I don't know about you, but I'm a casual-dining junkie. Call it a mixture of not wanting to cook, not knowing how to make very many dishes, and wanting to reward a hard day's work, but I regularly frequent mom-and-pop eateries as well as national casual-dining chains.
Dining out is one of the most common and easiest ways people can unwind. Think about it; it's not exactly every day you get to hop on a plane to Hawaii to forget your troubles, or purchase tickets at Disneyland to drown your sorrows in dozens of rides and attractions. Dining out gives consumers a temporary escape from their everyday lives where they can (potentially) be treated like a king or queen, where they don't have to cook, and best of all, where they don't have to clean! Don't lie -- how many of you just pumped you fist in agreement. It's OK -- I did, too!
But standing out in the restaurant industry isn't easy. According to the latest figures from the National Restaurant Association, there are 990,000 restaurant locations in the U.S. employing some 13.5 million people, or roughly 10% of the U.S. labor force.
Yet if a casual-dining restaurant can succeed, the rewards can be enormous. As the National Restaurant Association also notes, industry sales in the latest year totaled a whopping $683.4 billion, up 3.6% from the previous year.
What does it take for a casual-dining restaurant to succeed and create a loyal customer base? That isn't always easy to figure out. Luckily, New York-based research firm Brand Keys did the dirty work once again and uncovered, using its proprietary Customer Loyalty Engagement Index, which casual-dining restaurants tend to inspire the most loyalty among consumers. Today, we'll take a closer look at the restaurant that took the top honor, but first it might behoove us to better understand why loyalty even matters in the restaurant industry in the first place.
Why loyalty matters
It might appear as if offering daily specials on drinks and appetizers might be the primary way that restaurants draw in customers, but that's only one piece of the puzzle. Promotional events can certainly draw in traffic, but they're also margin killers. This means a restaurant needs to be able to find ways of successfully courting that customer back during nonpromotional hours, and needs to nudge that customer into buying higher-margin items such as beverages and desserts.
The easiest way a restaurant can achieve this is by creating an emotional connection between the customer and the brand. It could be the quality of service offered, the ambience of the restaurant, the depth of the menu, the taste of the food, or a combination of some or all of the above. In reality it doesn't matter what combination works as long as restaurants eventually do figure out what factors are successful for getting customers in the door and use those positives to create lifelong customers. A loyal customer means better margins, which should ultimately lead to beefier profits.
Back to the kitchen
Now that you have a better idea of why loyalty is so important in the restaurant industry, let's have a look at two larger casual-dining chains that didn't quite meet consumers' expectations.
DineEquity's (NYSE:DIN) Applebee's is the largest casual-dining chain in the country, but according to Brand Keys it was tied for second-to-last and saved only by a worse showing from Outback Steakhouse. IHOP, also owned by DineEquity, didn't fare too much better, taking a spot in the middle of the rankings.
DineEquity is hoping for a turnaround in customer loyalty by implementing 100,000 consumer-facing tablets this year in an effort to expedite drink and appetizer orders, and allow consumers the ease of paying their bill at their convenience. As I've noted previously, consumer-facing restaurant tablets could be a game changer, but it's still too early to tell whether it'll be enough to change DineEquity's long-term fortune.
Darden Restaurants' Olive Garden was a bit of a surprise, coming in a tie for fourth place. What's surprising is that Olive Garden ranks as high as it does considering how many problems the chain has had in growing same-store sales. Darden recently tweaked Olive Garden's menu and even its storefront logo in an effort to freshen the brand, as well as jettisoned Red Lobster through a private-equity sale to attempt to reinvigorate the brand. Only time will tell if Darden's actions prove fruitful, but I personally remain a skeptic.
If you thought Olive Garden was close to taking the top honors at No. 4, then Chipotle Mexican Grill (NYSE:CMG) shareholders are going to be hotter than a habanero to learn that they took the runner-up spot in Brand Keys' study.
Being second-best really isn't bad news for Chipotle, as it's making a lot of the right moves to hold on to its customers and keep them coming back. Specifically, Chipotle's Food With Integrity program ensures that the meats it uses are antibiotic and hormone-free when possible, and that organic and local producers are tapped as a source of fresh vegetables. Consumers are more in touch with eating healthfully these days, and Chipotle does a good job of reassuring consumers that it's offering them high-quality food choices.
Of course, Chipotle also has a big test to its loyalty upcoming. Higher beef prices have necessitated that the company start boosting its prices for the first time in years. Chipotle's stable menu prices have been one of the primary factors luring in repeat and new customers. Chipotle will have to hope that its customers truly do stay loyal as it passes along higher food costs in the coming quarters.
The casual-dining restaurant customers are most loyal to is ...
Before I reveal which restaurant took the top honor in Brand Keys' study, would you care to venture a guess as to which company it might be?
Got your answer?
If you said TGI Friday's, Ruby Tuesday, or Texas Roadhouse, then you can take a step back.
However, if you managed to pull a rabbit out of your hat and selected Panera Bread (NASDAQ:PNRA.DL), then step right up, as you've correctly guessed the casual-dining chain Americans are more loyal to.
There are are a number of factors that go into why Panera takes the top spot.
To begin with, Panera has worked hard on developing meal portions that fit their customers' needs. Rather than having the kitchen pile food a mile high on a plate and send it out to you, Panera has taken the approach of feeding its customers a reasonable portion for a wide range of prices.
Not only can Panera's customers get a wide assortment of meal choices, with the company expanding into an array of new pastas and breakfast sandwiches in 2013, but Panera has a keen focus on the quality of food that it presents. As Chipotle has fed on the fact (pun fully intended) that consumers are craving more nutritious foods, Panera has latched on by offering a number of organic and all-natural products. In fact, Panera recently announced a new "comprehensive food policy" that will see the end to artificial additives on its menu by 2016. The result is that Panera has been able to attract consumers from all walks of life, as well as families. The menu is wide enough to support even the pickiest taste buds.
Another winning strategy for Panera has been latching on to America's love for coffee and offering its own unique blend. Although this is somewhat ironic, Gavina Gourmet Coffee, the company that supplies Panera with its coffee, is also the same company that supplies McDonald's, one of Panera's prime coffee competitors, with its own special coffee blend as well. By developing a signature blend, Panera has given itself an easy way to stand out from the competition, and also has given plenty of customers a reason to stop in on a daily basis.
Put together, these factors allow Panera to charge a slightly higher price point than its comparable peers because consumers walk into a Panera Bread restaurant expecting more nutritious and better-tasting food, as well as fast service. Panera has even been experimenting with the idea of adding drive-thru's recently in an effort to hit an even broader market of consumers. As long as Panera keeps innovating and doesn't lose sight of the fact that its unique branding and high-quality products are what keep consumers coming back, then it should remain at or near the top of the casual-dining loyalty list.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Chipotle Mexican Grill, Apple, and Panera Bread. It also recommends McDonald's and Texas Roadhouse. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.