Searching for Fresh Options

Consumers hungering for tasty food at a moderate price are flocking to so-called fast-casual restaurant chains, making them the fastest-growing segment of the restaurant industry.

Fast-casual outlets such as Baja Fresh Mexican Grill, Panera Bread Co. and Panda Express--which combine the speed of fast food with the quality and freshness of a casual dining chain--still grab only a small share of Americans’ overall dining dollar.

But their growing popularity, coming partly at the expense of slower-growing traditional fast-food giants, is triggering McDonald’s Corp., Wendy’s International Inc. and others to counterattack with their own versions of fast-casual fare or by acquiring their own fast-casual chains.

The result is a fierce battle for market share, posing risks for fast-casual chains that lack the advertising and marketing muscle of their bigger rivals. Fast-food chains also face risks because their burgers-and-fries image may not attract diners seeking alternatives. Competition--always fierce in the restaurant industry anyway--already has taken its toll on some earlier upstart fast-casual chains.

Several dining trends are driving the fast-casual boom. Aging baby boomers and others--suffering from what one analyst calls “fast-food fatigue”--are eager to move up to classier fare. Cost-conscious businesspeople are looking for inexpensive but still presentable alternatives for client expense-account lunches. Diet-conscious consumers are looking for healthier or less caloric versions of fast food.

Thus, despite the sluggish economy and an overall decline in restaurant visits, fast-casual chains “are a bright spot in the restaurant industry,” said Tim Carlin, senior associate at Technomic Inc., a research and consulting firm in Chicago.

Sales for the fast-casual segment are growing at a robust 6% to 8% annually, to a total of $2.75 billion last year. That is still less than 1% of the $411-billion restaurant industry, said Technomic. By contrast, fast food--growing at 1% to 2% annually--registered revenue of $128 billion, accounting for nearly one-third of all restaurant sales.

The potential to take share from other dining segments has attracted a host of well-established players and upstarts.

Wolfgang Puck, best known for his ritzy Spago restaurants, plans--in conjunction with franchisees--to expand his fast-casual Wolfgang Puck Express from 19 units today to 300 by the end of 2005.

Fresh Enterprises Inc. of Thousand Oaks, owner of Baja Fresh, filed for a public stock offering last week amid a strong market for equities of many fast-casual and casual restaurants.

Panda, the nation’s largest Chinese restaurant chain, is expected to open its 500th restaurant soon, spokesman Wen Hong said.

And Panera Bread, a premium sandwich chain, has seen its stock price more than double.

To blunt the challenge while broadening their appeal beyond the core audience of young males, many fast-food chains are adding premium products or gobbling up fast-casual competitors.

In the process, they have become more like those rivals, said Bob Sandelman, a Villa Park restaurant consultant.

McDonald’s, the world’s largest fast-food chain, said recently that it planned to jointly develop as many as 30 outlets with Fazoli’s, a Kentucky-based fast-casual chain of about 400 Italian restaurants. McDonald’s also said it eventually could acquire the company.

Arby’s, the Fort Lauderdale, Fla.-based unit of Triarc Cos. known for its roast beef sandwiches, last year unveiled a line of Market Fresh sandwiches, which sell for up to $4.29, company spokeswoman Anne Kirchhoff said.

CKE Restaurants Inc., the Santa Barbara-based parent of the Carl’s Jr. and Hardee’s hamburger chains, last year introduced the Six-Dollar Burger, a hamburger that actually sells for $3.95. The popularity of the sandwich has helped boost sales and move CKE toward profitability, analysts said.

Similarly, Wendy’s offers four upscale salads at about $3.99 each, which helped increase same-store sales by 5.6% in the first quarter, the company said.

But Technomic analyst Carlin said there’s a limit to how far fast-food chains can wander from their pizza-and-fried-chicken roots.

That limit could allow fast-casual chains such as Baja Fresh and Panera to continue to do well.

Baja Fresh, which had an operating profit of $6.4 million, before charges, on sales of $72.8 million in 2001, hopes to raise $58 million from its planned IPO. The 157-store chain, which hopes to expand to 500 outlets within three to five years, has won a loyal following with its lard-free beans and charbroiled mahi mahi fish tacos, among other items.

“Everything here tastes yummy and authentic,” said Cammy Devereux, a 34-year-old teacher, as she ate a soft taco combo meal at a Costa Mesa restaurant.

Panera, based near St. Louis, has rung up strong profit and sales by offering premium sandwiches on freshly baked gourmet bread, homemade soups and upscale coffees. Meals are served on real plates with silverware.

In 2001, earnings jumped 92% to $13.1 million. Revenue at the 369-restaurant chain--which does not have outlets in Southern California--increased 51% to more than $529 million.

Not all fast-casual chains have met unqualified success.

Boston Market, one of the segment’s pioneers, slid into bankruptcy protection in the late 1990s after a period of supercharged growth. The chain, which once had more than 1,000 restaurants, expanded too quickly and signed some expensive leases, analysts said. McDonald’s acquired the chain two years ago.

Carlsbad, Calif.-based Rubio’s Restaurants Inc., famous for its fish tacos, put its plans for a national roll-out on hold because of trying times, Chief Executive Ralph Rubio said. In 2001, the company shut down 10 stores, mainly in Denver, Salt Lake City and Las Vegas. The problems: Fish tacos don’t translate well outside Southern California, and some stores were in bad locations, he said.

Still, seeking to ride the fast-casual wave, several fast-food chains have snapped up or purchased stakes in such chains, lest they get left behind.

In March, CKE acquired Santa Barbara Restaurant Group Inc. in a stock swap valued at nearly $82 million. The deal gave CKE ownership of the 95-outlet La Salsa chain, a Baja Fresh competitor.

One month earlier, Wendy’s made its first foray into the fast-casual arena by investing $10 million for a 45% stake in Cafe Express, a Houston-based chain of 13 restaurants.

McDonald’s, suffering six consecutive quarters of shrinking profit, has jumped most aggressively into the fray. In addition to its recent partnership with Fazoli’s, it has a stake in 1,280 non-burger outlets worldwide.

Eric Schlosser, author of the bestseller “Fast Food Nation,” said fast-food companies such as McDonald’s are branching out by necessity rather than choice. Simply put: There are so many burger, pizza and fried chicken joints that there’s little room for expansion.

“The hamburger-and-fries model is something out of the last century,” he said. “Fast casual is the future.”