Lane Cardwell

Restaurant Unicorn

I was talking with a casual dining CEO recently about his plans to develop a new concept. I asked him if it would be a fast casual concept. “No,” he replied, “I don’t believe in fast casual. I see very few fast casual concepts that make money. This one will be full-service so that we can make some money.” I have been pondering that statement for the past couple of weeks and have been thinking about the implications of it. Can it be true that a profitable fast casual concept is as rare as the mythical unicorn?

Fast casual has been touted as the new growth segment for the restaurant industry. It has higher quality than traditional QSR, and lower prices than casual dining. Perhaps its biggest advantage over casual dining is its counter service approach. Order and pay at the counter and then, depending on the concept, the food is either delivered to your table or you return to the counter to pick it up. With some, like Chipotle, you never leave the counter while your order is being assembled. Beverages in all fast casual concepts are self-serve. This approach to service saves the customer a 15-20% tip on the bill (an expense that we often forget since it doesn’t go into our pockets), and 20 or more minutes on the experience by not having a server as part of the equation.

                       
Large fast casual concepts include Chipotle, Qdoba, Panera, Pei Wei and many others of varying sizes and cuisines. They tend to gravitate around 3,000 square feet, with some larger and some smaller. Their menus tend to be more limited than casual dining to accommodate ordering from a menu board and speeding up the time from order to delivery of the food.

One of the interesting facts about our industry is that many of our costs are about the same per square foot no matter what segment the concept is in and what the cuisine is. Lease costs per foot, basic construction build out (pre-design and décor), labor cost per hour, ingredient costs for much of the menu, operating costs, and so on, are all essentially the same before you even put a name over the door. The big variable in fast casual, as it is in much of our industry, is sales. Fast casual concepts can range by as much as 200% between the lowest sales/foot concept and the highest sales/foot concept. It is the sales response to a concept that seems to be the biggest determinant of profitability.

I don’t mean to stereotype, but it appears from conversations with a large number of restaurant operators that there is a generational divide that exists between fast casual and casual dining. The younger Gen X'ers and older Millennials (ages 18-35 ) seem to prefer fast casual and Baby Boomers seem to prefer casual dining. I would imagine that if this were true (and if it were it wouldn’t be a stereotype) that the younger generation see fast casual as new, more affordable, and faster paced. The older generation see casual dining as familiar, affordable on their incomes, and comfortably paced. Obviously there is a big overlap between both groups in their use of both segments, but there does seem to be some truth to this line of demarcation.

With the rate of growth of many fast casual concepts it does not seem that their leaders are worried about the “profitability myth”. They are too busy opening restaurants to take advantage of the land grab that existed before the recession settled in, and will exist after the recession lifts. This does not mean that there is not a special challenge that confronts fast casual concepts in achieving an adequate return on their investment. There is no tip credit to help offset the wages of some front of the house employees.

I have listened to the Wall Street presentations of many of the public fast casual concepts in the industry. If their profitability is as rare as a unicorn, they don’t seem to realize it. However, for some fast casual concepts getting the sales necessary to thrive requires the luck of a leprechaun.

Posted by Lane Cardwell on May 7, 2009 | Comments (5)