™ Redefining Culinary expectations HOW THE FAST-CASUAL SECTOR IS DOMINATING THE RESTAURANT INDUSTRY How Often Do Consumers Eat Out? Source: Restaurant Success in 2019 Industry Report

45% 24% 20% 6% 3% 2%

Multiple Times A Couple Times Once a Every A Couple Times Multiple Times a Week a Month Week Day a Year a Day

The prolonged economic expansion can be a what has remained the same is their need good indicator of how the fast-casual dining for speed and convenience. Fast-casual has sector is performing. The unemployment rate is at taken over this in-between establishment a 50-year low and wages are steadily increasing, by appealing to a demographic on the move meaning people can afford to eat out more. through creative cuisine and dining concepts. Today’s consumers are beginning to question what’s in their food, creating a health-conscious demographic. Fast-casual restaurants have important qualities in restaurants for guests stepped in to accommodate the new demand for Source: Restaurant Success in 2019 Industry Report a healthy lifestyle while providing convenience. But what is fast-casual? It’s a new-age concept 1 QUALITY OF FOOD 72% that provides a mixture of elements offered in full- service restaurants and quick-service restaurants 2 TASTE/FLAVOR PREFERENCES 63% (QSR). According to the National Restaurant Association’s 2019 State of the Industry Report, the restaurant industry is expected to reach $863 3 VALUE 48% billion in 2019 sales. 4 PRICE POINT 33% In this article, Matthews™ takes a look at the restaurants that are dominating the limited- 5 CONVENIENCE 12% service sector and how their strategies make them stand out among their competitors. 6 RELATIONSHIP WITH THE RESTAURANT 11% As of fall 2018, there are 25,312 fast-casual units in operation in the U.S., and customers increased their visits by three percent over the year, revealed Ordering food online, through mobile apps a restaurant report conducted by NPD Group, a or text, has increased by 23 percent in the last market research company. Technomic’s 2019 Top four years, which accounts for $26.8 billion or 3.1 500 Chain Restaurant Report shows that out of billion in-store visits. NPD Group predicts digital the 1,569 restaurant chains added in 2018, 1,200 orders to grow by double-digits through 2020. were fast-casual. The price to eat at these limited- “Digital ordering overall and [mobile ordering service establishments runs a bit higher than at has] provided a path to market to consumers on a joint, but customers are willing to pay a one-to-one basis and offer them a restaurant extra for the quality. The average cost for a fast experience customized to their needs,” said David food meal is around $5, while the average price for Portalatin, author of Eating Patterns in America. a fast-casual meal is $12.

Customer preferences are evolving as people let’s take a look at the top five fast-casual search for healthy alternatives and more variety in menu offerings. On the contrary, restaurants setting a precedent in the industry.

MATTHEWS™ AVERAGE MEAL PRICE: $8.45

SIGNATURE MENU ITEM: Blaze Build-Your-Own Pizza FOUNDED: Pizza 2011

Average 2018 SALES: Meal PricE: $326 million

$10 LOCATIONS: 300+ (U.S. & Canada)

Blaze Pizza stands out among a sea of offers unique concepts like build- competition, ranking 125th on Technomic’s Top your-own pizza that is ready in three minutes. 500 Chain Restaurants. Blaze Pizza grew from two They also recently launched their Life Mode line franchises to 200 in four years, crowning the pizza which includes four diet-friendly pies. The fastest- franchise as the fastest-growing food chain ever in growing pizza shop started providing the option the U.S. for 14-inch “sharable” pizzas to enhance delivery and takeout sales. As Blaze Pizza continues to Since 2012, LeBron James has been an investor, cater to a new audience through new offerings, contributing to the chain’s success with viral Blaze Pizza will likely remain a top player in the commercials where James goes undercover as pizza chain sector. an employee passing out pizzas. During his four years playing for the Miami Heat, James’ goal was blaze’s annual location & sales growth to expand Blaze Pizza to Florida. This launched the Source: Restaurant Business, QSR Magazine, Forbes franchises’ fast growth, expanding from Florida all the way to Canada. 400M 400 350M 350

While fast-casual is built around a dine-in 300M 300 experience for the crowd, the California- 250 250M Units based chain has taken notice of the increasing 200M 200 popularity of takeout and delivery. Blaze Pizza’s 150M 150 off-premise digital sales account for ten percent Annual Sales of sales, more than double that of last years. 100M 100 Furthermore, the company has partnered with 50M 50 Postmates, a delivery app, to create even more 0M 0 delivery options, specifically in Southern California 2014 2015 2016 2017 2018 2019 and Arizona. Annual Sales # of Units

MATTHEWS™ AVERAGE MEAL PRICE: $10

SIGNATURE MENU ITEM: panera broccoli cheddar soup FOUNDED: bread 1987

Average 2018 SALES: Meal PricE: $5.8 billion

$10 LOCATIONS: 2,300+ (u.s.)

