The fast casual segment remains the top performer in the restaurant sector, and will continue to lead activity and change. The segment, typified by the likes of Chipotle, Noodles & Company and Zoe's Kitchen, is providing offerings that are consistent with a number of important consumer trends. Despite charging higher prices than many quick serve restaurants, fast casual chains receive high marks from customers from a value point of view. These are some of the views expressed by Bob Bielinski, Managing Director of the Restaurant Industry Practice for CIT Corporate Finance at CIT Group Inc. (NYSE:CIT) cit.com, a leading provider of commercial lending and leasing services, in " Now Serving Growth in the Restaurant Sector" ( cit.com/bielinski), the latest piece of market intelligence in the award-winning CIT Executive Insights video series (cit.com/executiveinsights). "Fast casual chains are changing the landscape of the restaurant sector through customization and better food quality, and by creating more comfortable environments," said Bielinski. "These chains are seeing growth because they are rewriting the rules of the business and are adept at meeting consumer needs, while continuing to add units and grow sales." Many quick serve chains and casual dining restaurants are reacting by remodeling restaurants, improving the quality of their food and utilizing new technology. As a result, these companies will likely seek financing to invest in their restaurants and improve their overall value proposition. Bielinski offers other insights and takeaways on the U.S. restaurant sector, including:
- Casual dining restaurants continue to struggle: Same store sales are mixed and traffic trends are weak. Chains that are faring better have an offering that resonates with their core customers.
- Franchisee consolidation is likely to continue at a rapid pace: With franchise owners retiring, small and large franchisees looking to acquire stores, and big domestic chains selling their corporate stores, the space will likely see more consolidation in 2015.
- Private equity interest remains high: Private equity firms have shown that they're very interested in backing restaurant companies and large franchisees and will continue to do so if the debt markets support it. Looking ahead, as private equity firms look to divest their portfolio companies, activity is likely to accelerate in 2015 if the capital markets are strong and the economy continues to improve.
- Bank regulations could impact the sector: Regulations could put added pressure on restaurant companies' ability to build their businesses. Restaurants rely heavily on debt and need capital for remodels, new units, and acquisitions.
- Potential interest rate increases may pressure the sector: The economic recovery should continue to drive increased sales and profits for restaurant companies, so that any increase in interest rates would be manageable. If the industry lags and sales don't keep pace with the overall economy, then rising interest rates could present issues for the sector.
- Increased costs may impact growth strategies: In the face of increased costs from commodities and wages and a general lack of pricing power in the industry, some companies will have to focus on only the best locations for new units because that's where they can get their return on investment.
- Technology is having a dramatic effect on the industry: With pizza chains leading the charge via mobile ordering apps, quick serve restaurants will follow in kind. More casual dining chains will be rolling out tablets so customers can use them to place orders, play games and get entertainment while waiting for their meal, and pay their check at the end.