For decades, the value equation in the limited-service restaurant industry was this: Divide what you get by what you pay. The lower the price or the greater the discount, the better the value.
Today, that equation more or less holds up for a large portion of U.S. consumers who remain budget-conscious in a post-recession world, and several quick-service brands are still committed to value deals and low price points to sway customers.
But the limited-service industry has also come a long way from the days of burgers for a quarter and milkshakes for a dime. Demand for high-quality and innovative foods is at an all-time high, and the fast-casual establishments that have sprouted up to answer that demand are growing faster than the rest of the restaurant industry; according to a report from The NPD Group last summer, fast-casual unit counts were up 7 percent compared with the year before, while that figure was just 1 percent for all chains and minus 1 percent for the whole restaurant industry.
The only problem? The high-quality foods served in fast casuals come at a premium. While average per-person checks at quick serves don’t often eclipse $5–$6, the average is often between $7 and $15 for fast casuals. These prices have forced fast-casual operators to consider their value equation and how they get customers to buy in, especially as they grow into areas with lower median incomes.
“Many people thought value meant lowest price or highest discount. But that’s an old way of thinking,” says Mark Mears, CMO of Noodles & Co. “Today, our guests want and demand more than just a meal; they want a total dining experience where the whole is greater than the sum of its parts.”
Adds Frank Paci, CEO of Corner Bakery Cafe: “At the end of the day, that customer has X number of dollars to spend. How do you get them to spend them with you?”
The sliding scale
Paci has been CEO of Corner Bakery—the nearly 200-unit, Dallas-based bakery-café chain serving upscale sandwiches, salads, pastas, and soups—since the fall. One of his first commitments has been to comb through the menu and find a way to bring the value within the brand’s menu to the forefront.
That’s included emphasizing the fact that the restaurants use fresh ingredients and make food to order. But he also wants customers to understand the wide range of menu options that can be mixed and matched to the customer’s liking. Paci points to the chain’s Corner Combos as a great value proposition because customers can bundle a number of different items—choosing two from among sandwiches, salads, Panini, pasta, and grilled flats—together for one price.
“One of the things we’re going to emphasize moving forward is, it’s all for the same price; you make the call as to what it is you get,” he says. “There are a lot of different ways people can get value, and we feel like our value is not to direct them. As opposed to the value menu, where you can have this and this and this for a price, we’re basically saying, ‘Here’s the price
point, you figure out how you want to take that from here.’ It’s just a different way to think about it.”
That sentiment is shared at Corner Bakery’s fast-casual peer, Noodles & Co. The Denver-based global-cuisine chain offers a menu where customers can pick an entrée size (regular or small), protein (meat or tofu), and side (vegetables, soup, or salad), all of which determine the final price. Mears says providing these options empowers customers to make their own decisions on portion and price, which delivers value.
He adds that the value extends to the several different occasions in which guests choose to dine at Noodles & Co. There’s dine-in and carryout. There’s catering, online ordering, and possibly soon delivery. Breaking it down even further, Mears says there are five types of customers who dine at Noodles & Co.: the habitual (those who crave the food), the flavor seeker (those who want something different), the health-conscious, the budget-conscious, and the family-first (young families whose kids influence their decisions).
By offering a range of items and prices for every type of customer and occasion, Noodles & Co.—where he says the average check is somewhere between $8 and $10—presents a value to its consumer base. “You can build a meal that’s customized to your particular taste or craving, your appetite, and certainly your budget—how much you want to spend during that particular dining occasion,” Mears says.
Customization has been key to the growing fast-casual movement, creating a sliding scale upon which guests can determine their price preferences, and, therefore, their value experience. Paci says this sliding scale creates an opportunity for Corner Bakery to reach many new customers across the country, especially as more people become educated about the food system.
“We don’t necessarily appeal to the person who is looking for the dollar menu. If they want the dollar menu, they’ll go find the dollar menu and say, ‘I’m happy with what I get for what I pay,’” Paci says. “Whereas, people who are stepping up to fast casual are saying, ‘I’m more interested in making sure that what I’m getting is worth what I’m paying, but I’m also interested in what it is I’m getting.’”
One of fast casual’s calling cards in its competition with quick service has always been the quality of the food. And that quality is increasingly important to customers. Local and organic foods found their way into the fast-casual system in the last decade, while clean-label foods—those without additives, genetically modified organisms, antibiotics, and other artificial ingredients—have become a part of the foodservice conversation in the last year.
Now operators are leveraging that quality by putting it front and center of their value proposition.