Ranked 10th in the Top 500 Chain Restaurants ’s impressive annual revenue by Technomic, Panera Bread is well-positioned and consistent performance were the primary in the fast-casual restaurant industry. reasons for the takeover. The acquisition Uncoincidentally, it is also the 10th largest has fueled Panera Bread’s growth even U.S. chain with over 2,300 locations. In 2018 further with the recent announcement alone, Panera Bread reached $5.8 billion in of plans to open locations in airports. sales, a 4.7 percent year-over-year growth. After finding that the bulk of their sales fell After a steady rate of growth through the into lunch and dinnertime, Panera Bread has recession, founder and CEO, Ron Shaich, focused on its breakfast strategy to retain loyal positioned Panera Bread as a healthier and young consumers. Additionally, with the alternative to their competitors. With claims increasing popularity of online orders, delivery as one of the first fast-casual restaurant chains has become a new priority. In order to build to offer one hundred percent clean food, the traffic, ordering through their online app bakery-café is successful with the on-the-go presents the option to reorder a customer’s demographic seeking quick, healthy cuisine. “usual breakfast” and have it delivered to Just last year, Panera Bread’s launch of breakfast their office. Guests can use the technology influenced their decision to provided to remain on-the-go by skipping the petition the Food and Drug Administration’s register altogether through “Panera Tap.” (FDA) definition of the term “egg.” The petition demonstrates their commitment to Delivery is now available in 56% of Panera serving only clean food in its restaurant. Bread locations. Panera Bread was acquired for $7.5 billion by JAB Source: Restaurant Business Holding Company in 2017. JAB owns other big- name brands such as Keurig Dr. Pepper, Krispy 200,ooo app downloads Kreme Doughnuts, and Einstein Bros. Bagels. Source: SensorTower

MATTHEWS™ AVERAGE MEAL PRICE: $11

SIGNATURE MENU ITEM: chipotle Chicken Fajita Bowl mexican FOUNDED: 1993

grillAverage 2018 SALES: Meal PricE: $4.8 billion

$10 LOCATIONS: 2,500+ (u.s. & canada)

The blockbuster of fast-casual, Chipotle Mexican locations in the summer of 2018 and has now Grill, is ranked 12th in the Top 500 Chain spread to 2,000 stores. These assembly lines not Restaurants by Technomic with over 2,500 U.S. only improved pickup times but also serve as a key locations as of February 2019. In 2018, the company strategy for their industry-leading delivery time. reached $4.8 billion in sales, an 8.7 percent increase compared to last year. Of those sales, 18.2 Back in March of 2019, Chipotle debuted a percent were digital sales, which is nearly double rewards program that’s already acquired that of the previous year. The burrito chain’s same- five million members. The company is store sales rose 9.9 percent in Q2 2019, marking seeing results from the program, with an the fifth quarter in a row of increased sales. increased number of member visits.

Chipotle’s most recent success can partly be 50% of Consumers say the availability of a attributed to the latest CEO, Brian Niccol. As former CEO of fast-food giant , Niccol customer loyalty and reward program would has plenty of experience with digital technology, make them choose one restaurant over another. brand innovation, and restaurant operations. After Source: National Restaurant Association his success with Taco Bell by reimagining the brand through marketing efforts and changing Chipotle is a limited-service restaurant focused demographics, Niccol will likely bring that on catering food that is good for its consumers. momentum to Chipotle. With the motto “Food with Integrity,” the company portrays its goals to serve naturally It’s no accident that Chipotle’s digital sales grown and produced food. After a tremendous accounted for 20 percent of total sales with the recovery from the food safety outbreak in recent shift in efforts to prioritize pickup times. 2015, Chipotle’s recent performance shows it’s The company began implementing “second capable of survival. With 20 new restaurant make” assembly lines in which workers fulfill openings in Q2 2019 alone, Chipotle shows no online orders. This practice was started in 350 indication of slowing down any time soon.

MATTHEWS™ AVERAGE MEAL PRICE: $9

SIGNATURE MENU ITEM: slim chicken tenders FOUNDED: chickens 2003

2018 SALES: $129 Million

LOCATIONS: 82+ (U.S., U.K., Kuwait)

As a 16-year old franchise, Slim Chickens ranks Slim Chickens recently made headlines with the number 241st among the Technomic’s Top announcement of a private-equity investment. 500 Chain Restaurants with 82 locations. In With this new capital infusion, the company plans 2017, their revenue grew by 46 percent, and the to expand by 600 units within the next decade. momentum carried into 2018 and 2019. Despite Already, franchisees have committed to 350 its low ranking, the company saw $129 million locations, 100 of which are under development in sales in 2018. While a majority of locations and scheduled to deliver in the next year. are within Texas and Arkansas, the franchise is picking up traction overseas, with three locations slim chicken’s annual sales and unit growth in the United Kingdom and two in Kuwait. Source: Restaurant Business, QSR Magazine, Forbes

