• by Karlene Lukovitz  @KLmarketdaily, October 3, 2008

With quick-service restaurants--including McDonald's--as well as full-service casual chains like Denny's both trying to muscle in on their format, it's no wonder that fast-casual restaurants (FCRs) are a bit nervous these days.

 

More than half (55%) of the 150-plus C-level FCR executives recently surveyed by Fast Casual magazine for its annual industry report expressed concern about QSRs--in particular, going after their customer base.

The FCR format continues to be the fastest-growing, and success breeds competition.

In 2007, FCRs saw dollar and unit growth of 13.3% and 9.5%, respectively, according to the latest top 100 FCR report from food service consultant Technomic. That compared to 5.3% dollar and 2.6% unit growth for the overall limited-service segment of which FCRs are a part, and 5% dollar and 2.6% unit growth for restaurants as a whole.

FCRs have found a sweet spot by attracting casual-dining customers with lower-priced but fresh, high-quality food and QSR customers with a more upscale environment at prices that are generally only about $2 to $4 higher than typical QSRs.

The top 100 FCR chains accounted for $14.8 billion of the segment's $16 to $17 billion in gross sales, Technomic reports. Panera Bread continued to be the leader, with $2.2 billion in estimated sales, and the largest growth in units sold, dollars ($337 million) and stores (adding 140), according to Technomic. Chipotle Mexican Grill ($1.1 billion) and Panda Express ($1.0 billion) are in second and third place.

In addition to introducing healthier offerings and specialty coffees, McDonald's is looking to lure away both FCR and Starbucks customers by transforming the interiors and exteriors of its corporate-owned and franchise units. Replacing the familiar red mansard roofs with a contemporary golden-hued slope design (although keeping the golden arches symbol in clear view) is just the start.

The new interiors feature toned-down color schemes (terra cotta instead of bright red, with coordinating yellows and greens), suffused lighting, wall art not featuring Ronald McDonald, fishtanks and--most important, three separate sections that include a "linger zone" with a McCafe coffee bar, comfy chairs and sofas and wi-fi connections. As of mid-August, the interiors of about 2,400 of McD's more than 13,000 locations had been redesigned.

Meanwhile, Denny's is gunning both to win back breakfast customers lost to QSRs and to woo FCR regulars. Its breakfast strategy includes its ad campaign, featuring "Sopranos" actor Tony "Paulie Walnuts" Sirico attacking "fake" fast-food breakfasts and the recent launch of a takeaway service offering Denny's traditional morning menu in proprietary new Dome packaging that keeps the meals hot and crisp.

In addition, the chain has been trying out a fast-casual store-within-a-store concept, dubbed "Denny's Fresh Express." Nor is Denny's alone in this: Other full-service chains, including Bakers Square, are testing similar fast-casual areas within their formats.

Furthermore, FCRs are increasingly competing among themselves. Nearly half (47%) of the FCR executives surveyed by Fast Casual confirmed that they plan to start other fast-casual concepts.

"Competition is getting tougher" within the FCR segment, summed up Darren Tristano, EVP of Technomic information services. "To continue competing successfully, fast-casual chains must align themselves even more closely with the needs of their target customers."

To differentiate themselves and maintain growth, FCRs should leverage opportunities represented by "exceptional flavor and spice profiles," high-quality ingredients, regional ethnic cuisines and "fresh and healthy inspirations," say Technomic's analysts

. More than 40% of FCRs spend 4% to 5% of gross sales on marketing, per the Fast Casual survey. Still, competition from the likes of marketing megalith Mickey D's puts pressure on FCRs to perhaps get more aggressive and innovative, including making the most of relatively low-cost social media and other online opportunities.

FCRs also need to harness data to hone operational efficiency and become more process-driven, Fast Casual Executive Alliance president and Wildflower Bread Co. founder Louis Basile stressed to Fast Casual.