More Thoughtful Food
This coming fall, DIRT—a vegan friendly, farm- to-table, fast casual restaurant—will open its first location in Miami. Splash 4 Partners (S4P) had the pleasure of advising DIRT on its business plan and capital raising process.
S4P views DIRT and its future growth plans as a data point in action surrounding the continued trend of consumers selecting healthier options and being more mindful about how the food they eat affects their health, wellness, and fitness.
This trend is more than a decade in the making (see graphic in the following section) and is changing the nature of the food and beverage market in real time as seen in:
- Declining U.S. sales at fast food giant McDonald’s;
- The emergence of healthy fast casual as an industry segment; and
- The emergence of alternative new beverage brands selling cold pressed juice, soft drinks with real sugar, coconut water, and Kombucha.
Figures pulled from public sources as of the end of the first quarter 2015.
Education, Awareness & Action: The Progression of a More Thoughtful Consumer
The progression of consumer consciousness and action around healthier food options took time to take root in the U.S. market. Over more than ten years, consumers became socialized to the idea of the importance of consuming healthier foods thanks to:
- Whole Foods Market bringing certified organic foods to the masses;
- The publishing of thought pieces and the emergence of thought leaders like Eric Schlosser’s book Fast Food Nation, which pulled back the curtain on the production, processing, and sourcing of the food we eat; and
- Chipotle bringing antibiotic-free meat to the country and helping define the fast casual segment.
By 2009, the education and awareness campaign had primed the market with customer demand for healthier food options. Since then, numerous multi-unit, healthy fast casual brands have emerged and many have received private equity backing to spur unit growth. Additionally, large established restaurant brands have found themselves having to respond to the changing market demand:
- 2011 McDonald’s put apple slices in all Happy Meals.
- 2013 Chipotle apologized to its customers and reversed course on its decision to allow antibiotic treated beef in their restaurants.
- 2014 Subway promises to remove an artificial preservative in its bread that is also used to make yoga mats.
- 2014 Panera Bread promises to remove artificial additives from their menu by 2016.
Emerging Supply & the Entrenched Competition
With declining same store sales, it is not surprising that many industry pundits look to McDonald’s as a relic with a target on its back. Yet you will not find S4P prognosticating the demise of McDonald’s anytime soon. After all, it is a global brand with $27.4 billion in sales in 2014 and the resale value of McDonald’s 12,738 U.S. franchised locations rests between $10.3 billion and $20.4 billion.
Domestically, McDonald’s is likely to keep a core price sensitive consumer as the price differential can be significant between quick service restaurants (QSR) and fast casual. The broad QSR category sees the typical meal priced between $3.00 and $6.00 compared to the $6.00 to $9.09 optimal price range for fast casual brands. Where McDonald’s is seeing the greatest competition is from brands like Chipotle, Pret-A-Manger, Starbucks, and Panera Bread. All brands whose pricing maps closely to the optimal meal pricing for fast casual and advertise based on quality and freshness.
Fast Casual vs. Healthy Fast Casual
S4P envisions growth in the healthy fast casual segment to mirror that of Whole Foods and Starbucks. Both brands came to market as high end brands that educated early adopters and used them to help spread the word to more mainstream users. As the brands took market share, competitors servicing a broader customer base chose to expand their product offerings in an attempt to hold onto customers that were seeking out Starbucks coffee or organic produce at Whole Foods.
As seen in the table below, early adopters of the healthy fast casual brands, such as Chopt’, Native Foods, and Veggie Grill, price sensitivity falls beyond the optimal fast casual price range of $6.00 to $9.09 per meal. The table below shows a relatively consistent customer spend around the $10 to $11 range for these brands.
Figures calculated by S4P using publicly available data.
However, first hand research and anecdotal evidence shows a willingness among loyal fans of the many emerging healthy fast casual brands to spend north of $15 a meal. Sit in a South Florida or Washington D.C.-based vegan friendly fast casual establishment and you are likely to find a cadre of the yoga or CrossFit community who are young professionals (mid-twenties to early forties) sporting either professional attire or the latest from lululemon. The high dollar spend on food is just an extension of their health, wellness, and fitness focused consumerism.
The early adopters to the vegan friendly chains have often been women. Research indicates that women are often the decision makers around dining decisions, a trend that is likely to increase as women are the primary income source for 40% of American households with children.
