NATION’S RESTAURANT NEWS October 3, 2005 • 57 SEGMENT STUDY: FAST-CASUAL

Baja Fresh debuted a new store design in a Willow Grove, Pa., restaurant with an exposition kitchen and a dining room that features softer lighting, warmer colors and more comfortable seating.

Fast-casual chains pick up 12. By comparison, , the Thousand Oaks, Calif.-based Wendy’s division that has 303 branches, continues to be stung by weak sales trends. Baja Fresh’s comparable-restaurant sales fell 1.7 percent for the second quarter, following a drop of 6.1 percent in the first quarter. Players in the conventional quick-service segment surged over the past two the pace years by mimicking their younger, hipper fast-casual rivals’ offerings, which include premium products and upscale ingredients. But now several fast-casual are turning the tables by borrowing strategies from the fast-food playbook, such as limited-time offerings, value menus and design upgrades. Observers view those modifications as a sign of the category’s competitive spirit. “I get concerned when I see a not he fledgling fast-casual sector, after struggling to keep pace last year with stiff trying new things and not trying to evolve,” competition from fast feeders, is taking a new tack by updating menus, launch- Menu upgrades, observes restaurant consultant Dennis ing new prototypes and growing more aggressive with franchising. Lombardi of Columbus, Ohio-based WD Those efforts by adult-oriented counter-service concepts come amid a push fresh designs, Partners, an architectural and engineering for expansion by many fast-casual brands — ranging from Chipotle Mexican and franchising firm that designed Baja Fresh’s new-concept TGrill and Baja Fresh Mexican Grill to Cosí and Noodles & Company — that store. He points out that new prototypes offer are seeking to establish higher profiles nationwide. give momentum such benefits as reduced capital costs and Wally Butkus, a partner of Restaurant Research LLC, a Fairfield, Conn., compa- improved customer service. ny that analyzes industry trends, estimates that the fast-casual sector contributed to such brands Chipotle, which prides itself on a limited only about $5 billion of the $162 billion in sales generated in 2004 by the 150 menu of high-quality ingredients, launched largest restaurant chains. But that number is growing and could exceed $7 billion as Chipotle, Cosí, salads this summer as a new permanent item. by year-end, he says. The -based chain, which is owned by Nonetheless, while the fast-casual segment is faring better than last year, its Baja Fresh and McDonald’s Corp., is considered a darling of sales performance remains mixed, Butkus says, pointing out that a slowdown Noodles & Company the fast-casual sector after posting its eighth among fast-food chains is helping other sectors. consecutive year of double-digit same-store For example, Butkus points to the standout performance of St. Louis-based sales growth in 2004. Spokesman Chris Co., the nation’s largest fast-casual chain, which has 795 units. By AMY GARBER Arnold says Chipotle, which has 460-plus Panera posted same-store sales growth of 7.7 percent for the six months ended July (Continued on page 58)

