Hungry for growth? A look at fast-casual restaurants

Freshii Inc.’s initial public offering tapped into the rapidly growing fast-casual restaurant sector, an area expected to see more startups acquired and further IPOs over the next couple of years.

The IPO raised more than expected for Freshii, as its initial plan to sell shares for $8.50 to $10 each was revised up to $11.50 per share on higher demand. The company’s stock price (TSE: FRII) has continued to climb since listing on January 31, reaching $14.60 on Monday morning.

Fast-casual restaurants, a subset of the quick-service segment, are positioned as alternatives to fast food. Driven by demand from millennials, the fast casual sector markets healthier and more sustainable menus. That means replacing fried and previously frozen foods with fresh vegetables, customization and fresh preparation.

Fastest-growing traffic

Fast-casual chains to watch

Via Cibo Italian Street Food. This Canadian startup comes by way of food-loving entrepreneur Alex Rechichi and his parters, Mark Rechichi and Sean Black. Rechichi previously led the growth of Mucho Burrito and Extreme Pita, which MTY Group (TSE: MTY) acquired in 2013 for $45 million. (MTY owns Thai Express and several other quick- service chains.) Hero Certified Burgers and South St. Burger. While they do not exactly sell fresh vegetables, these burger joints fall into the fast- casual segment. Southern Ontario chain Hero Burger offers grass-fed, antibiotic-free, Canadian beef burgers with a slice of “real cheese” and gluten-free buns. South St. Burger, with locations across the country, is also positioned as offering a healthier, alternative, Angus beef burger. Panera Bread. This U.S. fast casual chain, offering sandwiches, bowls and baked goods, is growing and expanding in Canada. “I would expect them to go public probably in the next 24 months,” analyst Robert Carter says. Smoke’s Poutinerie. This Ontario-founded chain seeks the global domination of poutine, according to its website, offering the Quebec dish with hand-cut fries and cheese curds. With locations in the U.S., it’s expanding outside North America and aiming for more than 1,000 restaurants by 2020. “We don’t try to pretend we’re a health craze. French fries are the base of my product. People still want to indulge when midnight cravings hit,” Ryan Smolkin, founder, told Canadian Restaurant News in 2013. Regional burrito chains have seen successful expansions, like Burrito Jax, on the East Coast, and Burrito Boyz in and around Toronto. Both chains have seen rising sales and locations, serving custom burritos with gluten-free options.

Robert Carter, food service analyst for NPD in Toronto, says fast casual represents only about 2% of all restaurant traffic in Canada, and about $500 million in annual spending. But the segment’s restaurant traffic is rising fastest, with growth of more than 10% in the past year. That’s as traffic for the entire sector is flat.

“Consumers are really responding. They like this segment,” he says. “In Canada, it’s starting to experience the same kind of growth momentum that it has in the U.S.”

Carter adds: “A lot of the drivers of that segment are really the positioning similar to what Freshii has capitalized on, that perceived health and wellness [and] higher-quality food. Freshii’s done a good job expanding from its core salads to bowls and wraps.”

Chipotle Mexican Grill (NYSE: CMG) led the fast-casual market’s growth in the U.S., rapidly expanding from 13 stores in 1998 to nearly 500 in 2006. The company held an IPO in 2006 and doubled its share price on the first day of trading, from US$22 to US$44. Today, a Chipotle share costs more than US$400.

Freshii is aiming for a similarly fast expansion, with plans to triple its store count by the end of 2019.

Matthew Corrin, Freshii’s founder and chief executive, says he has first-move advantage in the fast-casual segment. “We think there’s going to be Wendy’s and Burger King for every McDonald’s, and we’re McDonald’s. That’s the way we view it. We started first and we plan on staying first for a very long time,” he says in an emailed statement to Advisor.ca.

Evolving menus

Fast-casual restaurants must keep up with trends that, in recent years, have been shifting frequently, especially for young consumers.

Corrin says Freshii is evolving as the definition of “health” changes with the demands of customers. When the chain launched 12 years ago, the trend was brown rice and spinach. Now it’s serving more superfoods like quinoa and kale, he says. Similarly, salad at one time represented a majority of Freshii’s sales, and now it’s less than 15%.

“Freshii […] looks to global trends that we can make accessible to the masses at an affordable price point. In 2015, it was the sushi burrito. In 2017, we will get on board with the poke craze with our own twist,” Corrin says.

Getting into the market

Carter says to watch the Canadian and U.S. markets for more fast-casual IPOs or acquisitions of chains by bigger firms.

“Consolidation is definitely an opportunity in the market,” says Carter. “We have some good, small regional players that will look to get some additional financing, and I’d expect some more focus on going public, especially those like a Freshii.”