Is Casual Dining Starting to Take Share from Fast Casual?

What it now costs to dine out has given the category a chance to win with experience.

April 18, 2023 Danny Klein

One of the reasons fast casual erupted in the 2010s was its value proposition. The category nestled a gap between casual dining and quick service, but with quality closer to the former than what consumers had grown to expect from fast food. And it left casual dining in a dicey middle, where experience and quality had to come forward to justify the difference in the two segment’s price points.

It’s why brands from Chili’s to Applebee’s tightened direction to amplify their cores. Chili’s scaled its menu back 40 percent in September 2017 in a “Less is More” initiative that spotlighted what the brand had been known for over the decades (ribs, fajitas, margaritas). Applebee’s, meanwhile, trimmed its footprint, focused on operations and franchise profitability, and turned back in time as well. The “Eatin’ Good in the Neighborhood” positioning, abundance, and, more than anything, a value-driven approach difficult to rival at scale.

Essentially, casual chains found their footing by leaning into their points of differentiation versus trying to become something they weren’t.

Over the past two years, however, this conversation has tilted. The value gap between fast casual and much of the category has narrowed. Chipotle, in one example, has raised menu prices by more than 20 percent.

BTIG analyst Peter Saleh recently hosted several meetings with Texas Roadhouse’s Michael Bailen, the steakhouse’s senior director of investor relations and financial analysis, and CMO Chris Jacobsen. A topic that came up often circled this thought: Is the brand benefiting from modest trade down from upscale casual or fine dining, as well as trade up from fast casual?

While much of Texas Roadhouse’s evidence was anecdotal, Saleh said, management suggested a recent increase in sales for entry-level price items, which supports the notion consumers are trading up from fast casual. During that same two-year span, Texas Roadhouse increased price by only 10 percent or so. “We continue to believe that Texas Roadhouse is leveraging its value leadership, especially on the kid's menu, to take market share, as evidenced by record average weekly sales,” Saleh wrote in a note.

Texas Roadhouse’s water-mark performance led off 2023, when it drove into the fiscal calendar averaging weekly sales north of $146,000. Same-store sales surged 15.8 percent, year-over-year. Omicron comparisons or not (that came into play to start 2022), Texas Roadhouse restaurants averaged more guests during that span than in any period in its history.

Going back, the brand’s pre-COVID-19 view was $117,000 in the week leading up to March 10, 2020. Naturally, it plunged ($29,432) before rebounding ($60,000) by late April. And it’s only climbed since.

To management’s point, there are realities at work beyond the standard ones—to-go sales were $8,741 per week before COVID and now sit above $17,000; and price comprised 6 percent of that 15.8 percent comp to start 2023. The other 10 percent, however, was traffic, which few quick-service brands in America can attest to right now.

This isn’t just a Texas Roadhouse phenomenon, either. In the past three years, Olive Garden and LongHorn parent company Darden underpriced inflation by more than 400 basis points and the full-service segment by more than 600 basis points. Darden's prices were 6.5 percent higher year-over-year in Q2 and 6.3 percent larger in Q3.

This past quarter, Olive Garden and LongHorn set weekly sales records more than once, the highest coming during the stretch of Valentine's Day. Olive Garden earned $112,384 in average weekly sales per store ($5.84 million in annualized AUV) across the three-month period, well above its $103,998 average in 2020. For LongHorn, it was $96,905 ($5.01 million in annualized AUV), a big increase from $76,101 in 2020.

Darden said its proprietary brand health tracker suggested consumers weren’t pulling back or trading down into quick service. That’s partly due to an improved value proposition but also thanks to some of the customer service elements that have come into focus amid this climate. If fast casual and casual dining are going to rival each other in price, but one offers self-service and the other full, will it become clearer to guests what they’re paying for?

In June 2020, former Darden CEO Gene Lee (who has since retired), told investors one of the aftershocks of COVID was a “once-in-a-lifetime opportunity” for sit-down operators that “a lot of us had been waiting for.”

Olive Garden

Olive Garden's efforts on the to-go front have helped its operations inside stores, too.

Lee was talking about something that returns to the opening. “The most prominent and the most significant thing we've done is streamline the menus and our processes and procedures, and that's forever,” Lee told investors.