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In order to make it in this (Continued from page 57) Cosí’s new-store format, which space, you have to to make them more efficient. locations nationwide, is using more than 9 million debuted in Avon, Conn., exists in five The Deerfield, Ill.-based pounds of naturally raised meats annually, “more other locations from Rye, N.Y., to marry the culinary chain, which is known for its sig- than any other restaurant in the country.” . The prototype’s average unit nature “crackly crust” flatbread, The chain’s trading markets from Seattle to Chicago volume is $1.7 million, which com- skills of casual dining generated revenues of $110.6 recently switched to naturally raised chicken, which pares to a range of $1.4 million to million in 2004 with an average Chipotle plans to continue expanding to other areas. $1.6 million in the chain’s older mod- with the controls of check of $8.63, which officials The burrito specialty concept also said that 15 percent, els, Armstrong says. Startup costs quick-service. describe as “an affordable luxu- or about 750,000 pounds, of its total bean purchases for per store are about $660,000, which ” ry.” Over the past two years, the 2005 would be organic black and pinto bean. That per- is nearly $200,000 less than previous — BILL FORREST company has reduced food costs centage is up from 10 percent, or 500,000 pounds, of styles. While Cosí’s older locations EXECUTIVE CHAIRMAN, COSI by turning to precut and pre- organic beans bought in 2004, Arnold says. vary in size from 1,800 square feet to washed produce, such as Chipotle expects to have 500 branches by year- more than 4,000 square feet, the new romaine lettuce and roasted red end, reflecting an annual increase of 100 units. New prototype is 2,800 square feet with 86 seats. By sepa- peppers, says Paul Seidman, Cosí’s vice president of markets include Detroit and Boca Raton, Fla. The rating the order-taking process from the food produc- food and beverage. Previously Cosí was using three tion system, Cosí reduced its different dough products, but Seidman consolidated service times from more than it into one product for freshly baked bread, seven minutes to 4.5 minutes. and pizza crusts. Some existing restaurants “In order to make it in this space, you have to could be remodeled over time marry the culinary skills of casual dining with the controls of quick-service,” explains Bill Forrest, Left: Cosí’s senior management Cosí’s executive chairman. team, which has overhauled the Cosí also is featuring seasonal limited-time offer- brand over the past few years, ings as a way to drive , such as a meatball includes from left, Gilbert Melott, called the “Polpette Rustica,” which was executive vice president of launched in September and sells for about $6.50 in operations & people; Bill Forrest, Chicago. executive chairman; Kevin The chain also has reduced its labor costs by Armstrong, president and chief becoming more disciplined about staffing, according executive; and Paul Seidman, vice to Gilbert Melott, executive vice president of opera- president of food and beverage. tions and people. “For example, we changed our approach to understanding the appropriate number Below: Cosí’s latest seasonal of managers,” he explains. limited-time offering is a warm All of Cosí’s efforts seem to be paying off, as the meatball sandwich, called the chain recently elevated its 2005 same-store sales “Polpette Rustica.” guidance to a range of 7 percent to 9 percent, up from previous expectations of a 4-percent to 5-per- cent gain. Now Cosí is looking to capture more of the sand- wich market that has been dominated by Panera, Armstrong says. But rather than call itself a fast- chain has three franchisees who operate a total of casual brand, Cosí’s executive team prefers the about eight restaurants, but “we are not actively phrase “premium convenience restaurant.” looking to build the franchising program in the fore- Armstrong asserts that convenience drives 75 per- seeable future,” Arnold says. cent of all restaurant meal decisions. AMY GARBER While Chipotle is focused on the growth of its com- Meanwhile, Noodles & Company, based in pany-owned outlets, several fast-casual brands are Boulder, Colo., plans to spend the next 12 to 24 beginning to franchise as a way to ramp up expan- months renovating restaurant exteriors with “a sion, including Cosí Inc., whose sandwich specialty more artfully designed façade” as a way to drive chain now has two stores owned by franchisees. business, says Aaron Kennedy, founder, chairman In June the 95-unit upscale chain opened its first and chief executive of the 117-unit chain. He says franchised outlet as a grab-and-go kiosk format accents include a red awning, a red-framed entry- called Cosí Pronto. In July Cosí debuted its first full- way with a pivoting door, window graphics and a sized, franchisee-owned restaurant, in Lexington, Ky. more substantial patio treatment. Publicly held Cosí expects to have 10 franchised “What has happened over the last 10 years is that outlets in operation by the end of the year, and the customers now have a lot of choices today of where company also expects to open 11 corporate-owned to get a high-quality meal fast,” Kennedy says. “That branches. The chain has the potential to have 1,400 to is why it is important to really articulate our brand 1,900 restaurants nationwide, according to Kevin in the façade of the building. Customers infer from Armstrong, Cosí’s president and chief executive officer. what they see on the outside of the building what it Over the past few years, Cosí has retooled its will be like on the inside. We want them to see fresh, operations in an effort to turn around its once- high-quality food.” embattled enterprise. With a management team The effort comes on the heels of Noodles’ creation that has been completely overhauled since 2002 and last year of a new decor for its interior, which now is a more efficient prototype, officials insist that Cosí is in place at about half of its restaurants. Kennedy poised for growth. (Continued on page 62)

