Thinking With Your Stomach: A Glimpse of the Economic Growth of Fast Casual

I am a Foodie, someone who craves delicious calories and raves for quality tastes and textures to experience. I am a cinnamon roll concour, self proclaimed. I lift weights to eat and eat to lift weight. But mostly importantly, I LOVE FOOD. 

Below, is a topic I have considered many times but, until recently, did not have much research to back up my hungry curiosities. I hope you enjoy a brief but informative piece on such a dynamic topic of food economics, consumers, and the restaurant industry

Thinking with your stomach

Analyzing the Consumer Driven Economic Factors within the Restaurant Industry

Introduction:

Within microeconomics consumer behavior drives demand, market trends, and overall purchases in relation to price and supply.  Behavioral economics is primarily concerned with the rationality of economic decisions, influenced by psychology, neuroscience, and microeconomics, challenging the conventional “rational choice” view. More than any other, the restaurant industry is impacted by consumer choice. Within this industry, restaurants are segmented according to the level of customer service including: quick service/fast food, casual/family dining, and fast casual (Major Segments of the Restaurant Industry). Over the last decade, all but the fast casual segment of the restaurant industry, a type of restaurant that does not offer full table service but promotes a higher quality of food with fewer processed ingredients than a fast food restaurant, declined throughout the recovery of the 2008 economic recession. The recession had led to sharp cutbacks in consumer spending and a high unemployment rate. This analysis will identify the factors that have caused the fast casual segment to flourish despite the issued faced by the food industry at large, and will examine how the restaurant industry’s market structure has been affected by the emergence of fast casual as the dominant food service proving segment in the U.S.

Facts/History:

According the NPD Group, “fast casual is the only restaurant segment that has continued to grow throughout the economic recession and recovery” through 2008-2015 (NPD: Fast Casual Only Growth Segment during down Economy). During this period, the market size of the restaurant industry remained constant, signaling to analysts “When the overall market isn't growing, it means stealing customers from everyone else.” (The Chipotle Effect: Why America Is Obsessed with Fast Casual Food). While the fast casual segment continuously grew 5-11 percent annually, during that same period other restaurants hovered between one percent growth and two percent declines (NPD: Fast Casual Only Growth Segment during down Economy). For restaurants operating within the entirety of the restaurant industry, they compete in a monopolistic competition market structure in which many businesses sell similar, but not identical products. Product and service differentiation, driven by consumer preference and emerging behavior, separates the restaurant segments. Upon the recession, the divide between the price-competitive full-service casual dining and quick service fast food grew. Even in a recession that drastically decreased consumer spending, the U.S. consumer was willing and able to spend more money than before on what they perceived was a better value. The result was consumer demand outpacing unit expansion rates, reflecting higher levels of satisfaction with the fast casual experience (NPD: Fast Casual Only Growth Segment during down Economy).

Critical Analysis:

The critical analysis of the restaurant industry identifies the leading factors of the market imbalance presented. Economists believe the inverse relationship between fast casual and traditional fast food and casual restaurants can be traced back to changes from external economic factors, consumer market demand, and behavioral perceptions of value. Thus, consumers choose to spend their remaining disposable income based upon these changes and perceptions.  

In the initial months of the recession in 2008, companies and analysts believe that the credit crisis and decline in the larger economy were the major factors of the downturn in the restaurant industry.  For the first time in nearly two decades, the $550 billion restaurant industry had “suffered stagnant sales this year, creating painful cash-flow problems for restaurateurs who can't get credit lines to cover investment and operating costs” (Restaurants Face Lean Times in the Economic Downturn). Negative external factors that relate to the decline of the already saturated market include minimum wages and commodity prices increasing along with “soaring food costs and a surfeit of locations” that have hurt companies’ triple bottom line (Restaurant Chains Close as Diners Reduce Spending). This has made it harder for casual chains and independent eateries alike to upgrade equipment, hire new staff and renovate facilities which overall has formed a dramatic change in the landscape of the restaurant industry as a result of the economic crisis.

Economists believe the imbalance within the restaurant industry relate to how restaurant brands impacted overall market demand. Fast casual restaurants didn’t just respond to customer demand; they also shaped it. In essence, “consumers didn’t really know what they wanted until they were told they could get it” as explained by Technomis analyst Darren Tristano. Introduced by fast casual restaurants like Chipotle and Five Guys, the segment increased consumer demand by altering people’s expectations of fast serviced food simply by marketing different attributes of a product such as “organic” and “premium”. This strategy increases demand among consumers by making the consumer more aware of the commodity; training the consumer to desire the good more frequently (5 Behavioral Economics Principles Marketers Can't Afford to Ignore).  In contrast to the demand growth of fast casual restaurants, the remaining restaurant segments were drastically impacted over the 2008 recession and recovery. Once thought to be recession-proof, when consumers need to cut spending, the logic goes, cheap meals like Big Macs and Whoppers become even more attractive. The dynamic is similar to an inferior good in previous recessions. However, Techonomic notes that while fast food and casual dining have been well known for value by providing a lot of food at a good value price, “post-recession, the price-value equation no longer holds true in the consumer’s mind” (The Future of Casual Dining). As the economy continued to recover from the recessionary period, consumer confidence returned over time while employment continued to improve. As a result, consumers feel confident enough to swap inferior goods for normal or even luxury goods, as perceived by them, thereby shifting market spending from segment to segment in the industry.