Sean Pourteymour is CEO of Luna Grill, a San Diego–based Fast Casual 2.0 concept dishing a fresh Mediterranean menu at 21 locations between California and Texas. The chain features wraps and sandwiches for about $9, salads for $6.50–$10.50, and signature plates for $9.50–$14. The online menu lists calories and denotes items that are vegetarian or vegan, as well as those that include either all-natural or free-range proteins.
Pourteymour says customers don’t put price first as much as they used to when searching for value. Anymore, he says, they’re looking at the makeup of the food.
“I want to have a real, nutritious meal,” Pourteymour says. “That’s what I think customers look at, and that’s value. Because you can get cheap food. … But I don’t think just slapping on some food and putting a low price on it is what people are looking for anymore.”
He adds that portions are large and calories are low at Luna Grill, giving customers health-conscious choices while also giving them the option to stretch their food to another meal with leftovers. The value equation at Luna Grill is especially popular with Millennials, he says, which helps solidify the concept as a dining destination for that ever-important demographic.
Keith Melker, a partner with business consulting firm Boston Consulting Group (BCG), says fast-casual operators have done a good job listening to consumers and focusing their development on what potential customers want from the restaurants where they commit their dollars.
“If you think about a lot of fast-casual restaurants, they’ve really begun to talk a lot about the way the food is made, the quality of the ingredients, and some specific food characteristics like natural and organic that actually resonate with consumers and create a higher willingness to pay,” Melker says.
The use of characteristics, or “sensory terms,” says Jason Felger, CEO of market research firm Food Genius, is still in its infant stages but on the rise, especially at upstart fast-casual concepts in major food cities like New York, Chicago, and Los Angeles. Adding these terms to the menu makes sense for concepts that are trying to fit into customers’ healthy lifestyles and those that post higher prices, he says, because they illustrate the value proposition.
“The fact that they’re being called out and there’s such an overemphasis on it helps drive that price point to the consumer and reinforce it,” Felger says.
Bun Mee is one such place where food characteristics have found their way onto the menu. At the San Francisco–based Vietnamese sandwich shop, descriptors like fresh, organic, and gluten free help describe the menu items, which include things like the Grilled Lemongrass Pork sandwich, the Saigon Peanut Rice Bowl with Tofu, and the Mango Sesame Salad. Prices at Bun Mee range from $6.95 to $8.49 for sandwiches and from $9.75 to $11.75 for salads and entrées.
Denise Tran, founder of the two-unit Bun Mee, says she has to strike a balance with her prices because the Bay Area is an expensive area in which to do business, but local customers still demand value and a commitment to better sourcing strategies and ingredients. She says she sources local ingredients and those without antibiotics and additives whenever she can, and makes food to order. Now that she has two locations, she says, she has more power to negotiate costs on high-quality items so she doesn’t have to increase her prices.
“[Customers] still want fast and value, but they care about where their food comes from and what they’re eating,” Tran says. “That’s something that really was an important consideration when we developed Bun Mee. It was very important for me to have something that was made to order.”
Tran points to Chipotle as being the brand that changed the standard for value in the limited-service restaurant industry. By providing “Food with Integrity” in an environment that’s “clean, that’s nice, that’s hip, that’s cool,” she says, Chipotle became the “gold standard” for value in the fast-casual category.
Beyond the food quality, fast casuals have separated themselves from traditional quick-service brands by enhancing the in-store experience. Fast casuals today commonly have real plateware and silverware, as well as comfortable dining rooms and often alcohol service to encourage a dine-in occasion.
Luna Grill’s Pourteymour says the experience his company is trying to create is one that competes with casual dining, but with the speed and convenience of limited service.
“We don’t want to have that quick-service experience,” Pourteymour says. “We want it to be almost upper-end dining, but with the convenience factor that you don’t have to feel like you have to tip 20 percent and you still get the quality of food.”
Utah-based Blue Lemon is another Fast Casual 2.0 concept that was founded with the intention of providing value through a casual dining–quality experience but with limited service. Founder Aaron Day, who started the now-six-unit restaurant with his wife, Lychelle, says Blue Lemon’s prices are on the “high end” of fast casual at around $13–$14, but adds that customers still find value because of its casual-style experience.
“It’s not just about the quality; it’s not just about the speed of service. It’s a combination of all of these factors,” he says. “It’s even taking care of how you build out a dining room, or the tables and chairs you provide—the comfort level that your dining room can provide. All of these things are important, along with an appropriate amount of service.”
