolving needs of the younger generation and the evolving consumer," Tristano said.

In 2007, the fast casual segment took in $17 billion to $18 billion, about 10 percent of the $187 billion limited-service segment as a whole. Tristano expects fast casual's market share to increase this year, with QSR staying flat and full-service declining.

"As a result (fast casuals) will take more share of the total food service market," he said.

McDonald's reimaging process began in 2003 after consumer research found that customers wanted "a more contemporary experience," said Danya Proud, spokeswoman for U.S. McDonald's operations. About half of the chain's 14,000 U.S. stores have been through interior and/or exterior updates.

"We know that our customers over the last several years have changed, people's lifestyles have changed, our customers have evolved," Proud said.

McDonald's operators have different designs from which to choose, including a contemporary design that zones seating areas based on whether customers want to linger or eat quickly. The dÃ©cor is modern with pendant lights, plasma screen TVs and Wi-Fi access.

Tristano said that updating a QSR's dÃ©cor won't necessarily translate into more customers dining in and may even be counterintuitive to a brand's need to "push people through the drive thru quickly."

What makes McDonald's more successful, he said, is its multi-tier menu, which offers value items, mid-range signature sandwiches such as the Quarter Pounder, and premium offerings such as Angus burgers and premium salads.

"So now all of a sudden, if you've got $3, $5 or $8, you can find the right price, and the right quality from what you expect" from McDonald's, Tristano said.

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QSRs find fast casual model leads to higher sales

Dairy Queen also responded to consumer research when it debuted the Dairy Queen Grill & Chill concept in 2001. The new concept's goal is to replace the Brazier, which was never recognized for its food offerings, said American Dairy Queen Corp. chief operations officer Chuck Chapman.

That research revealed that consumers wanted "a warm, comfortable, inviting, relaxing atmosphere" in the dining room without changing the chain's treat offerings, Chapman said. The new look includes padded, fabric seats — and orders delivered to the table.

About 450 units — 14 percent — will have upgraded to the new look by the end of the year, Chapman said. Another 150 units have committed to upgrades in 2009.

And the new concept is paying off for those who implement it. Chapman said average sales at Brazier units in 2007 were $636,000, while new/remodeled Grill & Chill concepts averaged $1.1 million, with more than 80 percent of the growth in revenue coming from food — and morecustomers through the door.

Tristano said that it may be difficult for QSRs striving to maintain quality thin margins also update their dÃ©cor. But consumers have grown to expect the fast casual dining experience, so chains are likely to shift to that model in order to stay competitive.

"Unit volumes at these restaurants (that have moved toward a fast casual model) are much higher than their historical numbers, so it's definitely an opportunity to increase share and build their brand," Tristano said.

From the full-service segment, takeout is likely to grow, but the model itself may evolve as it borrows from the fast casual segment, with a mix of full serve and focus on takeout.

"The three-way hybrid might become the successful model for the future," Tristano said.