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(Continued from page 58) launched carnitas, a tradi- says the interior and exterior modifications combined tional Mexican dish of pork will cost about $100,000 per store. braised in herbs and spices Noodles plans to add five more restaurants before and used as a filling in tacos the end of the year, all of which would be owned by and burritos. Sales of carni- franchisees. The chain already has five franchised tas have exceeded expecta- locations in such states as Michigan and Illinois. tions, according to Brion That number does not include three branches in San Grube, Baja Fresh’s chief Diego County that the company is buying from its executive officer, who didn’t first franchisee, A.O. One, a Los Angeles-based provide details. affiliate. Under terms of the buyback The Wendy’s deal — expected to close International-owned chain this month for undisclosed unveiled in August a new It is an ongoing terms — Noodles agreed to concept store design in repurchase Southern Willow Grove, Pa., with an process to stay California expansion exposition kitchen and a rights and may seek dining room with more com- relevant with our menu. another operator to fortable seating, softer light- resume regional develop- ing and a warmer color We will probably take a ment. scheme. The restaurant was few dishes off the menu Noodles generated $90 created to be smaller and million in annual sales in more efficient, encompass- ... and organize it in a way 2004. While preparing to ing 2,400 square feet, com- grow that number to $500 pared with more than 3,000 that is more consistent million over the next five square feet in older units. years, the chain has estab- Grube describes the format with how people think lished a new leadership as a test for what could about their choices. team, hiring Kevin Reddy potentially be Baja Fresh’s ” as its president and chief restaurant of the future. — AARON KENNEDY operating officer and Keith Many of Baja Fresh’s cur- FOUNDER, CHAIRMAN, CEO Kinsey as its chief finan- rent locations still have high cial officer. tables with stools, which NOODLES & COMPANY Both the new Noodles customers have com- executives Noodles & Company has upgraded plained aren’t com- formerly held those same posts at the interior decor in about half its fortable for children, Chipotle, which named Montgomery 117 units nationwide. The chain according to Lee “Monty” Moran as its new president plans to introduce in October a Peterson, executive and chief operating officer, succeeding limited-time item of braised beef director of WD Reddy. Most recently Noodles tapped and gnocchi for $6.75. Partners who created Dwayne Chambers as its vice presi- the new look. In addi- dent of marketing, succeeding Rich tion to lowering the table height in remodels and at Miller. new outlets, the chain’s latest design package also Meanwhile, Noodles plans to have has booths, banquettes and a mixture of two-top and new menu boards by early 2006. four-top tables, Peterson says. He points out that “It is an ongoing process to stay Baja Fresh’s existing restaurant have mostly four- relevant with our menu,” Kennedy top tables, but almost 60 percent of all parties are says. “We will probably take a few comprised of two people. dishes off the menu to make it easier Last year Baja Fresh made its menu boards easi- to sort through and organize it in a er to read with improved graphics. way that is more consistent with how “The marketplace has changed dramatically, and people think about their choices.” there is a constant need for news, whether from the This month Noodles, which has a menu or the facility,” says John Butcher, the chain’s $7 per-person check average, plans to vice president of marketing. “The speed of change is introduce a limited-time item of much more rapid than it used to be. The speed of braised beef and gnocchi for $6.75. remodels has been compressed greatly. It is some- “The dish is targeted at men, thing we need to do to stay competitive.” which is one of the groups we have When addressing Baja Fresh’s depressed same- worked hard to appeal to,” Kennedy store-sales history, Grube suggests it may reflect the explains. Focusing on male cus- “large number of competitors” moving into the so- tomers, Noodles has made its proteins more promi- called fresh-Mexican segment. “Look at the business nent by developing noodleless dishes and switching The fast-casual sector’s first “value” positioning today versus five years ago. You see the growth of from sautéed chicken pieces to whole grilled chicken was seen in the 2003 launch by Rubio’s Fresh Chipotle and Moe’s and and continued growth breasts. In addition, Noodles is testing at 14 stores Mexican Grill of 99-cent “Street Tacos” of carnitas of other chains like Rubio’s and . some value-oriented items, such as a $6.95 “trio” and fresh-made guacamole and in subsequent mer- Additionally, I think you have a seen a renaissance of plate that includes a small noodle bowl, a choice of chandising of bargain-priced combo meals by the … I think what you are seeing is a really protein and a side salad. Kennedy says he hopes to Carlsbad, Calif.-based chain. competitive fresh-Mexican segment in a very compet- take the offering chainwide by early next year. In other menu news, Baja Fresh this summer itive overall foodservice environment.” ■

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