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BJ's Casual-Plus Strategy Works Wonders

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The $87 billion casual dining market is struggling. Growth in the market has been on the decline since 2004 as a result of "fast casual" concepts like Chipoltle Mexican Grill (NYSE: CMG) and Panera Bread (NASDAQ: PNRA). To compete with this new niche, casual restaurants need to differentiate through a lot more than food choice. Every casual dining restaurant is trying to adapt in their own way, but one restaurant stands out from the pack--BJ's Restaurants (NASDAQ: BJRI).

All about BJ's "casual-plus" niche

BJ's Restaurant & Brewhouse stands out by offering a more contemporary, higher quality, "casual-plus" dining experience for the same amount of money as the typical casual dining restaurants.

To put this in perspective, BJ's offers excellent burgers, deep-dish pizza, and pasta, a warm experience with excellent design and decor, topped off with linen napkins and handcrafted beers. But BJ's breweries (often on premises) don't produce your typical beer. Their renowned beers have earned 25 medals at the American Beer Festival, including two Gold medals in 2008. All of this is available for an average check per customer of $13.50, just $0.50 higher than Brinker International's (NYSE: EAT) Chili's and more than a dollar less than steakhouse Texas Roadhouse (NASDAQ: TXRH).

There are a few other borderline "casual-plus" diners like Texas Roadhouse, but BJ's fits the part exceptionally well. BJ's, unlike Texas Roadhouse, is able to maintain gross margins of 40% compared to Texas Roadhouse's 19%. BJ's higher margins on beer and deep-dish pizza of around 80% enable BJ's to spend even more money on the experience while charging less per customer.

"Casual-plus" holds its own

Turns out that this value proposition resonates with guests. This is no surprise in a struggling economy where businesses that depend on discretionary spending have been continually hampered as individuals return to frugality. Even with a tough comparison in 2011 of 6.5%, comparable restaurant sales for Q3 2012 were still up 2.3%. That makes 11 consecutive quarters of positive comparable store sales increases.

Measured by book value, "casual-plus" dining has managed to hold its own against the tough competition from 'fast-casual" concepts:

<img src="http://media.ycharts.com/charts/21bdeb38ce7736f81ab1527cd3220212.png" />

BJRI Book Value data by YCharts

As "fast-casual" took off, typical casual dining from the likes of Brinkers International's Chili's were severely hampered. Texas Roadhouse and BJ's both weathered the storm--BJ's even more so. In fact, BJ's has nearly kept up with Panera Bread in book value growth.

But BJ's growth is definitely not coming to an end any time soon. It has over 130 locations in 14 states, mostly in California, Texas, and Florida. It's conservative, careful, and debt-free expansion, region by region, allows BJ's to expand without degrading economics. Management says they plan to expand the chain to 425 restaurants.

Texas Roadhouse increased the number of its restaurants from 193 to 345 in just five years. Now it stands at 370 restaurants in 46 states. Though BJ's careful expansion probably won't result in growth this fast, there is no reason to believe that reaching its goal of 425 locations is unreasonable.

The bottom line

BJ's has has carved out for itself a profitable and growing niche in which it can hold its own against the "fast-casual" boom. With only 130 locations, its journey has just begun. Customers have embraced the "casual-plus" concept with open wallets. If you are looking for a wonderful business with a lasting strategy to hold for the long-haul, you should consider BJ's Restaurants.

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DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, Chipotle Mexican Grill, and Panera Bread. Motley Fool newsletter services recommend BJ's Restaurants, Chipotle Mexican Grill, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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