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Sector still golden despite slowdown


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What hasn’t already been said about the wonder that is the fast-casual restaurant: It’s what millennials want, it’s what busy families want, it’s true menu innovation, it’s making gobs of money.

But oh, growth has slowed? Call the bugler and cue Taps.

The segment has slowed, sinking nearly 2 percent in unit growth as several exciting brands dropped from double-digit unit growth, giving the overall segment a 6.5 percent unit growth overall.

But fret not for fast-casual: Some of that slowdown is a factor of the math—20 restaurants is a smaller percentage than it was in 2014. And the double-digit sales growth shows the segment is pausing momentarily to focus on the fundamentals.

At Smashburger, which appears for the first time in the top 200, 2015 was a great year and a second of nearly 20 percent sales growth.

The brand’s success paved the way to a strategic partnership with Filipino operating giant Jollibee and caught the ear of many a franchisee prospect. But CEO Mike Nolan said he has to keep growth in check.

“You always have to be careful as the steward of a brand how fast you grow a brand. Intelligent growth pays dividends in the long term,” said Nolan. “I’m very, very clear that growth is a license, and it’s one that’s easily and readily evoked.”

In fact, the growth could be a problem for the segment, even though Nolan sees 2,000- and 3,000-unit fast-casual brands as a norm in the next five years.

Slow growth doesn’t mesh with the incredible influx of private equity into the space. Firms looking for a five-year return can’t simply pause.  “The most prudent thing may be to slow down growth and build on the operating strength, but that is not aligned with private equity expectations,” said Nolan.

The double sword of private equity is not the only headwind for the segment. With higher labor costs than a typical QSR competitor, wages are becoming a very real concern. Pair that with an unknown economic backdrop that could affect even the modestly resistant fast-casual customer.

And as non-franchised Chipotle has shown, food safety is a constant concern and an outsized risk at fresh, clean focused concepts that make up much of the segment. Clean, local food brings consumers, but requires a manic focus on preparation and cleanliness.

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