Much has been made of fast casual’s potential sling-shot out of the COVID-19 crater. It’s a notion that tugs at some familiar examples. When the Great Recession smothered retail in 2008–2010, it was fast casual that rode lowered barriers to entry. In 2017, industry consultant Pentallect Inc. said fast casual growth slowed to between 6–7 percent from about 8 percent the year before. This was a headliner at the time. Why? Because fast casual boomed 10–11 percent in the five years prior.
It proved a couple of things. Firstly, fast casual and its entrepreneurial-fueled DNA flooded gaps left behind by the rationalization of overleveraged brands. And then things got crowded.
In general, consumers benefited since they had no shortage of options. The industry enjoyed 20-plus years of unit growth. But supply started to peak in 2018–2019. Following unit expansion of 8–9 percent year-after-year from 2010 to 2017, fast casual pulled back, rising just 2 percent in spring 2019, according to consultancy Green Circle.
This created an intensely competitive environment that forced returns on invested capital to narrow for all but the top brands. If we think in terms of a post-coronavirus landscape, the unfortunate closure of 90,000 or so restaurants (per the National Restaurant Association) should leave behind a thinner supply base that will lead to improved competitive dynamics for concepts that do make it out. Fewer stores grappling for share of consumer dollars spent on food away from home. In that, a more rationalized field of restaurants that also opens favorable real estate opportunities.
Where does fast casual fit in? Even before the crisis, a glut of commercial real estate within urban markets drove rent to stabilize. For instance, the amount of empty retail space in New York City climbed to 11 million square feet in 2017, double what it was in 2007, Green Circle pointed out.
The pandemic exacerbated a precarious situation. “In addition to the countless small retail and restaurant businesses that may be forced to permanently vacate their commercial spaces because they can no long afford them, a growing number of corporate chains is also beginning to prove unwilling or able to pay their rent. These store closures are sure to create an overhang of real estate inventory, leading to lower rent for the surviving chains,” Green Circle said
This rise in vacancy has the potential to reduce commercial rent and surface tenant improvement packages made available by landlords ready to fill their spaces.
When you consider all of this, plus where fast casuals tend to spring up and how this was always a real estate conversation, it draws an interesting picture. The total dollars spent by millennials and Gen Z continues to grow versus other age groups, particularly within restaurants, Green Circle added. And thus, consumers from these generations could move away from traditional quick-serve concepts and trade up to healthier fast-casual alternatives in the years to come.
Yet is it so cut-and-dry?
Here’s a point made by Firehouse Subs CEO Don Fox: “The economic fundamentals are still akin to that of the 1990s,” he said. “The post-pandemic regeneration of the restaurant industry may well sprout from the fertile ground that gave birth to fast casual, creating a renaissance in restaurant development for the segment. Some brands will lean into free-standing buildings, and drive thrus will be coveted. The line will increasingly blur between quick service and fast casual. But the economics have not changed all that much, and it is in the realm of leased in-line space where the current white space will likely be filled.”
To go back in time, the “fertile ground” Fox referenced was born from a quandary. Operators sought to launch innovative concepts and compete with quick-serve giants, and so they turned to in-line, leased real estate, which could be developed more affordably (as opposed to ground-up builds and capital requirements north of $1 million before the doors opened). These became increasingly common launch pads for fast-growing pizza and sandwich chains. And eventually, the incubator that would become fast casual, Fox said.
But let’s zero in on a different point Fox made—this idea of the lines between quick service and fast casual blurring.
Location technology company Bluedot recently released its latest “State of What Feeds Us,” report, which has kept tabs on consumer behavior and restaurant habits throughout the pandemic.
The latest edition offered a year in review of shifting preference precipitated by COVID. In addition to the emergence of indoor dining, it explored rising competition between fast food and fast casual as restrictions drop away. What it found was consistent consumer behavior across both categories, signaling the once-vivid dividers between fast food and fast casual might be evaporating.
“It remains to be seen if fast casual brands will win back the customers they lost to fast food restaurants this past year,” said Emil Davityan, Bluedot co-founder and CEO, in a statement.
Before getting into nuances, Bluedot’s data, from a high level, showed fast food outpaced fast casual and casual-dining restaurants by more than 2X in the past months. Forty-five percent of people visited fast-food restaurants mainly, if not exclusively, over fast casual. Visits to fast food over casual dining was slightly higher at 47 percent.
“Brands that accelerated investments in technology and logistics to deliver faster and more frictionless service during the pandemic are beginning to level the playing field, but now there’s a race to roll out restaurants of the future,” Davityan said. “It’s the next evolution of personalization, speed and convenience layered with a unique brand experience that will best position restaurants to win market share.”
The state of fast food
Going through the sections, it will become clear where fast food and fast casual are melding, and what’s going to separate brands as the industry resets.
Starting with fast food, it all begins with the drive-thru. Consumer visits to drive-thrus remain strong, contributing to higher customer lifetime value.
Visited drive-thru the same or more often than before:
- May 2021: 70 percent
- February 2021: 68 percent
- August 2020: 74 percent
- April 2020: 52 percent
So we’re talking a 36 percent year-over-year increase. Nine out of 10 respondents in Bluedot’s 1,800-plus consumer study said they’ve visited a drive-thru in the last month.
Nearly 30 percent (29) said personalized deals and offers inspired repeat business. And the No. 1 reason they gave for why they frequent one drive-thru over another was order accuracy, at 67 percent.
Next on the list was speed and wait times (61 percent), followed by the restaurant offering their favorite menu item (50 percent).
Thirty-four percent of consumers ranked drive-thru as the most likely place they would add more menu items (or build their check).
- Drive-thru: 34 percent
- Restaurant app ordering: 24 percent
- At the counter: 20 percent
- Online (web ordering): 18 percent
- Ordering by text: 4 percent
Bluedot also asked guests, based on channel and income level, where were additional menu items most likely to be added?