Fast casual has become the restaurant trend every company aspires to. Cheaper than a meal with waitress service, but with higher-quality food than a typical quick-service (fast-food) eatery, the concept hits the sweet spot for the American consumer right now.
The market for the category has "grown by 550% since 1999, more than ten times the growth seen in the fast food industry over the same period," wrote Robert Ferdman in The Washington Post, in February. In an article titled "The Chipotle Effect: Why America is obsessed with fast casual food," he declares Chipotle (CMG -1.34%) the clear leader in the category:
The Mexican chain has come to embody not only the present but also the future of fast casual sector. Chipotle both has satisfied all of the conventional qualities of the category -- food quality, freshness, efficiency, transparency, etc -- and has managed to etch out a new standard that is increasingly central to the category: sustainability.
He also acknowledges that if the Mexican chain is the leader, Panera Bread is not far behind.
Other fast casual chains, including Panera, seem to be following suit. Panera has taken steps to be more environmentally friendly, including a redesign of all of its packaging last year to promote recycling.
Those two companies are clearly pacing the field, but they are not alone in the exploding category. Below I will look at the leader, the follower, and one company that has stumbled so far, but that aspires to become a fast-casual leader.
The leader: Chipotle
Chipotle has built an empire around its brand marketing. The company pitches "food with integrity," and it actually practices what it preaches. This has included not selling certain items when it was not able to source the quality of ingredients it requires for its stores.
The company has ridden that philosophy to steadily increasing results, which continued upward in the first quarter of 2015. Revenue for the quarter was $1.09 billion, up 20.4% from the first quarter of 2014. The company also posted a 10.4% increase in comparable-restaurant sales. In the earnings release, the company said that was
driven primarily by an increase in average check, which includes the benefit of a nationwide menu price increase that was fully rolled out during the second quarter of 2014, and to a lesser extent by increased traffic.
Chipotle has built a brand where customers accept that maintaining quality can mean price increases, and they seem willing to pay them. The brand has pushed using quality ingredients, and the public actually seems to believe it. That gives the brand a very defensible position going forward, as companies that espouse the same philosophy -- especially those who are late to the game like Yum! Brands and McDonald's -- often come off as insincere.
Chipotle was the first major chain to eliminate GMOs.
The contender: Panera
Panera may not inspire the same cult-like loyalty Chipotle does, but it has built its brand using many of the same philosophies. In the past, the fast-casual chain hasn't done as good a job as its rival in promoting its use of quality ingredients, but it has started to change that. In May 2015, the chain published "a list of artificial colors, flavors, sweeteners and preservatives that the Company has eliminated or intends to remove from its U.S. Panera Bread and St. Louis Bread Co. bakery cafe food menus by the end of 2016."
"Last year we unveiled our Food Policy to hold ourselves accountable to long-held values and set the future vision for our menu. The No No List is the latest step on our journey to clean food and a transparent menu," said founder and CEO Ron Shaich.
These efforts have been paying off, as the brand's revenue for the first quarter grew by 7% to $649 million, and sales in company-owned stores climbed by 1.5%. Like Chipotle, Panera is also growing, adding 11 new company-owned stores and 14 franchise-owned bakery-cafes. The company is also working to improve results by refranchising "50-150 bakey-cafes," according to its earnings release.
The wannabe: Noodles & Co.
While Chipotle leads the fast-casual space and Panera has used many of the same tactics to carve out its own growing piece of the market, Noodles & Co. (NDLS 0.85%) has struggled to find its footing.
Source: YCharts.
However, Noodles may be back on the right path despite its downward-trending stock, as it posted 18.1% revenue growth in the first quarter of 2015, though same-store sales only increased by 0.8% for company-owned restaurants, and 1.4% for franchised restaurants. The growing brand also added 16 restaurants during the period but saw contribution margin decrease to 16.2% from 17.3%.
Noodles and Co. has not quite put together the formula, but it has many of the same ingredients that power Chipotle and Panera. It pushes the quality of its food and offers heavy customization of its menu. The chain's results have lagged, but it may be the next brand poised to capitalize on the fast-casual craze. Noodles may not be a buy just yet, but it's a stock worth watching.