Unlike the franchise-giants who ranked on 160M 120 Technomic’s list, Slim Chickens’ more popular 140M 105 menu items entail fried food. They pride themselves on their hand-made batter and made 120M 90 from scratch menu but offer grilled chicken 100M 75 options for their health-conscious customers. Units 80M 60 The Southern hospitality restaurant focuses Annual Sales 60M 45 its efforts on mobile orders after finding drive-thru orders accounted for 45 percent 40M 30 of their sales. Once the mobile app was 20M 15 created, they saw an increase of $2 million in revenue. To further prioritize the drive- 0M 0 thru system, Slim Chickens implemented 2014 2015 2016 2017 2018 2019 two kitchen service models with dine-in and Annual Sales # of Units drive-thru kitchen display system monitors. Projected # of Units

MATTHEWS™ AVERAGE MEAL PRICE: $10

SIGNATURE MENU ITEM: Mendocino the hot italian FOUNDED: Farms 2005

Average 2018 SALES: Meal PricE: $75.7 Million

$10 LOCATIONS: 25+ (U.S.)

Established in 2005, Mendocino Farms has themselves in the fact that their food is made yet to make an appearance on Technomic’s from local and sustainably sourced ingredients Top 500 Chain Restaurants. However, that and offers a healthy spin on classics like Banh Mi. doesn’t reflect this powerhouse mom-and-pop Taking it a step further, each new restaurant is shop gone national restaurant, often referred to custom designed according to the neighborhood. as fast-casual 2.0. In 2018, their sales increased by 38 percent, with a total of $75.7 million in In 2015, Whole Foods took an interest in the high- revenue. The California-inspired eatery reached end neighborhood café and invested in its first an average volume of $3.8 million per unit in 2019. restaurant, allowing Mendocino Farms to sustain Their most recent opening in San Ramon, CA their prices without losing quality in their meals. marked their 25th location in the United States After establishing their reputation in California, and the upscale and salad chain plans the owners are ready to expand their brand to grow by five more restaurants within the year. to other states. In July of 2019, Kevin Miles was named CEO, and with experience as the former 62% of consumers say the availability of locally CEO of Zoë’s Kitchen, Miles plans to transform Mendocino Farms into a national concept. On sourced food would make them choose one July 18th, Mendocino Farms opened its first restaurant over another. location outside of California in Houston, TX. Source: National Restaurant Association houston sandwich spots saw a median Fast-casual 2.0 elevates the experience beyond 2.4% increase in new yelp reviews over that of which its limited-service competitors offer. The California-based restaurant group has made the past month, but mendocino farms headlines for their chef-driven menu, family- saw a dramatic 461.5% increase. focused dining experience with foosball tables and Source: Hoodline.com corn hole games, and dedicated commitment to their community. Mendocino Farms prides

MATTHEWS™ capital expenditure on image activation program INDUSTRY CHALLENGES Source: The Wendy’s Company Annual Report 2018, The While the industry is conquering in terms of Wendy’s Company PR Release sales, there are still challenges that lie ahead. labor As of now, the restaurant industry is the country’s second-largest private-sector employer with 15.3 million employees. However, the industry still faces recruiting and retaining challenges, The fast-casual sector has continued with 35 percent job openings needing to to show indicators of durable staying be filled. The shrinking teen labor force and power and the ability to outperform unemployment rate further contribute to the other foodservice sectors. It is a market obstacle in finding employees, particularly management positions. Limited service that has seen extensive growth in a restaurants are currently experiencing a 132 retail market with robust economic percent turnover rate for hourly workers and 50 headwinds. Companies such as Slim percent manager turnover. As the turnover crisis Chickens, Mendocino Farms, and Panera worsens every year, experts predict employees Bread are just a few highlights in the will be replaced by ordering kiosks and robots. sector that have secured investment from either private equity or large, Some companies are creating incentive sophisticated conglomerate groups programs to increase retention rates. For for backing growth and scale. With a example, Chipotle offers quarterly bonuses of general food service sector where brands up to a month’s pay, based on the employee’s seem to be stagnating or struggling, average weekly income, as well as paid meal there is a high percentage of fast-casual breaks, and tuition reimbursement. Chipotle is positioned as fierce competition to other fast- brands that continue to have success casual restaurants facing employment issues. and strong growth. Average receipts show that consumers will pay more for Furthermore, minimum wage hikes are slowly quality, taste, experience, and creative transitioning across the nation within the industry. concepts. SoPENDING as long as companies in the Workers are fighting to increase their hourly sector areCONCLUSION capable of quick adaptability, wages to $15. However, in response to the wage adopting technology, and offering fresh increases, operators are increasing their menu new ideas and offerings, the fast-casual prices, reducing employee hours, and eliminating sector should continue to see expanding jobs to compensate for high labor costs. market share in the coming years. traffic & communication For more information on the fast-casual dining sector, contact a Matthews™ Large restaurant chains are experiencing modest growth as they rely on price increases instead specialized agent today. of geographic expansions. In fact, unit count only grew by 0.7 percent in 2018. This could be explained by the market growth in 2003, when large chains grew by 29 percent, and the U.S. population only grew by 13 percent, thus creating oversaturation in the market. Moreover, recently announced plans to close 500 underperforming locations over the next two years and replace with delivery and carryout stores.

MATTHEWS™