Finance | May 2017 | By Maggie Hennessy

The Value-Driven Equation of Fast Casual

Consumers are demanding better-quality foods, but are they willing to pay the extra cost?
Washington, D.C.’s Astro Doughnuts & Fried Chicken sells at a premium price but has the high quality to back it up. Astro Doughnuts & Fried Chicken / Scott Suchman
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The emergence of the higher-end fast casual 2.0 category continues to blur the line separating limited and full service, particularly when it comes to price. But more consumers seem willing to shell out a few extra bucks per entrée in exchange for what they see as higher-quality fare and one-off, hospitable experiences that rival full-service casual dining.

By definition, fast casuals are more expensive than quick serves—a characteristic that alienates consumers in the lowest income bracket but doesn’t deter other diners. In fact, a November 2015 survey of 2,000 consumers by market analyst firm Mintel found that 30 percent think fast casuals are a better deal than quick serves, and 28 percent think the quality of the food justifies its price.

Value seems to become even more flexible of a notion when it comes to fast casual 2.0. Based on the definition of value as a “product, plus service, plus atmosphere, plus brand, divided by price,” fast casual 2.0 concepts get a lot of pricing leverage from product investment, says Justin Pridon, vice president of consulting services, North America at Revenue Management Solutions, a data-driven RMS provider.

“When you talk about those differentiators for 2.0, you’re really finding they’re looking to invest much more in the product—better specialization and more focus on farm to table, innovation, and trends down to the regional level—because they have those strong vendor relationships,” he says.

As this new segment embraces higher standards for food quality and transparency, though, it’s under more pressure to meet the freshness and creativity standards that are wrapped into fine dining–level notions of value.

“There’s definitely this pressure to keep reinventing yourself and keep the quality fresh,” says Elliot Spaisman, cofounder of Washington, D.C., comfort-food chain Astro Doughnuts & Fried Chicken. “You can’t go stale, and you always have to reinforce that quality thing.”

Astro’s mix of staple doughnuts (PB&J and crème brulee) and monthly rotating specialty options (like raspberry rose and blood orange mimosa) are priced up to $3.10, mainly because of food costs and labor-intensive, from-scratch prep. But value is a balancing act, especially as the bar on quality has gone up across limited service.

“It’s a fine line with doughnuts,” Spaisman says. “Everyone in our price range is making everything from scratch—everyone who’s not is using some sort of mix you add water to. To do what we’re doing and use good-quality eggs, butter, flour, and milk, you can’t charge much less unless you’re using a mix.”

Because Astro offers savory lunch items like wings and specialty fried-chicken sandwiches, Spaisman is also guided by the notion of fitting into everyday dining budgets. “Take the example of an office worker going to lunch,” he says. “My mindset is that he does have a budget, and if you go over, he’s not going to visit you as much. You’ve got to factor that into your pricing.”

Indeed, 26 percent of the Mintel survey respondents dubbed fast-casual chains as too expensive to eat at regularly. But for some emerging 2.0 brands, super-high volumes may not be as important to their success, particularly if they’ve invested in a more robust alcohol program.

“Offering beer, wine, and batched craft cocktails allows us to not be as defined by food costs and trying to hit a number,” says Peter Thanoukos, co-owner of DOX Quality Greek, a 2.0 newcomer specializing in chef-driven Greek street food in Chicago’s trendy Wicker Park neighborhood. “We can absorb a little of that and have it offset by liquor sales.”

DOX’s menu ranges from $3.50 for hand-cut fries with imported Greek cheese to $20 for locally sourced, whole rotisserie chicken. Most dishes are highly shareable—there are dips, snacks, kabobs, and pitas. Ticket times range from five to 12 minutes per dish, though having alcohol helps assuage guests’ impatience, Thanoukos says.

“I think when they have a drink in their hand and good music playing, it makes them more willing to just relax,” he says. “[Limited-service] booze is great, too, because you don’t have to have a full-service bar or bartender—just a small, curated selection that pairs well with the food.”

Some DOX customers will linger up to an hour and a half, which is uncommon for limited service. Longer meal times mean higher check averages, as diners opt to spread the course out and share their meal over a few drinks. In fact, alcohol is a great example of “organic” check building, which is proving profitable for 2.0s. Pridon says it’s an example where the option to increase check averages can be seen as a benefit, not just as an additional charge.

It also plays into DOX’s location in a more residential neighborhood. Unlike its more established sister chain GRK Greek Kitchen, which offers fast, inexpensive, made-to-order Greek fare at four locations in high-traffic downtown areas, DOX gets the bulk of its revenue during dinner and on weekends.

Service remains the line separating fast casual and fine dining, and is reflected in a cheaper final bill. But 2.0 brands are showing a unique ability to create one-off-type experiences that also manage to feel hospitable and generous. This comes through branding, whether it’s tapping into their communities or investing in ambience with local personality.

“The ambience and feel help reflect the perceived value that you’re walking into something different here,” Thanoukos says. “That’s the evolution of dining as we see it.”

This story originally appeared in QSR's May 2017 issue with the title "Value 2.0: The Price of Premium."