Should Fast Food Trade Up To Fast Casual?

We are often asked by our clients if they should consider moving from fast food to fast casual. We define fast food as a concept with lower price points per meal (between $5 and $7), no table service, where food is paid for in advance, may be pre-made, and take-out/drive-thru is a key component. Fast casual concepts are slightly more expensive (between $7 and $10) due to higher-quality ingredients, may have some table service, offer customization, and encourage a longer, more relaxed stay.

In many cases, the upside to moving from fast food to fast casual are enormous. We found this to be true in our experience with International Dairy Queen, as we moved the chain from fast food to fast casual food service retailer as part of the DQ Grill & Chill program. The change more than doubled the chain’s same-store sales. The National Restaurant Association reported sales in 2016 exceeded $780 billion dollars, with full-service restaurants dominating at 48%, fast food at 44% and fast casual at 8%. Although fast casual represents a smaller overall percentage of sales, the category is out-performing fast food with revenue growth of 10.4% versus 5.7%. Not only is there a significant growth trajectory for fast casual, but Investment U identified the gap between the two is increasing.

With the growth of fast-casual, many fast-food operators such as McDonald’s are offering new fresh, high-quality meal additions to effectively compete. The verdict is not yet in on the success of such strategies, as this approach continues to blur the lines between the two categories which may add more confusion to an already complex world of choices for consumers. Although the allure of higher sales and margins is enticing to chains considering changing their operating model to a fast-casual format, what is the likelihood of success, especially if you are a well-established brand? To help answer this important question, we have identified five factors operators should consider as they explore a new business model, namely:

Can your customers make the leap?

This is by far the most critical factor that will determine whether or not a fast food chain can make the leap to fast casual. A key factor is the brand perception and equities currently owned in the minds of consumers. If the brand has established strong equities for innovation and leadership within the category and retains a strong net promoter score, customers will give the chain permission to test the fast-casual waters. However, if the level of trust in the brand and its reputation are weak, making the shift from a weak base will not only jeopardize the shift but may undermine the existing equities of the brand.

Do you have a strong value proposition?

A strong value proposition is first determined by how much a customer is willing to pay for the chain’s offerings, and more importantly by what would be missed if the chain no longer operated. Fast food chains that have traditionally competed based on deals and lowest prices should not consider a fast-casual migration strategy since their value proposition will impede such initiatives. In order to move the chain to a higher margin and per-guest check, discount or value-driven chains will first need to evolve their brand equity and value proposition well beyond price and promotions by staking an emotional connection with customers.

Are the trade-offs acceptable?

A study by Technomic on the factors that are most important for customers in their decision to visit a fast food versus fast casual restaurant identified high quality and freshness of the food, followed by low prices as being the key driving factors determining which of the two a customer chooses. The speed of service was identified for fast food as another key factor influencing the decision process. If the new program reduces the speed of service while also significantly increasing the food cost, you may lose the customer as part of the transition. It’s important to ensure the key driver of the speed of service is maintained within an acceptable timeframe. Customers will always want to trade off time depending on the given occasion (quick lunch break versus social gathering) and the quality and freshness of the offering. If your chain is known as a value player, making the leap in one major jump will lead to failure, with sticker shock’s significant impact as the main reason.

Is your category frothy with fast casual options?

One of the biggest challenges facing customers today is the complexity of choice present every time they make a buying decision. Fast-food operators are not immune to this challenge as new fast casual and fast food chains are popping up each year. Many categories, such as burgers, are represented by an abundance of local and national fast-casual chains, many being very well established, making a fast food incumbent shift almost impossible. If a fast food chain is considering moving to a fast-casual operating model, the company will need to identify an unmet need in the marketplace that current fast-casual chains are not providing, and then ensure their brand has the credibility to deliver a quality fresh product.

Do you have the right culture and operating model?

Often the least considered, but still a critical factor, is the actual culture of the organization and the ability of front-line staff to deliver on the new promise. We worked on a new cafe concept many years ago for Barnes & Noble. The concept focused on growing their per-guest check size and introduced new panini sandwiches as well as a great range of gelato desserts. The phenomenal reaction from customers was reflected in a double-digit sales increase but after three months, the program was suffering deep declines. After conducting extensive mystery shopping visits, the culprit for the sales decline was determined to be the complexity of the business model and the rate of support by the front-line staff who had grown accustomed to a simple operating model with a limited range of offerings. The program was killed irrespective of the sales and margin potential because the culture and operating discipline were not built into the organization.

Growth is the key concern of all foodservice operators, irrespective of the category or industry classification. However, considering a growth strategy that includes a shift in the operating model requires significant discipline that many chains do not have. Additionally, before taking that step, brands must ensure the trust they have with customers will allow such a major shift. Our recommendation would be to proceed in gradual steps, starting with the introduction of new menu items allowing the operator to build trust in delivering a fresh and quality product. By taking a measured and strategic approach, brands can answer these above questions for themselves, gain the trust of the customer, and ensure the time is right for such a move. Only then will a chain have permission to successfully evolve to a more complex and challenging fast-casual model.