For decades fast food has been a quintessential symbol of American culture. Burgers, fries and Coke is probably as American as a meal can get, but things have been changing in the last couple of years with the ascension of a new type of restaurants: fast casual. The fast casual industry has grown from $29 billion in 2011 to $47 billion in 2016 and is projected to reach $74 billion in 2020, according to Technomic, an industry research group.
Even though, at $47 billion fast casual restaurants’ sales pale in comparison with the $221 billion fast food industry, the largest players of the latter group are adjusting the ways they source, prepare and serve food in order to remain relevant in an age of growing awareness in where food comes from and how it’s prepared. For example, McDonald’s Corporation (NYSE:MCD) has started using cage-free eggs and serving fresh, unfrozen beef patties for its quarter-pounders.
Fast casual restaurants started as a concept in the early 1990s, with the first restaurants in the industry being Boston Market, Fazoli’s and Einstein Bros. However, fast casual restaurants really took off at the end of the 2000s and the beginning of this decade. From the beginning, the idea of fast casual seemed like it was poised to succeed and its growth in the last couple of years bears testimony to that. Fast casual occupies a niche between fast food and traditional restaurants. They offer freshly-prepared food at affordable prices, though slightly-higher compared to fast food. According to Technomic, an average check at a fast casual restaurant like Chipotle Mexican Grill, Inc (NYSE:CMG) or Panera, ranges between $9 and $14, as compared to less than $9 per check at fast food restaurants and $12 to $20 at traditional casual restaurants such as Applebee’s, Ruby Tuesday or Outback Steakhouse. The food is still served faster than at traditional restaurants and can be enjoyed either as take-out or at the restaurant itself, which is usually decorated and has a level of comfort that is better than at most fast food locations.
Many fast casual restaurants rode the wave for a couple of years, as they became increasingly popular among millennials, but latest trends indicate that the industry might be experiencing a slowdown. According to Pentallect, fast casual restaurants are seeing slowdown in growth due to several factors, including reliance on new units for growth instead of focusing on same store sales, which created an imbalance between supply and demand and a saturation in the “better burger”, sandwich and pizza segments. In addition, the 2015 scandal involving Chipotle Mexican Grill, Inc. (NYSE:CMG), one of the key players in the fast casual industry, caused by outbreaks of E. coli and norovirus, led to a decline in consumer confidence, which likely affected other restaurant operators. Moreover, major fast food chains like McDonald’s Corporation (NYSE:MCD) and Restaurant Brands International Inc (NYSE:QSR)-owned Burger King have adapted to changes in consumers’ tastes by re-imagining their locations and providing better food to the match the fast casual segment by introducing high-quality, made-to-order menu items, such as beef patties manufactured from meat from Angus cattle.
In this way, as fast casual restaurant industry shows signs of saturation, it’s taking a toll on stocks of fast casual restaurant operators. In 2016, the Bloomberg Fast-Casual Restaurant Index declined by 14%, compared to a 0.9% gain registered by the S&P 500 Restaurants Index. Pentallect estimates that fast-casual restaurant sales growth will reach between 6% and 7% this year, down from 8% in 2016 and significantly lower compared to growth between 10% and 11% seen between 2010 and 2015.