An extreme example of a fast-casual restaurant offering full service value is Houston-based Dish Society. The two-unit operation features a full bar, a chef-driven menu, and brunch service, but it also switches over to table service for the dinner daypart.
Dish Society founder Aaron Lyons says he opted for the “flex casual” model because he wanted to compete with fast casuals but also maximize his real estate by bringing in a solid dinner business. He says the fast-casual service by day gives his customers value by being a “$30 experience for $15.”
“When you come in and you look at the prices and you stand in line and you order at the counter and you have to get your own drink, you don’t necessarily expect a chef to come out and talk to your table and ask if everything is OK,” Lyons says. “You don’t expect the attention to detail, the plating, the presentation, how we build our salads—it looks like something you’d pay $30 for at another restaurant. I hear all the time that we should raise our prices. To me, that’s the definition of value for our customers: They feel like they’re getting more than what they paid for.”
Not just for lunch
Luna Grill, Blue Lemon, and Dish Society all represent a new generation of Fast Casual 2.0 concepts that fit between fast casual and casual dining when it comes to quality, experience, and price, but all are successful because of their potential to take business away from casual-dining concepts. That competitive advantage helps turn these concepts into legitimate dinner destinations, even while fast casual has long been primarily a lunch occasion.
“All in all, when you think about dinner in a fast-casual restaurant, consumers are getting something that we’ve seen in our research that they perceive to be of a higher quality, but at a lower price and faster [than casual-dining restaurants],” BCG’s Melker says.
New York City’s Mighty Quinn’s BBQ is another example of a business that offers an attractive value proposition across the dayparts. The four-unit chain serves meats in a single serving or by the pound, with prices ranging from as low as $7.50 for the Smoked Sausage to as high as $23 for the Brontosaurus Rib. Cofounder Micha Magid says customers in New York don’t care so much if a restaurant is casual or fast casual, but rather care about getting “great food at a great price.”
“[Fast casual] definitely grew as a lunch category because people were grabbing and going back to their desk and only had 20 minutes to eat lunch,” Magid says. “But as they realized you can get an awesome meal for $13, $14, then why not extend that to the dinner category as well?”
Traditional fast casuals are also finding a way to provide value across the dayparts. Noodles & Co.’s Mears says the company’s lunch/dinner split is close to 50/50, which he says is a “testimony to that broader value equation.” And at Corner Bakery, business is split among three dayparts, with breakfast pulling in 18 percent of the company’s business. Paci says smaller markets across the country especially embrace concepts like Corner Bakery because they don’t have as many options when it comes to having a quality dinner.
“They don’t have the same kind of competition at the fine-dining and casual-dining level, so … it becomes more of a substitute for a casual-dining occasion in some of those smaller markets,” he says.
Pressures on price
Of course, with some exceptions, the price of goods rarely goes down in any industry; cost pressures mean prices in both the quick-service and fast-casual categories are unlikely to get lower, which makes value something of a moving target for operators.
For starters, there are food costs. According to the most recent Industry Forecast from the National Restaurant Association, food costs remain one of the biggest concerns to restaurant operators, with weather patterns and other external factors contributing to volatile commodities.
And then there are labor costs. Pressure has increased in the last few years to raise the federal minimum wage, while several states and cities have already implemented minimum wages that are as high as $15 an hour—as much as double the previous wage rates.
According to a 2015 study by Purdue University, a minimum wage increase to $15 would force a 4.3 percent increase in prices at limited-service restaurants. The same study found that an (unlikely) increase to $22 per hour (the average private sector wage) would require a 25 percent increase in prices.
Luna Grill’s Pourteymour says the good thing about cost pressures is that it’s not just his brand that is experiencing them—it’s all brands. If prices have to go up in one restaurant concept, it’s likely they’re going up in most others, which would soften the blow with customers. But he adds that just because costs go up doesn’t mean prices need to, as well. There are other ways operators can get around cost increases so they can protect the value proposition in their restaurants.
“When costs go up, change your menu a bit; come up with things you could serve [at the right price],” he says. “Not necessarily by shrinking your portion, but by becoming more innovative and coming up with a different item that, maybe at that time, the costs aren’t as high on. It’s just a matter of how much time you want to spend on your concept.”
In his new role at Corner Bakery, Paci is spending a lot of his time thinking about these things. He says the trick to preserving value on the menu is managing the entire menu portfolio as individual pieces to be adjusted, rather than as one entity to be changed all at once.
“That’s why I love the business,” Paci says. “It’s not one of those things where you say, ‘I’m just going to sit here and not think about this stuff.’ You’ve got to think about all of those different parts of the business at the same time.”