A potential headwind to vegan and vegetarian focused brands, like Native Foods and Veggie Grill, is the inability to bridge the divide between non-meat and meat eaters. Carnivores will tolerate or opt for the occasional meatless meal but are unlikely to dine at a vegan restaurant regularly without some sort of social catalyst. Likewise, the salad focused offerings at Sweet Green and Chopt’ has drawn similar criticism about the limits of these brands growth, without expanding the menu offering and operating costs.
Menu expansion risks alienating or confusing these brands' customer bases. The tandem growth of both salad brands and vegan focus concepts provides the health conscious consumer with the variety to limit the need for menu expansion in the short term.
Brands like DIRT present a differentiated offering bridging the gap between vegan eaters and their carnivore friends, offering a place with modular protein for each dish, alongside a menu of power shakes and cold pressed juices. S4P believes this is a model that can help accelerate the growth of the healthy fast casual segment as it provides a broad based menu that appeals to vegans, vegetarians, Paleo dieters, and straight up carnivores alike. In short, the menu is inclusive to attract both women and men for frequent repeat patronage.
For the time being, there is enough greenfield for all the emerging health focus concepts to grow and expand the healthy fast casual category’s customer base. As the customer base expands beyond early adopters, lower priced traditional fast casual brands, like Chipotle and Panera, will likely feel increased competitive pressures from these brands.
Signs of such competitive pressures from emerging healthy fast casual brands are already being seen, as Panera has pledged to remove to remove artificial additives from its food by 2016.
S4P encourages those interested in the space to play close attention to Chipotle over the next couple years as the brand tries to maintain margins, as competition and pricing for locally sourced vegetables, or ethically sourced, antibiotic-free meat continues to rise. Much of the impressive same store sales growth the brand has experienced in recent years has come from siphoning off many of the QSR’s least price sensitive consumers, making them Chipotle’s most price sensitive consumers. The brand will be forced to find a way to keep to a brand image it has created over two decades while managing a pricing strategy that keeps them competitive from increased competition coming from direct comps and upstream health focused brands.
Inhibitors to Growth
As seen in the chart at the top of this piece, private equity is betting on the future growth of the healthy fast casual industry. Many question what brand will be the next Panera or Chipotle among the early success stories. While the future is bright at large thanks to the growing consumer focus on healthier living, the same constraints that govern most chain restaurants exist. Having previously sifted through restaurant growth trends for hundreds of brands historically, a governor of sorts exists for brands around 20 units, 50 units, and 100 units. The factors inhibiting growth often include:
- Locating attractive but affordable real estate;
- Finding vendors that can scale with the brand to meet inventory needs, without sacrificing quality or profit margins;
- Achieving constituency in food quality, service, and general customer experience as the brand grows; and
- Creating a unified and integrated marketing program across all geographies and channels.
Looking to prominent brands like Chipotle and Starbucks, clearing these hurdles was only truly achieved when engaging other large corporate partners. Chipotle had only 16 stores in 1998 when McDonald’s made its first equity investment in the brand. Under McDonald’s guidance the brand grew to over 470 stores before being spun out. This partnership provided knowledge on:
- Supply chain and vendor management;
- Real estate selection;
- Marketing and branding; and
- Training and store level operations.
In the case of Starbucks, they created partnerships with Target, Safeway, and Marriott to gain real estate and access to a larger customer segment. One might imagine the largest of healthy fast casual brands to forge similar partnerships to accelerate and manage the brand’s growth to 50 restaurants, 100 restaurants, and beyond. Maybe Chipotle will become the adoptive parent to Native Foods, Chopt’, LYFE Kitchen, or DIRT, like McDonald’s did for them.
 Based on pricing provided by McDonald’s 2014 franchise disclosure document and S4P estimates.
 This excludes any real estate value and approximates only the total price of all franchise agreements if there were to be sold today.
 Average ticket price for McDonald’s is estimated to be $4.75, according tohttp://www.eater.com/2012/2/8/6615415/the-average-mcdonalds.
 Optimal Fast Casual Pricing provided by Techonomic’s report.
 Data aggregated from ten individual open sources.
 Customers choose between a vegan based protein, or organic, antibiotic free bison or chicken.