Fast Casual Restaurants Slice Off Bigger Portion of Dining Dollar

Led by the rapidly growing fast casual segment, the restaurant industry should see significant sales increases in 2011 after getting rocked by the recession.

Consumers who were worried about the economy cut back on dining out in 2008 and 2009. But with modest gains in 2010 pointing to better days ahead, industry analysts believe this year could be the best for restaurants since 2007.

"Consumers are finding some retail therapy in things like eating out," John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC inBoston told Bloomberg. "They may not be ready for that two-week vacation inEuropeyet, but they'll go to a restaurant once every couple of weeks. It's an affordable luxury."

U.S. restaurant chains should enjoy a 1.6% increase in sales this year following a 0.1% increase in 2010, according to restaurant consultancy Technomic Inc.

The National Restaurant Association is even more optimistic, predicting a year-over-year sales increase of 3.6%.

"We're seeing a substantial reversal in the trend and consumer confidence is getting better," Hudson Riehle, senior vice president of the Research and Knowledge Group for the National Restaurant Association told "Challenges remain, but from an industry perspective, the momentum levels are the highest they've been since 2007."

The Popular Choice

While all types of restaurants should get a lift from the gradually improving economy, the fast casual group - exemplified by Panera Bread Company (Nasdaq: PNRA) and Chipotle Mexican Grill Inc. (NYSE: CMG) - is expected to outperform the rest of the industry as it has for the past several years.

Fast casual, an offshoot of the quick service segment that includes fast food chains such as McDonald's Corporation (NYSE: MCD), offers a more upscale atmosphere and healthier food while omitting the table service of casual dining restaurants like Brinker International Inc.'s (NYSE: EAT) Chili's and DineEquity Inc.'s (NYSE: DIN) Applebee's.

Visits to the top fast casual chains, which include Chipotle, Panera Bread, Five Guys Burgers and Fries, and Noodles & Co. (both Five Guys and Noodles are privately held) rose 6% in 2010, according to NPD Group's CREST, while restaurants as a whole witnessed a 1% drop. Since 2007 traffic has increased 17% at fast casual establishments.

And the fast casuals have responded by adding more locations. Even in the difficult economy of past three years, the segment has expanded by 12%.

Sales growth also reflected the exploding popularity of fast casual restaurants. Five Guys, with a 38% increase in sales, was the fastest growing chain in the United States last year, according to Technomic. Chipotle's 22% rise in sales earned it third place; Noodles & Company, with a 14% increase, came in ninth.

"The strong growth in demand in restaurants is the [fast casual] sector that is positioned between fast food and casual dining," Bryan Elliott, restaurant analyst with Raymond James told columnist Andrew Leckey. "These restaurants have no ‘wait staffs' (table servers) and are perceived to offer better food quality and a better buying experience than fast food, which helped them do well during recession and continues to help now."

The healthier food is a primary reason consumers are flocking to fast casuals. According to the National Restaurant Association, 7 out of 10 consumers say they are trying to make healthier choices in restaurants then they did two years ago.

"There's a food revolution going on in this country," Steve Ells, founder of Chipotle, said at a Television Critics Association press tour. "People are really concerned about what they're eating. This notion of a fast-casual restaurant is different from fast food. ... Fast casual brings real food and real cooking and adds convenience."

Tough to Swallow

To some degree, the fast casual group's success has come at the expense of the two segments it sits in between, fast food and casual dining.

While fast casual visits went up last year, visits to casual dining restaurants fell 2%. The bar-and-grill segment in particular has struggled, reporting negative traffic every quarter since 2004.

Two chains, Fuddruckers and Uno Chicago Grill, filed for Chapter 11 bankruptcy in 2010. By midsummer Luby's Inc. (NYSE: LUB) had purchased Fuddruckers, while Uno managed to emerge from bankruptcy.

Only those casuals that offer distinct dining experiences, such as The Cheesecake Factory Inc. (Nasdaq: CAKE) and Texas Roadhouse Inc. (Nasdaq: TXRH), have thrived.

The fast-food chains have made a mediocre showing in the U.S. lately.

"The only fast-food chains really doing well this year are YUM! Brands Inc. (NYSE: YUM) and McDonald's, and that is really driven by international business," Steve West, restaurant analyst with Stifel Nicolaus (NYSE: SF), told columnist Andrew Leckey. "McDonald's has a really good U.S. business as well, but when we talk about YUM it is all about China and its 3,000 KFC stores and its 500 Pizza Hut stores there."

With fast casual the only segment showing significant growth, the rest of the industry has taken notice.

Competing segments are trying to adopt some of the elements that have made fast casual so popular. Most fast food chains already have jumped on the healthier menu bandwagon. And last November Denny's Corporation (Nasdaq: DENN) took the radical step of launching Denny's Café, a fast casual version of its traditional restaurant.

But while all segments should do better 2011, potential threats to the industry like higher food and gas prices may keep skittish restaurant-goers from returning in full force for years.

"You don't have the same freedom and frivolity around eating out that you had prior to the recession," David Grzelak, an executive director at Engauge, an advertising and marketing agency told the Chicago Tribune. "(Consumers) are eating out more often, but the decisions around how they're spending - they have more guardrails, warning signals. They're doing so much more cautiously."

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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