The Fast-casual Segment Remains an Important Player in 2016

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Higher-end dining without the big bill — that’s how Ryan Smolkin, founder and CEO of Ajax, Ont.-based Smoke’s Poutinerie describes the fast-casual segment in Canada. “People can’t afford to, or don’t want to, spend their limited discretionary income on fine dining,” he says. “They want to spread it out instead of blowing it all on one meal, but they want something a step up from a [quick-service restaurant].”

Fast-casual operators offer a hybrid solution that’s driven the success of the category, recording a whopping $987.5 million in annual sales in 2014 according to Technomic’s “Top 200 Canadian Chains Restaurant Report.” According to Kristin Menas, associate editor, Canada and Adult Beverage at Technomic Inc., that’s an increase of 8.4 per cent in sales over the
previous year.

Leading the charge are restaurants offering ethnic cuisines such as Asian or Mexican. “We see that Asian/noodle is the most popular cuisine or menu type among fast-casual concepts in Canada, ranking highest by sales,” says Menas. “Bakery/café and burger concepts are also successful in terms of sales.”

Fast-casual pizza concepts experienced the most significant increase, with a 121-per-cent growth in sales in the latest year-over-year period, followed by Mexican (up 10.7 per cent) and burgers, which recorded an 8.6-per-cent increase in sales.
For South St. Burger Co. president Jay Gould, 2015 was a good year to sell burgers, with sales up six per cent for the year and 8.5 per cent in the last quarter of 2015. “The last few years have been stagnating in that there’s been a lot of competition in this segment,” he says. “That’s finally consolidated itself and slowed down.”

Customer satisfaction has been a key factor in the brand’s success, says Gould. “I’ve heard more people this year saying ‘we’ve tried all the rest and we like yours,’ so we’re trying really hard to be that consistent player; our competition is not going to go away, but on an ongoing basis we’re trying to replace the traditional burger in many consumers’ buying habits. People are still going to buy burgers and fries, they’re just going to up their [expectations].”

South St. Burger Co. has built its reputation on offering a variety of burger toppings and signature menu items to make it easier — and faster — for diners to order. “We’ve tweaked our product by doing things such as offering better tasting buns,” explains Gould. “These are small steps that maybe people don’t notice quickly, but our product now is the best we’ve ever had.”
Uniqueness of product, service and brand are key to running a successful fast-casual operation, says Smolkin, whose concept has expanded by 100 locations across the country since 2008. “You have to have fun and build brand perception, but more importantly you need to really know your brand and stick to it. Some chains get lost in trying to be everything to everyone.”
In the case of Smoke’s, the proof is in the numbers. “It was a great year, all on projection,” says Smolkin, adding his goal is to double the number of units this year and hit 1,300 units by 2019. “[In 2015] we hit our mark on units and revenues were more than expected at a 12-per-cent sales increase. We’re forecasting even greater growth in 2016.”

Technomic expects the fast-casual segment to remain an increasingly important player within the Canadian limited-service restaurant category in 2016. Menas also expects the segment to continue to compete with fast-food concepts for limited-service restaurant dollars.

“In response, quick-service restaurants will continue to make changes to upscale the dining experience while still focusing on a lower price point to stay competitive with fast-casuals. U.S. chains will inspire much of the fast-casual growth in Canada with a focus on customization, health, ambiance and affordability,” she says, adding many U.S.-based chains, such as Firehouse Subs (see profile on p. 24) and Panera Bread, have plans to grow in Canada.

Gould agrees. “We compete, not just with other guys in the burger segment, but also with everyone else in the fast-casual segment, not to mention the traditional fast-food guys; our customer is not going to any one of us every day.”
Gould sees the fast-casual concept as a trend, not a fad, noting consumers are more informed than they used to be. “They know and care about what’s in the package, and while not everybody follows specifically what the ingredient list is, many are pretty well educated and want the real deal. People will spend an extra dollar or two to get a quality of product they now know exists so I think fast-casual is going to continue to chip away at the market.”

Menas also recommends fast-casual operators evaluate their adult beverage offerings as a way to drive sales. “There is room for adult-beverage program development among fast-casuals and operators may want to consider offering beer, wine and cocktails.”

The demographic frequenting fast-casual restaurants — busy families looking for healthy, affordable options — hasn’t changed much in the last few years as the number of time-pressed consumers continues to grow. “The market continues to expand,” says Gould, “but the number of establishments opening is outpacing it.”

Although the segment is experiencing steady growth, with Technomic reporting a unit count increase of roughly 4.2 per cent in the same year-over-year period among the top 200 Canadian fast-casual chains, the segment will face its share of challenges this year. “It’s going to come down to cost — cost of space, people and food,” says Smolkin, citing increases to minimum wage and ingredient costs as barriers. “Smaller guys can’t negotiate [ingredient] prices like some of the bigger companies and even with buying power, there’s only so low you can go without compromising quality.”

The biggest challenge Gould predicts operators facing is the rising cost of occupancy — not just rent, but taxes and extra charges levied on operators. “An average spot for us is a minimum of $10,000 per month — that’s a lot — and it’s well north of $15,000 in some of the better locations downtown,” he says.

But that’s not going to stop South St. Burger Co. from growing the brand. With expansion plans that include four new units opening this year in Vancouver, Calgary, Edmonton and Fort McMurray, Alta., as well as three other locations in the works in Ottawa, London Ont. and Oshawa, Ont., South St. Burger Co. is on a roll. “We’re also going to do a couple of food court units this year,” adds Gould. “This is new for us, but our competition has been doing food courts successfully so we felt it’s high time we did it, too.”

Smolkin is focusing his brand’s growth on a mix of traditional units and non-traditional spaces such as arenas and university campuses both in Canada and the U.S. “We stay core to our target and go by what the people want; customization, casual sit-down and control of their spend — it’s one-step up from QSRs.”

In 2016, he predicts fast-casual business will be cost-focused as operators try to maintain revenues and growth. “If [operators] want to maintain the dining experience and the true definition of the fast-casual market, they’re going to have to spend a few bucks to do it.”

Volume 48, Number 11

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