Fast-casual restaurants have been taking a hit as consumers no longer want to pay for that pricey lunch bowl.
Three chains that are big into selling bowls—Cava Group Chipotle Mexican Grill and Sweetgreen—all recently posted worsening sales trends in their latest quarters, with top-line results missing expectations.
The readouts raised warning signs about the strength of the fast-casual consumer, and whether they will continue to pay up for burrito bowls, salads and chicken-and-rice dishes or opt for cheaper options such as homemade meals or fast food.
“We’re operating in a fluid macroeconomic environment, and it’s one that sort of creates a fog for consumers where things are changing constantly,” Cava Chief Financial Officer Tricia Tolivar said this week on an earnings call. “During those times, they tend to step off the gas.”
Analysts chalk up the struggles to a number of factors. Younger consumers, a key demographic that has helped drive popularity at these chains, are struggling from a weak job market and increasing student-loan repayments. Competition from across the dining spectrum is heating up. Also, these bowl-based restaurants are in some cases finding it hard to top their previous successes.
About 15% to 20% of customers at fast-casual restaurants—a category that is a step above fast-food but below full-service restaurants—are between 18 and 24 years old, according to a recent TD Cowen survey. Andrew Charles, an analyst at the firm, said that the financial challenges of the Gen Z cohort is tied to the performance of the sector.
“There’s clearly some softening of Gen Z; there’s clearly some softening of fast-casual,” Charles said. “I don’t think this is coincidental.”
Fast-casual chains are also getting a run for their money from some sit-down restaurants, which have amped up aggressive marketing and discounts. John Zolidis, president of the stock-research firm Quo Vadis Capital, pointed toward Brinker International’s Chili’s, which has been offering an appetizer, entree and drink for $10.99, helping same-store sales soar in recent quarters as the chain wins share in the dining space.
Some of the fast-casual players have had a hard time getting recent promotions, critical for drumming up excitement, to top previous successes. Cava, for instance, saw a jump in traffic last year after launching grilled steak as a nationwide menu option, a bar that will be hard to top with its upcoming chicken shawarma offering, Zolidis said.
Sweetgreen, meanwhile, noted the challenges in topping the success from the launch of its steak option last year, which contributed to its lackluster results.
“They need to have exciting new menu items that drive incremental engagement from their customers,” Zolidis said. “They have to do that in an environment where the consumer is being more careful about where they’re spending their money, so it’s a big challenge.”
Fast-casual chains still have reason for optimism, according to analysts, especially if they play their cards right. They will need to continue to update their menus, improve service and increase marketing, which can all contribute to getting customers back into their restaurants, even as the macroeconomic environment remains challenging.
Another potential boost: More workers coming back into the office means more customers needing to grab lunch.
“I continue to think that fast-casual will remain a bright spot of the industry,” said Charles, the TD analyst. “We remain bullish on the category and believe that these macro headwinds from Gen Z will prove transient.”
