Despite my dad’s best efforts, I’m not sure Bob Dylan is ever going to find his way onto my playlist. Nevertheless, The Times They Are A-Changin’ is a reference well worth keeping in mind when you look at consumer brands. If you’re buying something on a high p:e multiple, you’d better think carefully about which consumers will be contributing to the earnings in five and especially 10 years from now.
We’ve certainly seen it in lab-grown diamonds. Despite protestation by investors from older generations, my beliefs about the rapidly changing behaviour of millennials and Gen Z consumers were proven correct there. If anything, I was shocked by just how quickly the disruption happened. It’s hard to see any way back for mined diamonds.
Every day, the mix of consumer spending shifts towards millennials and Gen Zs. They are earning and spending more, while older consumers either have to become more conservative with their spending ahead of retirement, or are passing on. Either way, businesses that aren’t responding to the modern generation are setting themselves up for extinction.
You’ve certainly heard of McDonald’s. You know Burger King, though you may not be aware that the listed holding company is called Restaurant Brands International (RBI). If you want to invest in KFC, you can do it via Yum! Brands. Year to date, McDonald’s is up just 1.5%, RBI has done 6% and Yum! is the tastiest at 12%. But if you look beyond the calorific options, you’ll find Darden Restaurants in the US with 18% year-to-date share price growth.
Darden is a casual and fine dining offering, though you should immediately put any thoughts of Michelin stars out of your mind. When Darden talks about fine dining, imagine your local Hussar Grill as an equivalent. The closest thing we have on the JSE to Darden is Spur Corp.
As one of the analysts on the recent Darden earnings call puts it, casual dining is “having a moment” right now. The ironic use of this Gen Z term is perfect, as it speaks to how a business listed for 30 years is thoroughly enjoying its time in the sun. As an aside, Darden celebrated that milestone by ringing the opening bell at the New York Stock Exchange with several team members who have 30 or more years of service. The American dream of working your way up from the shop floor is still alive.
Eating your way to diabetes isn’t cool any more
Darden is executing to a high standard in response to a broader trend in favour of casual dining rather than fast food. While analysts scratch their heads and look around for data, I think this is a perfect example of just applying common sense and looking around you. You’re now dealing with a generation of consumers who understand the health impact of sugar, obesity and other nasty things that find their way into US burger joints. They barely even drink alcohol these days, let alone smoke. Eating your way to diabetes isn’t cool any more.
On top of this, inflationary pressures mean fast food options aren’t really that affordable any more vs value offerings at casual dining restaurants. If you’re prepared to cut consumption of takeout and rather focus on higher-quality experiences less often, you can shift your spend from McDonald’s to Darden’s core Italian business, Olive Garden, and swap out the Big Mac for the big macaroni. A great example is the recent “buy one, take one offer” at Olive Garden that offered consumers a $14.99 meal at the restaurant, and another to take home as part of that price.
The other thing craved by younger consumers is convenience. They are working and playing hard, while feeding smaller families or often living alone. I’m not surprised to see takeout sales are up 20% at Olive Garden, with initiatives such as kerbside-to-go and delivery options doing well, including via funded partnerships with Uber Eats — and Uber is one of my long-term positions.
This isn’t the only area where Darden has learnt from the fast food names. It is using franchise deals as a growth lever, such as a recent deal to sell restaurants in Canada to a local franchisee that can apply regional knowledge and that loveliest of things for investors: other people’s money. Franchising leads to scale and more efficiencies, while boosting return on capital.
Darden is taking the best of fast food models and applying it to offering food younger consumers want to eat more often. I wouldn’t bet against that strategy. And locally, I expect Spur to keep outperforming Famous Brands for all the same reasons.
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