How The Fast Casual Segment Is Gaining Market Share In The Restaurant Industry

Over the last decade, fast food restaurants or more technically, Quick Service Restaurants (QSR) have grown at a much faster pace than any other restaurant segment in the industry. Best described by concepts such as McDonald’s (NYSE: MCD), KFC and Burger King (NYSE: BKW), they are characterized by fast food cuisines with average quality of food, minimal to no table service, limited menus and price of meals ranging from $3 to $6 per person. QSRs are typically part of a restaurant chain or franchise operations, with drive-thru outlets for most of these chains.

On the other hand, fast casual restaurant is a relatively fresh and rapidly growing concept, positioned somewhere between fast food restaurants and casual dining restaurants. Technically, being the hybrid of the two concepts, they provide counter service and offer more customized, freshly prepared and high quality food than traditional QSRs, all in an upscaled and inviting ambiance. However, they also have minimum table service but the typical cost per meal ranges from $8 to $15. Fast casual restaurants most often does not have drive-thru outlets. Brands such as Chipotle Mexican Grill (NYSE:CMG), Panera Bread, Qdoba Mexican Grill and Baja Fresh are considered as the top restaurants in this category.

In modern QSRs, fast food is highly processed and prepared in bulk using standardized cooking procedures. McDonald’s has been leading the fast food restaurant category in terms of system-wide sales and total number of restaurants worldwide followed by Subway and Starbucks. In the fiscal year 2013, system-wide sales for the fast food giant rose 2% to reach nearly $28 billion and its total store count reached nearly 35,000 with 7,000 company operated restaurants. However, fast casual restaurants such as Chipotle Mexican Grill have started eating into the market share of these leading QSR chains for the last couple of years. According to Technomic’s 2014 Top 500 chain restaurant report, sales for fast casual chains grew by 11% and store count by 8% in 2013. Although Chipotle generated $3.2 billion in revenues in 2013, which in comparison to McDonald’s seems to be a much smaller figure, the revenue growth has been consistently at around 20% for Chipotle for 5 years now.

We have a $444 price estimate for Chipotle, which is about 20% lower than the current market price, compared to a $103 price estimate for McDonald’s, which is about 2% above its market price.

See Our Complete Analysis For McDonald’s Corporation and for Chipotle Mexican Grill.

The Quick service restaurants consider the growing fast casual segment a major threat due to following reasons:

Shift in Customer Traffic

Big QSR brands such as McDonald’s, Subway and Starbucks have been facing a huge threat by the leading fast casual restaurants, as the traffic growth in the latter segment surpassed that of every other segment for the fifth consecutive year. ^[1] According to the NPD group, the fast casual segment saw an 8% rise in the guest count in the 12 month period ended in November last year, whereas traffic count was flat for quick service restaurants. This consumer shift is primarily due to the fact that people with higher disposable income are inclined more towards quality and hygienic food, unlike less nutritioned junk food in most of the quick service outlets.

Average customer count per company-operated restaurant annually at McDonald’s, the leading brand in QSR segment, has been diminishing by 1.3% for two consecutive years, whereas for a successful fast casual restaurant such as Chipotle, the average guest count has been rising by 5% and 2.3% in the last two years.

However, McDonald’s shifted to healthier menu items with its new wraps but the products didn’t take off as per the company’s expectations. The company has been refocusing on its burgers and other value products, instead of providing wide variety of healthier eating options, causing health conscious customers to shift to fast casual brands with an added luxury of proper dining in an upscaled decor.

Higher Average Customer Spend Per Visit

In leading fast food restaurants, price of meals ranges from $3 to $6 on an average, whereas in any casual dining restaurant, price of meals is no less than $13. Lying between the two segments is the fast casual segment where typical cost per meal ranges from $8 to $15. According to the NPD group, the fast-casual segment’s average ticket was $7.40 for the 12-month period ended last November, higher than the $5.30 for QSRs and well below casual dining’s average of $13.66. This range difference is due to the additional costs of high quality organic ingredients and flavors in the dishes and other conveniences such as non-plastic proper dining utensils and plates in a soothing ambiance. Average spend per customer per visit at a McDonald’s company-operated store has been rising for the last three years but at a very slow pace as the growth rate has dropped significantly. In 2013, the figure reached $3.88, up by mere 0.6% over the prior year.

For Chipotle, the average customer spend per visit per restaurant in 2013 stood at $11.56, one of the highest in the fast casual segment, with a growth rate of 1% over the prior year. The average ticket per restaurant has been rising consistently for leading fast casual brands, due to commodity price fluctuations being passed on to the customers. The sector still maintains its traffic count indicating that people prefer quality and hygiene over a rise in item prices.

During the great recession of 2008, fast casual segment saw a rise in sales from the 18-34 age group demographic. Customers with low discretionary meal spending tend to use it on healthier dining. Some of the leading fast food brands have taken initiatives which aim at adopting the traits of some of the successful fast casual upstarts, to defend their market share. From upgrading menu items to creating on-the-go options, from remodeling the stores to creating innovation hubs, top QSRs are doing everything to maintain their customer count and improving sales. McDonald’s have already planned system-wide customization of its outlets and its initiative to revamp its menu is already reaping profits. Trefis has already considered both the factors and expects the average spend per visit for McDonald’s to cross $4 by the end of its forecasts period.

Next few quarters would be very crucial for top fast food chains like McDonald’s, KFC and Subway, where the industry would be reacting to increasing commodity prices on one hand and changing consumer preferences on the other.

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1. Fast casual leads traffic growth again, NPD group [↩]