Schafer: Buffalo Wild Wings invests in 'fast casual'

Buffalo Wild Wings appears to be really interested in getting into a new segment of the restaurant business.

The company made its name with a sports-themed empire of what are known in the business as "casual" restaurants, the kind where servers greet customers and take orders at the table. But the buzz in the industry these days is around "fast casual," a format exemplified by the thriving Chipotle Mexican Grill chain.

Wild Wings has noticed the trend. It's just invested in its second fast-casual restaurant company, one called Rusty Taco.

CEO Sally Smith downplays the significance, suggesting that the company might easily invest in a full-service breakfast restaurant concept next quarter.

Yet it wouldn't be surprising if the company does more of what it's been doing, investing in promising concepts in the segment of the industry that is currently growing rapidly.

The thing that makes a restaurant either a fast-casual or casual restaurant is really the service model. At a Buffalo Wild Wings, filled on busy nights with sports fans drinking beer and munching chicken wings, customers order at the table and the food comes to them. The customer generally pays for this service with a 15 to 20 percent tip in addition to paying the check.

At fast-casual restaurants, the customer orders at a counter and gets food perceived to be as good as if not better than the food served at a full service restaurant. The ticket is cheaper, sometimes a lot cheaper. And there's no tip.

Not only is it cheaper, the customers still get to sit down in a comfortable and attractive room that doesn't resemble the crew's mess of the USS Iowa the way fast food joints do.

It's a winning combination of good, fast and cheap, easily making fast-casual the hottest segment of the business.

Sales for the segment had been growing at a compound annual rate of about 11.2 percent over the past five years, according to the Chicago market research firm Technomic, stealing market share from both the fast food companies as well as full-service casual restaurants.

This is not to suggest that there's any slowdown in evidence at Buffalo Wild Wings. Sales at restaurants open for at least a year increased 7.7 percent in the most recent quarter at the restaurants it owns, and 6.5 percent at franchised locations.

Same-store sales growth will eventually flatten, however, and opening new restaurants is how it will keep up its earnings-per-share growth. The expectations are lofty, with the analysts looking for just under $6 per share in earnings next year, which would represent a big move from $3.79 per share for 2013.

The Golden Valley-based company has more than 1,000 Buffalo Wild Wings restaurants, both owned and franchised, well over half the way to the 1,700 restaurants in North America that the company thinks might represent a fully built out chain.

That's why it's looking to make investments now in five to seven start-ups, not as a diversification strategy but as relatively low-cost way to find the growth vehicle that will drive earnings growth when the core concept of Buffalo Wild Wings runs out of headroom.

"Full-service dining is still on the radar of things we're looking at," said Smith. "It just happened to be that the first couple of them were fast casual."

Smith said she and her team have looked at perhaps 150 different concepts, an effort that really extends back years when franchisees first started asking about what else the company had for them to build and operate in their own markets.

When she goes through her list of what she called "must-haves," the list certainly seems to favor fast-casual.

Smith said she is looking for concepts that would appeal to customers throughout the country. And since part of the strategy is to find and refine a restaurant concept that can be easily operated by franchisees, it's important that the operations be what she called "simple," maybe a limited menu offered to customers in a simple and inexpensive space.

The really popular fast-casual niche in 2014 is pizza, and Buffalo Wild Wings jumped in with a minority investment in PizzaRev last year. It just opened its second Minnesota PizzaRev location this month in Edina. The company is far from the only one to have figured out the appeal of pizza, and there's a long list of competitors in this niche.

Rusty Taco sells what it calls street tacos emphasizing fresh ingredients, a concept that seems to rival a hot dog stand for simplicity. There's a long list of upstarts in the Mexican food niche as well, along with the reigning fast casual champ, Chipotle Mexican Grill.

It's easy to see the appeal of fast casual concepts like Chipotle, explained restaurant consultant Allan Hickok, but it's a stretch to suggest that the traditional casual segment is going shrivel to nothing.

Part of his explanation for disappointing sales in the casual segment is that chains like Chili's, Applebee's and TGI Fridays were all the hot companies of 25 years ago. Hickok called them the "class of 1990."

The best managers can refresh the menu with new items and come up with effective ad campaigns, but the fact remains that a young adult in particular is not going to frequent the same restaurant where his parents went after their prom.

Young adults will go in droves, he said, to a Buffalo Wild Wings. He called it "their clubhouse."

Yet the company deserve some credit for looking into new fast-casual concepts now, he said, and jumping into a crowded niche like pizza or simple Mexican foods makes good sense to him.

"This sounds a little counterintuitive, but to succeed you go to where the greatest competition is," Hickok said. "So many chains are invented, do a course correction and then fail because they try to be different. The way you really want to compete is to be the same. Same as what? The same as the guys making all the money in the areas where all [the consumers'] money is being spent."

And ignore any comments that there may be too many restaurants, he said. A well-managed company like Buffalo Wild Wings has plenty of growth opportunity.

"There aren't too many restaurants in America," he said. "There are too many mediocre restaurants."

lee.schafer@startribune.com • 612-673-4302