Over the past several years, fast casual has been the darling segment of the restaurant world. Observers and the press hailed it as changing the industry landscape. New brands proliferated and financing was abundant. And, indeed, from 2014 through 2016, fast casual outpaced the industry in comp sales, although by decreasing amounts each year.
Data tracked by Black Box Intelligence™ shows that it’s been a different story in 2017. Fast casual’s sales performance continues to slip and now trails the industry by -0.9 percentage points for the year. Looking a bit further, we find that traffic lags even more: -5.8 percent for fast casual versus -3.5 percent for the industry.
How did this high flying segment find itself struggling compared to industry benchmarks? In many ways, it’s a story often repeated when a new idea shakes up the status quo. Rapid growth brings opportunities. It also brings a host of challenges, many of which can be anticipated.
Based on Black Box Intelligence (BBI) analysis, fast casual unit growth has outpaced the industry by roughly 7 percent over the past five quarters. So, despite lackluster same-store results, total revenues have increased and fast casual continues to gain market share. But, with all this unit growth, what accounts for the slowdown in comp sales? There are several factors at play which, when viewed in aggregate, help explain why strong comps are difficult to maintain.
We can start with this one because it’s the most obvious. Chain restaurants already operate in a pretty crowded space, with many saying the industry is seriously overbuilt. When new brands and units get added at a higher rate, restaurants have to fight for share against their own nearby units (cannibalization) as well as new competitors.
New units depress comp sales
It’s common knowledge that most new restaurants experience a “honeymoon curve” – sales typically start out high when the doors first open and gradually settle at a normalized run rate. That’s why most chains don’t add new units to their comp sales databases for a period of time, typically 18 months. Even so, BBI research shows that the effect of new units lingers longer than the initial honeymoon period. So far in 2017, fast casual units that have been open 18 to 30 months have comp sales of -3.4 percent. Units open more than 48 months have comp sales of about -1.8 percent. That 1.6 percentage point gap means a lot if a substantial percentage of your unit base is relatively new.
Expanding the footprint
Part of the reason new unit sales lag is that they often open in new markets or areas that may take some time to mature. Legacy brands generally have a good understanding of the market characteristics it takes for them to be successful. But, to sustain growth, fast casual brands have more pressure to leave native markets and explore opportunities where their name is not yet well established. Penetrating new markets is risky. Consumer dynamics and competitive profiles are unique to each area. It may take time (and patience) to gain acceptance and operate at expected levels.
Finding and retaining staff
The biggest challenge restaurant operators face today is staying staffed with quality employees. TDn2K’s People Report™ indicates hourly and management turnover are at historic highs and analysis continues to show a linkage between employee turnover and operating results. It’s difficult to find and keep staff in an existing unit base. It’s even harder to do so while searching for additional management and hourly employees to run new units, especially if these units are in new satellite areas. In a tight labor market, rapidly growing brands can be hard pressed to supply new locations with sufficient talent and resources to guarantee smooth new unit openings.
What’s fueling growth?
As with any rapidly-growing business or segment, financing is the fuel that makes things possible. And, the industry has certainly been able to attract capital from a number of sources. But, the downside to available funding is that’s it’s usually tied to expectations of continued rapid expansion. There are those who suggest that this pressure to open new units encourages brands to expand more aggressively that they otherwise might. Experienced executives know how difficult it is to create an organization that balances solid operations, fiscal responsibility and rapid growth. It’s not uncommon for the rapid growth priority to divert attention from running the everyday business.
None of this is to suggest that fast casual will be relegated to underperforming the industry forever. Rather, it’s recognition that this growth phase has common characteristics. The path from rapid unit growth to a more mature segment is bumpy, but largely predictable. History tells us that we’ll settle into a new (albeit different) equilibrium until the next market disruptor appears.