In addition to increasing consumer demand, experts believe behavioral factors influenced consumers in a way that led many to value food differently from the way the choice was framed. Often observed in the wine industry, the irrational value assessment occurs when consumers’ preferences perceive an increased price as a “premium” for what is actually a similar product and, in the case of the restaurant experience, overall shorter experience (5 Behavioral Economics Principles Marketers Can't Afford to Ignore). According to Technomic, there are at nearly 10 different markers in the fast casual segment that resonate with consumers’ preferences: the quality of the food, the use of better ingredients, food that is wholesome, perceived freshness, first-rate décor, value pricing, fast service, friendly employees, flexible offerings, and a full view of how the food is prepared (The Chipotle Effect: Why America Is Obsessed with Fast Casual Food). Even in the recession, the emerging demographic places high priorities on food and an experience that traditional economists define as “irrational”.

Opinion:

In a dynamic environment that has not seen total industry growth from 2008-2015, identifying which driving factor that affects the industry is the key to identifying consumers and trends. Therefore, in a monopolistically competitive industry that offers only slightly different products and extended services across its main segments, I believe behavioral factors, specifically the irrational value assessment, has altered the market in way that is transforming the industry as a whole. This factor, developing over the last decade, has shown not just an increase or decrease in market demand but rather a shift in values for the consumer, providing a competitive advantage for the fast casual restaurant segment while reducing growth in other traditional segments of the market.

  A number of elements have sparked this, including the rise in millennials and purchasing power of low-income consumers. Additionally, social trends have emerged over the last decade impacting the way consumers value their experience rather than just impacting demand.  For example, while full-service casual restaurants such as Olive Garden, Applebee’s, and Outback Steakhouse were defined by higher prices, slower staffed service, and higher quality, fast food restaurants like McDonalds, Taco Bell, and Dunkin Donuts shared fast service, economy driven prices, and utilitarian dining rooms. Rather than appealing to consumers with extended personal services and a low price point, fast casual emphasized fresh, high quality ingredients and preparation methods, comfortable outlets and flexibility that had not been offered previously in the industry. In comparison of the average price for a single cheeseburger, small French fries and a medium drink in each industry, one meal in the fast food segment was priced below $5 (McDonalds Prices). In contrast, that same meal in a casual restaurant averages $15, not including tip, while the fast casual segment averages between $9-$13 (The Burger Is the Heavy Artillery in Restaurant Lunch Wars). The price differences reflected are the result of how different segments have catered to consumers over the last decade. Fast casual in particular outlines the most important trends that value a consumer’s time, health, and social experience while cutting costs, and thereby the price, on non-essential factors. For instance, rather than wasting time and resources on a full-service sit down menu and waiting serviced staff, fast casual identifies the value of fast service and the increasingly busy consumers.  In an industry that offers only slightly different products and extended services across different segments the result of transforming trends is how consumers perceive value and ultimately how consumers have rationalized paying a premium for a perceived optimal value.

Conclusion:

The restaurant industry interacts with myriad dynamic economic forces such as urbanization, digitization and globalization. From every resource in the supply chain needed, to the services required on a daily basis in order to bring a meal to the consumer, the restaurant industry demonstrates the dynamic microeconomic interactions that shape the very basis of supply and demand. Yet, underlying these larger forces, behavioral economics help to define consumer’s decisions, purchases and overall choice. In conclusion, I believe through evolving consumer behavior, changes in how consumer’s value products and services is the driving factor in transforming the restaurant industry.

Thoughts?

Thank You!

References:

1. Akers, Helen. "Major Segments of the Restaurant Industry." Small Business. N.p., 2010. Web. 10 Apr. 2016.
2. Caplan, Jeremy. "Restaurants Face Lean Times in the Economic Downturn." Time. Time Inc., 10 Oct. 2008. Web. 10 Apr. 2016.
3. Ferdman, Roberto A. "The Chipotle Effect: Why America Is Obsessed with Fast Casual Food." The Washington Post. N.p., 2 Feb. 2015. Web. 10 Apr. 2016.
4. Grynbaum, Michael. "Restaurant Chains Close as Diners Reduce Spending." The New York Times. The New York Times, 29 July 2008. Web. 10 Apr. 2016.
5. Killifer, Valerie. "NPD: Fast Casual Only Growth Segment during down Economy." Fast Casual. NPD Group, 7 Feb. 2012. Web. 10 Apr. 2016.
6. "McDonalds Prices." Fast Food Menu Prices. N.p., July 2015. Web. 19 Apr. 2016.
7. Mclynn, Kim. "The Burger Is the Heavy Artillery in Restaurant Lunch Wars." NPD Group. N.p., 18 Aug. 2015. Web. 10 Apr. 2016.
8. Olenski, Steve. "5 Behavioral Economics Principles Marketers Can't Afford to Ignore." Forbes. Forbes Magazine, 1 Mar. 2013. Web. 19 Apr. 2016.
9. Yanyeri, Dana. "The Future of Casual Dining." Foodservice Equipment & Supplies. N.p., 02 Jan. 2012. Web. 10 Apr. 2016.