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The booming restaurant segment that’s eating rivals’ lunch

Wednesday, 5 Feb 2014 | 1:55 PM ET
A Chipotle Mexican Grill in Hollywood, Calif.
Patrick T. Fallon | Bloomberg | Getty Images
A Chipotle Mexican Grill in Hollywood, Calif.

The restaurant business is a tough one—that is, unless you're a fast-casual operator, according to a new report from The NPD Group.

Though the overall industry has struggled since the recession, fast casual—associated with higher-quality food and enhanced service, such as Chipotle Mexican Grill and Noodles & Co.—remains the bright spot.

"There are very few segments in the industry that are growing," said NPD restaurant analyst Bonnie Riggs. "The few that are would be fast casual, gourmet coffee and tea, the doughnut industry and Mexican restaurants," she said, adding that increased business travel has fueled a rise in fine dining.

(Read more: Coffee connoisseurs boost high-end market)

For the 12 months ending in November, visits to fast-casual restaurants rose 8 percent. Spending jumped 10 percent, versus 2 percent overall. Traffic was flat in the overall industry and in fast food.

While the fast-casual segment is getting business from all age groups, millennials are especially drawn to it.

Goldman Sachs noted in a recent report that more business from that group correlates with robust same-store sales.

"Some of this can be explained by life stage, but we believe some relates to evolving consumer preferences, and those consumers who establish these habits early on will maintain some as their disposable income rises," Goldman analysts said.

(Read more: Buffalo Wild Wings falls as fourth-quarter revenue misses)

The marked growth suggests that fast-casual restaurants are stealing share from other segments as diners trade down from full service and up from fast food, said Riggs at NPD.

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Earnings from two heavyweights illustrate the trend.

Recently, Chipotle capped off its fiscal year with a 17.7 percent revenue increase and a 5.6 percent hike in comparable restaurant sales, a measure that strips out the volatility of store closings and openings.

(Read more: Early Glance: Restaurant companies)

Meanwhile, fast-food giant McDonald's has had lackluster results in the wake of the fast-casual boom. Comparable sales in the U.S. fell 1.4 percent in the fourth quarter. The company has struggled to strike a balance between selling more premium items, such as its now-defunct Angus burger, and retooling its value menu.

"Even within the fast-food segment, they are trying to up the ante so they can compete," Riggs said. "We're seeing a lot of remodeling of stores ... more of a focus on the inside dining area and the offering of more premium products."

(Read more: CVS snuffs out cigarette sales)

Some competitors have been more successful with that strategy—notably Wendy's, which had a 1.9 percent rise in same-store sales in fiscal 2013.

January appears to have been a tough month kicking off what could be a challenging year for the overall restaurant industry. According to Knapp Track, same-store sales fell 2.6 percent and traffic dropped 4.4 percent on a four-week basis as bad weather kept consumers away.

—By CNBC's Katie Little. Follow her on Twitter @KatieLittle

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