YUM

Fast Food Goes Upscale

As typical fast food restaurants like McDonald's, Burger King, and KFC struggle to adapt to changing consumer habits, fast-casual chains have stepped in.

By Katie Little

Call it the Chipotle effect.

With fast-casual restaurants such as Chipotle and Panera Bread growing at a sprint while fast-food counterparts expand at more of a slow jog, the latter group is entering the race and trying to shift upscale. At stake is a booming restaurant segment.

Fast-casual restaurant sales rose 13 percent last year, while fast-food sales increased 4.7 percent, according to data from market research firm Technomic. The company expects the former to grow an average of 10 percent through 2017, compared with a rise of 3.5 percent for fast food.

Despite the rush, experts say there's definitely room for fresh ideas.

"Right now, our country is pretty saturated with fast food—you could evolve that entire segment into fast-casual," said Sam Oches, editor at QSR magazine, which covers the quick-service restaurant industry.

"There's no ceiling on this," he added. "This is just going to be explosive growth for possibly decades."

Fast-food restaurants are taking one of two routes into the fast-casual space.

Many have chosen to test completely new concepts. That includes Yum Brand's KFC unit, which prompted fan outcry when it launched KFC Eleven, which doesn't feature Colonel Sanders or the company's red-and-white color scheme. KFC spokesperson Rick Maynard described it as a "innovation" restaurant that was "developed with a focus on relevance for today's consumers."

"This innovation lab offers a great way to test new elements—products, services and design—that may end up in other KFC restaurants across the country," he added.

From pretzels to artisanal pizza

A mainstay of U.S. malls, Sbarro is also going higher end with its Pizza Cucinova concept, which will feature made-to-order pizza as well as alcohol. It is set to open this fall.

The co-founder of Wetzel's Pretzels entered the competitive artisanal pizza market last year with Blaze, which uses an assembly-line format similar to Chipotle and has drawn a handful of well-known investors, including former California first lady Maria Shriver, movie producer John Davis, and Boston Red Sox co-owner Tom Werner.

From the beginning, Rick Wetzel, co-founder of both companies, said he viewed fast-casual as the best way to position Blaze.

"If you look at the top five QSR categories—burgers, Mexican, Chinese, sandwiches, and pizza—all have been developed into the fast-casual space, except pizza," he said. "This one looks like a natural whose time has come."

That's not to say things aren't busy with fancy burgers. Lexington, Kentucky–based A&W Restaurants is tossing its hat into the fast-casual and better burger segment later this year.

"We've seen a lot of success within the burger portion of fast-casual with Five Guys just exploding and Smashburger," Liz Bazner, A&W's social and digital communications strategist, told the Lexington Herald-Leader. "This is our way of saying these are options."

The second path is to incorporate more premium selections into the existing lineup, such as the decision by Wendy's to launch flatbread items or McDonald's attempt to sell Angus-beef burgers (which fizzled). Among other possible advantages, that approach lets companies capitalize on their brand reputation.

Leaving a mark

"I think the ones that are choosing to adapt some of these fast-casual [ideas] instead of launching a whole new concept, they still want to maintain their image and still want people to see them as what they set out to be," said Lauren Hallow, an assistant editor at Technomic.

Although fast-casual has taken off within the past 10 to 15 years, it is only in the last four years or so that established companies have started to eye the segment, partly because it weathered the recession better, QSR's Oches said.

In time, the whole industry will move to a more premium experience as the recent explosion of fast-casual restaurants leaves a lasting mark, he predicted.

"The lines are not very firm, and you're seeing a lot more blending of the two," Oches said.

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