Are grocery and c-stores a threat or opportunity for fast casual restaurants?

You're feeling a little hungry, and you are in a bit of a hurry. You want something that's fast, fresh, organic and healthy, but you don't want to pay more than $10 for your meal.

Where do you go?

Increasingly, the answer may be your local grocery retailer or convenience store.

Grocery stores and convenience stores have long offered grab and go foodservice options for consumers, but now foodservice options are becoming more varied and sophisticated. While new offerings may put some grocery stores and c-stores in direct competition with fast casual brands, new partnerships also present new opportunities for fast casual brands to reach new audiences and new markets.

Foodservice growing in grocery

One of the fastest growth areas in foodservice is prepared foods at grocery retailers, according to Jason Whitmer, president of Market Research at Cleveland Research Company. Whitmer presented his research on Foodservice in Grocery at the International Foodservice Manufacturers Association President's Circle event in Phoenix, Arizona last November.

Prepared foods are an increasing part of the mix in the "perimeter" departments – meat, seafood, produce, deli, etc. – of grocery stores. Traditional grocery stores have been growing the perimeter department sales mix to around 40 percent of total sales, while the figure is even higher for specialty grocers like Whole Foods.

While prepared foods still likely represent only a single-digit slice of perimeter department sales, that single-digit percentage could be significant considering many grocery retailers do $20M in volume compared with the perhaps $3M a high-performing restaurant might do.

Prepared food sales are also expected to grow, perhaps increasing to year over year growth in the mid teens by the end of this year.

Whitmer estimates that as much as 20 points of Whole Foods' 70 percent in perimeter sales is prepared foods.

Prepared foods are stretching far beyond a deli counter for many grocery stores. Offerings now often include extensive soup and salad bars, sushi bars, olive bars and more.

And some grocery retailers are even going so far as to offer their own restaurant experience right in the store.

Lunds & Byerlys, a small upscale grocery chain in Minneapolis-St. Paul, Minnesota, offers its own Lunds & Byerlys Kitchen in its Wyzata location. Lunds & Byerlys Kitchen features food offerings prepared on site and in view of guests by an executive chef, a wine and beer bar and a tailored selection of groceries.

Menu selections include burgers, stone-oven pizzas, seasonal entrées and weekly meat and seafood flights. The wine and beer bar features "hyper-local" craft beers on. Customers order and pay via iPads located at each table.

Grocery stores also bring restaurant brands under their own roofs, presenting customers with restaurant kiosks or units right inside the store.

Texas-based H-E-B is a standout, "incubating" new ideas, said Whitmer. Fast casual coffee and smoothie chain Maui Wowi has several units in H-E-B stores, for instance.

C-store success

Convenience stores may soon be getting in on the act, too, bringing fast casual brands under their roofs.

Quick service and pizza concepts are not an unfamiliar sight at gas station convenience stores and truck stops, but fast casual chains are still a bit unexpected.

Elliott Oil Company is pioneering the trend in Iowa. The company, which has 17 locations, opened a Pita Pit in its BP gas station/convenience store located at 1147 N. Jefferson Street in Ottumwa, Iowa last year.

Elliott Oil is not new to foodservice. It got into the foodservice business in the 90s, and now offers Godfather's Express in nine of its locations, among other offerings. Pita Pit, however is a new concept for Elliott Oil.

Not only is the Pita Pit a first for Elliott Oil, says VP Andrew Woodard, it's a first for Ottumwa.

The small city, which has a population of around 25,000 according to Woodard, has many quick-service and pizza restaurants, but no fast casual concepts. The Pita Pit in the Elliott Oil convenience store is the first in the region.

When the city of Ottumwa decided to do major work on the intersection where one of Elliott Oil's convenience stores was located, Woodard says the company took the opportunity to rebuild the store and rethink offerings. The result is a 4,000+ square foot store, with 1,000 square feet dedicated to Pita Pit. The store also includes seating, wifi and a frozen yogurt bar.

So far the concept has been well-received. Since it opened in the fall, the Pita Pit accounts for 38 percent of the inside sales for that Elliott Oil location. In comparison, foodservice accounts for somewhere around 28 percent of store revenue system-wide.

Woodard credits the early success to Pita Pit's appeal, particularly to millennials. Millennials, with their $600 billion in spending power, are a key consumer audience, and they are increasingly relying on convenience stores for meals and snacks. According to a study by the NPD Group, convenience stores accounted for 11.1 percent of millennial food and beverage stops in 2014, up from 7.7 percent in 2006.

"My generation still really focuses on the basics: convenient location, clean location, competitively priced," says Woodard, who is 27. "They also want to create their own meal. That's what Pita Pit offers. It's made right in front of you."

Woodard got the idea for putting a Pita Pit in the Ottumwa location from Elliott Oil's foodservice manager. She heard about the brand from family members attending college in another city an hour away. Woodard remembered the brand from his own college experience, and agreed it might be a fit.

He's now considering revamping some of Elliott Oil's other Ottumwa c-stores to include fast casual outlets.