Web Exclusive | June 2017 | By Danny Klein

How to Survive Fast Casual's Decline

Penn Station East Coast Subs’ president talks about what to do—and what not to do—to thrive in today's challenging industry.
Before you even think about making cuts, think about the customer first, says Penn Station East Coast Subs' president Craig Dunaway. Penn Station East Coast Subs
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Leading up to Penn Station East Coast Subs’ annual meeting on June 26, president Craig Dunaway spent 45 days working on his state of the union. Throughout research, Dunaway continued to digest similar headlines: Sagging sales, fleeting foot traffic, or, as Bloomberg recently put it, the reality that “America’s Fast-Casual Dining Boom Is Over.”

According to industry tracker TDn2K, sales across fast casual fell 1.18 percent in May. Another company, BDO, which collects data from publicly traded restaurant companies, identified fast casual as the industry’s lowest performing segment through the first quarter of 2017, with sales declining 2 percent. Bloomberg’s article referred to findings from industry consultant Pentallect Inc., which noted that fast-casual sales growth is slowing to between 6 and 7 percent from around 8 percent in 2016. Growth hovered between 10—11 percent in the previous five years.

Much of this, Dunaway says, can be credited to increased competition, both in fast casual and quick service, and some straightforward perspective. Fast casual’s boon was so pronounced, for so long, that a drop off isn’t exactly reason to smash the panic button. The scales were bound to balance in time.

And, regardless of how difficult the financial climate gets, it still doesn’t compare to 2008, Dunaway says. He’s sharing those lessons with the 315-unit company’s 81 vested owners.

“I saw a lot of brands that I guess, for lack of a better term, they cheapened their product,” says Dunaway, who took over as president in 1999 when the company had 63 stores. “Either the portion size or the quality of protein they used. We took a very contrarian approach to that, and said, ‘You know, we need to make sure at a minimum we’re using the quality products that we are. When we come out of this, people will remember that.’”

Dunaway has some ideas for what fast casuals should and should not do to counter the sluggish economy. He’s vehemently against cheapening product. When you consider the issues at hand—competing for consumers with grocery chains, convenience stores, improved quick serves, casual dining and full service—the window to attract guests is narrowing, he says. If they choose Penn Station, Dunaway wants the impression to be lasting. It has to be. And if that means paying more for USDA choice steak and stocking a leaner pepperoni, it’s worth it.

As any operator will second, the two most prudent costs in this business are food and labor. Dunaway understands restaurants need to make cuts, but operators should let efficiency, not paychecks, guide their decisions, he says. His solution: Don’t cut back during busy times. It’s about learning how to manage the periods between 2 and 5 p.m. and 8 p.m. to close.

“People are more starved for time than ever,” he says. “When you only have half an hour, 45 minutes for lunch, you want to make sure you’re not standing in line for 15, and I’ve seen and heard the inclination to cut back on labor during the busy periods. You just can’t do that.”

This is true late at night as well.

“I’ve heard from a lot of other executives in other companies where their franchisees want to cut back on the hours of operation. Hey, we’re not as busy after 8 so let’s close the doors at 9 or let’s close the doors at 8. Hey, people still need to eat. And people are still going to eat then. I think when you offer them better service by staying open you’re much better served than trying to manage your PNL by not allowing sales to come in because you closed your doors early.”

Ever walk into a restaurant and it’s cleaning up and getting ready to close? Dunaway says that’s a sure way to lose a customer for good. “You’re making the guest feel unwelcomed,” he says.

Another factor Dunaway points to is advertising. On average, he says, statistics show consumers are spending around $240 less per person eating out. On a $10 ticket, that’s twice a month. “So you better stay relevant in their minds,” Dunaway says. “So I think at a minimum you have to stay the course of advertising. And I think in this day and age you need to get your food in the mouths of people and you either need to give food away to remind them whom you are or you need to advertise to remind them. And that doesn’t mean discounting everything. It means a lot of promotions and getting involved in schools and churches and community to make sure you’re still relevant.”

Investing in employees and improving employee retention is huge, and it’s all driven with the consumer in mind. Before cutting back, Dunaway says, think about that equation first.

“I think there are better ways to save money in a competitive environment than cutting back on something that impacts the customer,” he says. “Something that impacts your employees and the quality of your product impacts all of the people.”

For example, thinning a burger patty from 2.5 ounces to 2.2 ounces might seem negligible. It’s not, Dunaway says.

“You may think they don’t know but they know,” he says. “The way I’ve always tried to approach is it to say look at your operating income statement or look at your PNL and what is it that you don’t need to keep the doors open. And if it impacts your customer or your employees negatively, you might need to rethink that.”

As for the pulse of fast casual in general, Dunaway says quick service deserves some kudos. It wasn’t so long ago that the discrepancy was so wide between, say a fast food burger and a fast casual one, that you could drive a semi-truck through it and shift the lever to park. Meanwhile casual dining is starting to fight back as well, investing in to-go, delivery, and quickening operations in-store.

“To me, that’s where fast casual has suffered,” he says. “It’s the pressure from both sides, both acknowledging fast casual and then getting better at what they do in order to compete with it.”

But there are still some distinct advantages. Dunaway says fast casual’s potential remains rosy thanks to a limber model that can “adapt and modify easier than some of the big boys.” The concepts are more financially reasonable to scale and you can often avoid the huge bureaucracy when it’s time to implement change.

“I think that what you’re going to continue to see is technology playing a part. Because technology to me answers some of the questions that I talked about,” he says. “It answers the get the food to me as fast as you can part. It answers the what do I do about an ever challenging labor market part.”

“I think you’re going to see online ordering or mobile ordering or potentially customer ordering through kiosk,” Dunaway continues. “I think you’re going to continue to see that take on a greater role. Because I think people are just going to continue to feel pressured for time.”

On that final note, however, Dunaway isn’t exactly sold on the kiosk method, currently being touted nationwide by McDonald’s “Experience of the Future” redesigns.

“I think there’s a misconception because we used to go to the airport and we would go up to the kiosk at Delta or American and get our ticket and people think you can order food that way,” he says. “I like the idea of the smart phone, which the consumer pays for the hardware and we pay for the software. So their technology is always current and because their phones are always in their hands they know how to use it better than my kiosk. I would rather you order online through your phone than come into a restaurant and look at my screen and have that be foreign to you every two weeks. Again, it always comes back to the consumer. Are we doing everything we can to make them happy?”