Fast-Casual vs. Fast-Food: An Overview

The two stalwarts of the American restaurant industry were always fast-food and fine dining, but now the rapidly growing fast-casual restaurant sector has squeezed in between them.

Many companies combined healthy ingredients with fast-food convenience to launch the trend, including restaurant brands Chipotle (CMG), Shake Shack (SHAK), and Panera (PNRA), among others.

In sheer numbers, they are still dwarfed by the fast-food competition and will be for years to come. But fast-casual restaurant chains are growing much faster than their fast-food competitors.

Fast-Casual

Fast-casual restaurants offer consumers freshly-prepared, higher-quality food in an informal setting, with counter service to keep things speedy.

Notably, Shake Shack, a burger chain that originated in New York City, has found success offering a casual dining experience at a fast food pace. Shake Shack's stock price soared from $21 to $47 at its 2015 initial public offering (IPO). At the end of May 2019, it closed at $61.35.

37,855 vs. 114

The number of McDonald's restaurants worldwide compared to the number of Shake Shacks.

It will be a long while before a fast-casual chain competes with McDonald's for sheer size or revenue numbers. "Mickey D's," as it is known to its fans, is a global powerhouse with 37,855 restaurants around the world as of mid-2019. Its sales were close to $5 billion in the first quarter of 2019. Shake Shack, by comparison, had 114 stores and hoped to open up to 40 more in 2019. Its first-quarter 2019 revenues were about $133 million.

However, note that Shake Shack's revenue for that quarter represented growth of 33.8% year-over-year, and stock investors love growth above all else. Overall, fast-food revenues are expected to grow by about 4.2% in 2019 compared to 8.3% for fast-casual restaurants.

Combining the ambiance and meal quality comparable to casual dining with the convenience of a quick-service chain, the fast-casual industry has been a model for current and future success. A number of factors, including affordability in conjunction with quality, taste, convenience, and customer service, form the basis of the business model for fast-casual outlets.

But affordability is relative. A fast-food meal can cost between $5 and $7, although some now offer premium selections that are priced a bit higher, and most offer "value" options that cost less. Chipotle prices, by comparison, average about $11 per person.

The fast-casual concept incorporates relative affordability with high-quality ingredients. Their menus feature more natural ingredients, more fresh vegetables and fruits, and customized selections.

As consumer habits shift to healthier life choices, ingredients labeled organic, fresh, and non-GMO are associated with higher prices.

Fast-Food

The fast-food sector contains a number of popular franchises, including McDonald's, KFC and Taco Bell (YUM), and Wendy’s (WEN). McDonald's has led the fast food industry in terms of overall sales and number of restaurants worldwide, followed by Subway and Starbucks (SBUX).

McDonald's sales declined 6.47% year-over-year for the 12 months that ended March 31, 2019.

Fast-food chains earned much of their success by offering quick, inexpensive meals that are always made exactly the same way. However, over the last few years, fast-casual restaurants have continued to eat into the market share of leading quick-service chains.

As American consumption trends toward healthier, organic choices, fast-food chain sales have declined. Revenues for the bellwether of the industry, McDonald's (MCD), declined 6.47% year-over-year for the 12 months that ended March 31, 2019.

Traditionally, fast food chains gained market share by offering simpler and cheaper alternatives. Fast-casual chains stepped in to provide consumers with healthier and spicier selections.

The fast-food industry is not ignoring the trend. In late 2018, McDonald's announced that it was removing all preservatives, fake colors, and other artificial ingredients from seven of its burger selections. Its menu now features a Southwest Grilled Chicken Salad, and you can get apple slices with a kid's Happy Meal. Customers at Kentucky Fried Chicken now can choose fried or grilled. Taco Bell has a vegetarian option.

Key Takeaways

  • Fast-casual restaurant chains offer higher-quality food in an informal setting.
  • The leaders in this sector are outpacing more traditional fast-food outlets in growth.
  • The fast-food industry is responding with healthier menu options.