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David vs. Goliath: Fast Casual Burger Segment Growth Kicks up QSR Competition

By: Annemarie, Mannion; QSR Web

The competition between quick-serve and fast casual burger chains is not quite at a sizzle, but it is clear the two segments are facing off in the premium hamburger category.   

QSRs from McDonald’s to Jack in the Box have already taken lessons from the fast casual segment and begun re-imaging their stores with a more upscale look. Even Burger King got the message and has started an upscale re-imaging plan.

Now, the top three burger chains have bigger, better burgers in the pipeline to compete with fast casuals’ made-to-order, high quality menu items. McDonald’s has introduced its line of Angus Third Pounders, Burger King has a Steakhouse XT in the wings, and Wendy’s just announced it has a premium bacon burger with bacon cooked from scratch and a better bun coming this fall. 

Hardee’s and Carl’s Jr., who placed their stakes in the premium burger category nearly 10 years ago, have always positioned the burgers as an attempt to capture some casual dining occasions. But with fast casual burger chains growing at a rapid rate, the better-quality burgers are needed to stave off that competition.

Ron Paul, president of restaurant consulting firm Technomic, said that for QSRs, introducing premium burgers is a good strategy for chains that have already saturated the marketplace with locations and value products.

“They need to do what they’re already doing — which is introduce premium products,” Paul said.

Fast casual burger segment by the numbers

The fast casual burger segment is still small compared to the QSR burger leaders, but in a tight economy, quick-serves can ill afford to lose any market share.

According to Technomic, fast casuals increased their number of units from nearly 7,000 in 2004 to more than 13,000 in 2008. The number of units in the QSR segment rose from about 123 million in 2004 to nearly 146 million in 2008.

Sales for QSRs were $145.7 billion in 2008, compared to $121.1 billion in 2004, while sales for fast casuals grew from $7.2 billion in 2004 to $16 billion in 2008, Technomic reports.

“Fast casuals are a minor threat,” said Ron Paul, president of Technomic. “That’s because they have so few stores. Take all of the fast casual stores together, and you’re talking in the thousands, not nearly the number that the quick-service chains have.”

Watching the competition

Still, the growth in fast casuals is enough evidence of their appeal to diners and of the demand for their premium products usually served in an upscale setting.

“It says that these concepts are finding success and that there are not enough of them,” Paul said.

One of the major players in the fast casual burger category is Lorton, Va.-based Five Guys Burgers & Fries. Technomic reports that sales at Five Guys grew from $190 million in 2007 to $302 million in 2008. The chain’s number of units increased from 241 in 2007 to 360 to 2008.

“They’ve got an aggressive management team,” Paul says. “They want to grow, and eventually, I think, they will go public.”

Another fast casual on a rapid expansion track is Denver-based Smashburger, which saw an average unit volume in 2007 and 2008 of $1.2 million. That’s likely to increase with the addition of new units. Smashburger has 28 stores and is slated to have 40 by the end of the year.

Smashburger sees fast casuals’ attractive dining environment, quality foods and customized menu items as just a few of the areas where the segment has the upper-hand over QSRs.

Even so, Tom Ryan, Smashburger founder and chief marketing officer, said that while he is not worried about competition by QSRs, he can’t ignore their premium burger introductions.

“When McDonald’s rolls something out, you have to have your ear to the ground and watch it,” he said.

Quality a differentiator

McDonald’s is clearly the leader in the QSR burger segment with close to 14,000 U.S. units. Its Angus line is already deemed a success, having boosted same-store sales in July, said Marta Fearon, director of U.S. marketing for McDonald’s. “It has been well-received by customers.”

Burger King, with more than 11,500 stores worldwide, has not had quite the success with its initial premium offerings, with analysts blaming the chain’s emphasis on those products over value for falling U.S. comps in the most recent quarter. But with its new batch broiler rollout scheduled to complete in January, the company has said it will focus on both premium offerings and value to compete.

While Carl’s Jr. and Hardee’s have only 3,100 stores combined, the sister chains have lead the QSR premium burger category for years. Carl’s Jr. began offering its Six Dollar premium burgers in 2001, followed by Hardee’s Thickburgers in 2003.

The chains use those burgers as their differentiator — not only in QSR but fast casual as well. Andy Puzder, chief executive officer of CKE Restaurants, parent company of Carl’s Jr. and Hardees, said his company is prepared to compete with both segments.

On the QSR front, Puzder predicts that McDonald’s and Burger King, since they are known for their value products, will have a hard time also straddling the premium market that Carl’s Jr. and Hardees already occupy.

“You can’t be both to customers,” he said.

On the fast casual front, Puzder said anecdotal evidence showed his company has taken a bite out of sales of fast casuals, particularly before the recession. Carl’s Jr.’s Six Dollar Burgers cost $3.99 and come one-third and half-pound sizes and include premium toppings such as Portobello mushrooms and guacamole — well able to compete with fast casual menus and higher price points.

Until the economy cooled off about six months ago, Puzder said, customers who filled out comment cards at his chains’ restaurants often mentioned they were choosing to dine at Hardees and Carl’s Jr., rather than at pricier fast casuals.

Puzder is well aware that QSRs can’t compete with fast casuals only with their menu offerings. Fast casuals can demand a higher price point because their made-to-order quality offerings are served in an upscale atmosphere.

Like McDonald’s, Carl’s Jr. and Hardee’s have been undergoing a reimaging process to improve the décor of their restaurants. Renovations are complete at 80 percent of Carl’s Jr. locations and at 60 percent of Hardees.

“We’re doing a ’50s diner look,” he said. “Consumers always want a clean and inviting place to eat, and the ‘50s are a time people associate with good memories of fast food.”

As for CKE Restaurants’ premium burgers, Puzder is taking advantage of McDonald’s Angus burger launch to showcase his chains’ longevity in the category, no matter the competitor.

Puzder insists McDonald’s introduction of its Angus burger has given his company the chance to show they have a lock on the public’s perception of Carl’s Jr. and Hardee’s as the chains that specialize in premium burgers.

“It opened a door here,” Puzder said. “We ought to write them (McDonald’s) a thank you note.”