Brands throughout the sector reacted in kind. When dining rooms shut, full-serves had to simplify offerings to accommodate added off-premises orders. And then, operators found themselves asking what would happen when the doors reopened. As Lee put it: “How do we keep this simple because we had no idea what was going to happen … We didn’t know if anybody was going to show up.”

Darden introduced disposable, pared-down menus systemwide. That was a temporary reaction. But more lasting, it learned how to squeeze enough variety onto menus to satisfy consumer demand. “That’s been the biggest insight—that some of what I would call the superfluous menu items that are on our menu that one out of 100 people were buying when they were coming in, just aren't important, and most of those created the complexity in the kitchen,” Lee said at the time. “… I think that's what's going to be the lasting change. It's going to have significant impact two years, three years, four years from today.”

Processes and procedures were rethought. Extra prep work cut out. Labor efficiencies dialed in and the idea of being “fully staffed” reworked due to circumstance (shortages) and because, simply, what it took to run restaurants had changed. KDS and handhelds have since raced into the picture. Restaurants are using technology—first adopted as COVID must-haves—to create a more hospitable experience rather than replace workers, and to leverage data in a way that strengthens relationships well beyond the points-based loyalty programs of quick service. Those never fit low-frequency models like casual dining. So now, sit-down brands have become more sophisticated in understanding the difference, especially given what it costs to dine out. Consumers are tapping in for experience and personalization, and a VIP-like approach that rewards visits with insider information and access to brands over deep discounts.

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"Consumers continue to seek value, which is not about low prices. Consumers are making spending trade-offs. And food away from home is one of the most difficult expenses to give up because going out to a restaurant is still an affordable luxury for them," current Darden CEO Rick Cardenas said in March. "And so, what does that mean for us? For our brands, we believe that operators that can deliver on their brand promise and value will continue to appeal to consumers, despite economic challenges. And that's what we remain focused on doing, no matter what happens in the industry and whatever happens to the category."

This is evident at Chili’s of late, as well. The brand recently made its return to TV boasting a revamped “3 for Me” value platform that starts at $10.99 and allows customers to pick their beverage, appetizer, and entrée. They can also “spice it up” by adding a classic margarita, Dip Trio, or dessert.

Casual chains continue to move away from deep discounting. Instead, “relative value” has become a constant to help the category compete with the straight convenience of counter service.

Chili’s 3 for Me platform arrived in October and introduced three tiers—$10.99, $13.99, and $15.99. The latter two offer more variety and encourage guests to move up the ladder. Perhaps more vitally, the deal closed a pricing loophole for the brand. Previously, there were bundles on Chili’s 3 for Me section cheaper than the its la carte menu for an entrée and side. Chili’s also removed some items from 3 for Me to nudge diners toward a la carte for certain purchases.

Out of the gates, Chili’s said, 24 percent fewer 3 for Me meals were being purchased per day, but the per check average rose $1.38. More than two-thirds of orders came from the $13.99 and $15.99 price point. Additionally, Q2 menu mix lifted 5.6 percent as customers switched to a la carte and bought higher-priced items, appetizers, and soft drinks (all of which are not included).

In some ways, Chili’s implemented a gate on its value. It’s not so different from how many quick-serves lean on the lower end of the barbell to inspire trial versus courting a steady source of cheaper transactions. They draw guests in and work to trade them up.

Chili's

Chili's $10.99 3 for Me rivals any platform in fast casual.

Chili’s task here was a bit different, though. CEO Kevin Hochman, who came over from Yum! Brands, noted the traffic the brand shed as a result of cutting discounting (negative 7.6 percent, year-over-year) was “unprofitable traffic.” Chili’s knew this would happen with menu changes and the removal of discount-heavy coupons via email. The brand, Hochman said, gained dollars in the market despite dragging on traffic. Same-store sales climbed 8 percent in Q2 on top of 12.1 percent growth the prior year. Pricing in the quarter lifted 10 percent over 2022’s comparable quarter.

Even so, the delta between Chili’s and competitors remained “pretty big,” Hochman said. The $10.99 entry point is lower than what much of its category charges in quick service. “That's pretty unbeatable,” Hochman told investors. “So I think as long as we make sure that we are honest about protecting the price points for that guest that really needs it in order to come in, I think we're generally going to be OK.”

