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.
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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.
One other major factor that explains the decline of the fast casual segment is that while it is advertised as a healthy alternative to fast food, many of its menu items actually pack a lot more calories. For example, a chicken burrito from Chipotle Mexican Grill, Inc. (NYSE:CMG) has over 1,000 calories, almost double compared to a McDonald’s Corporation (NYSE:MCD)’s Big Mac, which carries 540 calories, while a turkey fresco sub at Potbelly Corp (NASDAQ:PBPB) packs 720 calories.
Americans have been becoming more aware of the food they eat and how it affects their health. A recent survey conducted by the Pew Research Center showed that around 54% of Americans consider that people in the US are paying more attention to healthy foods today than they did 20 years ago and 72% agree that healthy eating is important for a living a long a healthy life. However, at the same time, 54% consider that Americans’ eating habits are less healthy today than they were 20 years ago. So, while there is an increase in awareness, there is still work to be done for Americans to change their eating habits. In this way, fast food and fast casual restaurants will continue to reshape their menus and lean towards healthier items.
Despite the issues faced by the fast casual segment, fast casual restaurants still represent a good investment. They have solid fundamentals and are expected to eat into the market share of fast food restaurants even though their growth is expected to come at a slower pace. Americans are also more often opting to eat out rather than buy groceries. There are also many good restaurant stocks to invest in, in addition to the well-established fast food chains like McDonald’s Corporation (NYSE:MCD) and Restaurant Brands International Inc (NYSE:QSR). Chipotle Mexican Grill, Inc. (NYSE:CMG) and Jack in the Box Inc. (NASDAQ:JACK), which owns fast casual chain Qdoba Mexican Eats, are considered among the best stocks in the fast casual industry, especially as Chipotle Mexican Grill, Inc. (NYSE:CMG) is still recovering from the 2015 incidents, but looks on a solid path, and Jack in the Box Inc. (NASDAQ:JACK) is exploring the potential spin-off of Qdoba, which would unlock more value for shareholders.
However, in addition to widely-followed stocks like Chipotle Mexican Grill, Inc. (NYSE:CMG) and Jack in the Box Inc. (NASDAQ:JACK), there is an up and coming company on the horizon that has a lot of potential in the fast casual industry – Muscle Maker Grill. The company operates and franchises fast casual restaurants that serve food on the healthier side, aimed toward fitness enthusiasts, athletes, those starting their journey to a healthier lifestyle, and people trying to eat better while on-the-go. At the moment, Muscle Maker Grill has over 50 locations in 14 states and plans to open 5 to 10 new company-owned restaurants and nine franchised locations by April 2018. MMG’s sales have topped $24 million last year and it plans to increase the number of restaurants by 30% to 50% per year. The company is currently in the middle of a Regulation A+ offering, where it plans to sell up to 4.20 million shares at $4.75 apiece, which gives it a valuation of around $48 million.
MMG’s focus on healthy food means that the restaurants don’t use deep fat fryers to cook food, offer nutrient-rich foods like quinoa, kale, spinach, grass-fed beef and natural chicken. The company also carries rich menus, which include everything from a full meal to protein shakes or smoothies that can be consumed on the go.
To diversify its business model, MMG engages in eight revenue streams, which, include delivery, food trucks, kiosks, catering, and meal plans. The company also has technology driven rewards programs and a loyal customer base, with 85% of its daily orders coming from repeat customers.
In this way, while Muscle Maker Grill is still in its inception phase, it provides good food, which has been praised by leading industry publications, and has a solid business plan aimed at expansion, including international destinations. If its management team, which includes people with years of experience in franchising, real estate, operations, marketing, and finance, executes well on the plan, Muscle Maker Grill stands to strengthen its presence in the fast casual segment, so at the moment it makes an interesting investment opportunity, which can provide solid returns.
Disclosure: The opinions expressed in this article are Insider Monkey’s writer, Alex Oleinic’s. Insider Monkey is compensated by CrowdfundX on behalf of Muscle Maker Grill for publicizing the offering of Muscle Maker Grill’s securities. The total fees to be paid to Insider Monkey for its services are $1500, payable in cash. Insider Monkey doesn’t recommend purchase/sale of any securities, cryptocurrencies, or ICOs. Please get in touch with a financial professional before making any financial decisions. You understand that Insider Monkey doesn’t accept any responsibility and you will be using the information presented here at your own risk. You acknowledge that this disclaimer is a simplified version of our Terms of Use, and by accessing or using our site, you agree to be bound by all of its terms and conditions. If at any time you find these terms and conditions unacceptable, you must immediately leave the Site and cease all use of the Site.
