Fast-casual chains operate above average
A new restaurant design for Penn Station East Coast Subs attracts a crowd.
Some sandwich concepts get a bad rap in the franchising space. It’s a common refrain that sandwich concepts have low margins and owning one of the traditional sub franchises is akin to “buying a job.”
While that isn’t completely true—there are plenty of successful operators doing very well with Subway, for example, the most traditional sub sandwich chain of all—growing fast-casual concepts bring in more revenue and more income and don’t suffer from cannibalization from the franchisee down the street.
They continue to draw market share in the sandwich segment, driving ticket prices up and hitting enviable average unit volumes, according to company franchise disclosure documents. Concepts like Corner Bakery, which pulls in AUVs of $2.2 million, or Newk’s, which posts $2.5 million AUV, make larger footprints attractive.
And while there is quite a range of average sales within each concept, sub players that straddle the fast-casual line inch ahead of Subway’ estimated $400,000 to $500,000 average. Firehouse Subs pulls in $655,400 AUV at most stores. Charleys Philly Steaks posts an average of $717,300. And most Which Wich restaurants top $624,000.
Then there is Panera, the giant in the franchised fast-casual sandwich world, coming in at more than $2.5 million at franchised locations and $2.6 million at corporate locations.
Fast-casual sandwich concepts have similar earnings before interest (EBITDA) ranges as the standards in the category. According to analysis of the Item 19s and other available data, the majority of Corner Bakery Cafes have a 10.3 percent EBITDA margin. Panera averages 15.7 percent at company restaurants. Penn Station averages 17.4 at all restaurants in and out of the comparable sales range. And Newk’s comes in at 18.5 percent for company-owned restaurants. There is a significant range within each concept—averages are made from extremes after all—but high AUVs and the modest margins still make for good income and faster return on investment.
So how do they do it? For one, higher price points. Fast-casual sandwich meals typically come in at $10 or more, though value is still important, especially among the various millennial groups.
“You’ve got to figure out who your audience is. Everybody is trying to get a piece of millennial pie,” said Ric Scicchitano, executive vice president of food and supply chain with Corner Bakery Cafe. “Are you going after the young one that doesn’t want to spend a lot of money; he’s probably going to buy a flatbread for $4.99. Or how about that older millennial, that Yoda millennial with a house and kids? I can probably grab $6 to $7 for a sandwich or maybe $9 for a steak sandwich.”
Gyroville banks on smart buying to make sure the next limited-time-offer isn’t a financial bust. “It depends when commodities come down far enough” in price, says its CEO.
More options like salads and flatbreads keep everyone happy and avoid the “no” vote among group diners, even if most diners still get sandwiches. The multiple day parts also keep revenue coming in throughout the day with dinner and breakfast options that are on trend.
“We were looking for a healthful version of a breakfast panini, and we came up with a Power Flat. At that time people were watching carbs so we came up with a thinner piece of bread that was made with whole grains,” said Scicchitano, describing the “flats” that became a new category within the breakfast segment. The move highlights another critical revenue driver for fast-casual sandwich concepts: innovation.
Certainly, there is a hallowed place on the menu for a simple sandwich with good bread. But innovation on the menu and limited time offers highlight menu diversity and get people engaging with marketing messages. At Penn Station East Coast Subs, they innovate, but do so carefully.
“We try to look at things that we do that are unique and try to play off that,” said Craig Dunaway, president at Penn Station.
He said there is a significant time and cost to getting new ingredients into all the restaurants, so they like to build innovation within the ingredients already in house. That way the seven to 12 percent of monthly special sales income isn’t eaten by additional food costs. “When you see something like a BLT, the ingredients are already there and it’s a unique product,” said Dunaway.
Given the regionality of sandwiches, Penn Station is also giving franchisees the opportunity to choose their own monthly special and sending out stripped-down marketing materials so they can add only ingredients they think will do well in the area.
At Gyroville, a fast-casual sandwich franchise with a Mediterranean focus, founder Lambros Kokkinelis said evolutionary innovation in sauces has helped a lot, but smart buying is key so the bet on the next LTO isn’t a big bust. “It depends when commodities come down far enough to get a good price,” said Kokkinelis. “I wish the restaurant industry was simple, but it’s gotten very scientific.”
Finally, operational excellence will be what keeps the fast-casual sandwich segment growing. That means not getting too far ahead of the infrastructure.
“If you open up too many restaurants too quickly, you could be in a situation where you don’t have the infrastructure to support it and I think customers are more sophisticated than ever,” said Dunaway. “They’ll give you a couple chances to fall on your face, but more than that, you’re going to really struggle.”