CFO Joe Taylor spoke a similar line as Darden’s Cardenas. Value isn’t just price point—it’s also about quality, consistency, and service levels, he said.

And also, to Lee’s old observation, Chili’s rethought its labor model to emphasize these opportunities. At the end of December, it began rolling changes: servers were given more time on fewer tables; runner/busser positions were added to keep tables cleaner; a second bartender was added in restaurants with higher bar traffic; and an expeditor position was tacked on to monitor the back-of-house so managers could focus on leadership and coaching instead of hourly tasks.

The result does offer full service a leg up. In quick service, namely fast casual, the category is trying to reset a dynamic where it’s charging more for the same service guests once paid less for. Casual dining is now measuring up against a more expensive quick-service world. Hochman said guests are accepting the price increases thus far, and, in fact, the brand has seen value scores tick up despite prices rising. “And we think that's because the service levels have improved … and so we're seeing all those things trend in the right direction. I don't want to say that victory is accomplished and there's not a lot more work to do. But as I said in previous calls, as long as we continue to make progress every quarter, we know that we're making the right moves.”

Returning to Texas Roadhouse, Saleh said all indications suggest the brand’s sales have remained strong since its last reveal and continue to gain thanks to market share grabs from fast casual. And, to a lesser extent, fine dining.

That plus roughly 5.9 percent of menu price in Q1 2023 and Saleh predicts Texas Roadhouse will surpass its record $146,000 weekly sales figure.

He also expects the chain to stay true to its strategy of underpricing peers, despite commodity inflation, with pricing focused on offsetting higher wages. Management recently reiterated their 5–6 percent inflation outlook for the year, including high-single digit to low-teens inflation in beef. “While commodity inflation is expected to be above the range in first half of 23 and below the range in the second half, restaurant margins are still expected to be highest in the first half, consistent with sales volumes,” he wrote. “That said, we don't expect the company to take much more than the mid-single-digit price already baked into comps, so the path back to 17 percent restaurant-level margins is contingent on beef deflation, which does not appear to be in the cards for this year.”

More on the response, tech in the fold

Saleh heard a good deal about technology in his conversations with Texas Roadhouse leaders. That’s a sure and distinct change from the past, when the brand admittedly lagged the field. But in the past year or so, Texas Roadhouse quietly introduced a customer-facing tablet (called Roadhouse Pay and powered by Ziosk) at the table that allows guests to pay for their meal when they’re ready to leave. These are currently deployed in all restaurants and account for 80 percent of checks, management said.

Ultimately, Saleh believes they’ll reduce wait times, increase table turns, and lift same-store sales growth.

Further, management noted tablets were helping boost server tips, which could lead to higher retention. That’s been a common selling point of the model; that customers are more likely to tip and leave higher ones when they’re presented with a floor and easier options to calculate. In other words, it’s more difficult to leave a sub-15 percent tip when you have to manually type that in. And, conversely, simpler to just hit 20 percent with your finger than your calculator.

Texas Roadhouse also now boasts a digital waitlist where customers put their name down and wait somewhere else—in their car, house, etc. Anywhere but the lobby of a crowded restaurant. “[That] should also improve the customer experience and benefit sales,” Saleh said.

The chain is working on a comprehensive consumer data platform as well. It’s essentially a more sophisticated CRM that aims to arm Texas Roadhouse with detail on customer visitation, frequency, and walkaways over the next 12–18 months.

Also, Texas Roadhouse continues to test and expand its “Digital Kitchen,” or new kitchen display system, which first went live at a store in Shakopee, Minnesota, and a conversion in Austin, Texas. As of last quarter, Texas Roadhouse had opened two new units and converted two others to include it, and CEO Jerry Morgan said, the brand was “probably committed” to 30 restaurants this year.

Physically, the “bump outs” Texas Roadhouse built to help with to-go are active in about 12 restaurants. Every one of them, the brand said, witnessed a lift in sales. Bailen said earlier it wouldn’t surprise him if Texas Roadhouse added 10–12 this year—another 20-plus are already in the pipeline for 2024 and beyond.