The quick-service restaurant industry is all about speed, value and recognisable brands that seem like an oasis (of calories) after a tough day. When you are tired, dealing with load-shedding at home or just gatvol in general, there really are few things in life better than a Whopper. Except, perhaps, a Double Whopper.
It’s difficult to think of a more competitive industry. There are literally no switching costs whatsoever for consumers. If recent numbers are anything to go by, many consumers are making a Spur of the moment decision. I wrote on this local company last week, highlighting its strong execution of a sensible strategy that is resonating with South African consumers.
At the time of writing, Spur’s share price is up more than 27% this year and Famous Brands is down about 6%. Issues like overpriced Steers burgers and my local Mugg & Bean that closes when the power goes out are coming through in the Famous Brands performance. Investing is often about common sense and just looking at the world around you, especially in consumer-facing industries. Happy faces at the local Spur, especially small ones covered in ice cream, tend to be supportive of earnings.
It’s been a volatile year for equities in general and this sector is no different, with considerable pressure on share prices in the past month
This week I decided to look abroad to see what the US market is doing in this space. It’s been a volatile year for equities in general and this sector is no different, with considerable pressure on share prices in the past month. By mid-July, shares in Restaurant Brands International (owner of Burger King and a few smaller brands that haven’t expanded internationally) were up 20% year to date. It’s been one-way traffic since then, with a current year-to-date performance of just 6.5%.
Yum! Brands (owner of KFC, Taco Bell and Pizza Hut) is up just 1.7% this year. McDonald’s is ever so slightly ahead of Restaurant Brands International, up 6.6%. There are many others we can include in this peer group, ranging from coffee brand Starbucks (down 3.6%) to current star Chipotle Mexican Grill (up 35%). Domino’s Pizza is up 11.7%.
Local players Spur and Famous Brands own a variety of brands, from quick-service restaurants (takeaways with limited seating) to full-service and premium restaurant experiences that enjoy high margins on alcohol sales. In the US you can take a pure-play view on full-service restaurants by investing in Darden Restaurants, up more than 13% this year. The brands range from a Caribbean restaurant concept designed to keep you well fed, and especially well hydrated with colourful cocktails, through to fine-dining steakhouses with menu prices that are an excellent reminder of how lucky we are to live in South Africa.
If we look at performance since the start of 2020 (that is, before the world went mad), then Chipotle is nacho ordinary investment. The share price has more than doubled (up 116%), an incredible outperformance of every other well-known player in this sector. Darden is up next, with share price growth of more than 42%. That’s exceptional when you consider the Covid restrictions that would’ve affected the company, though the US took a less heavy-handed approach than many other governments. This helped US-focused Darden outperform global quick-service restaurant groups.
The recent trend among consumers is the pursuit of value, with scale players able to effectively compete with the cost of groceries
The recent trend among consumers is the pursuit of value, with scale players able to effectively compete with the cost of groceries. In case you haven’t noticed, a convenience meal from Woolworths is hardly any cheaper than a fast-food option. The same story is playing out in the US, to the benefit of the likes of McDonald’s and Burger King. Though the US economy is strong, the reality on the ground is that US consumers are trading down and looking to stretch their budgets.
One of the techniques used by restaurants to address this situation is “barbell” pricing, which includes very cheap offerings on the menu to attract the most price-sensitive consumers and more expensive offerings for those who can afford them.
Recent share price pressure in this sector in the US is a function of broader equity concerns (a direct response to a spike in yields and thus the discount rates for future cash flows) and the high multiples that these companies tend to trade on. Spur is on a p:e multiple of 10 based on recent earnings guidance. The global players are trading at 20-30. With a medium-term outlook and the possibility of a further unwinding in valuation multiples, local seems very lekker here. But taking a long-term view, the US giants are generally solid compounders.
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