Fast-food chains are not immune from the slowdown afflicting the restaurant industry. Customer traffic was down 5% in February and comparable-store sales fell almost 3%, one of its worst performance in the past four years. With food price deflation at grocery stores making it a better value to cook at home instead of going out, rising guest check costs seal the deal for diners.
Yet, like the items on their menus, some fast food joints still represent a good deal. Here are three that could cook up some tasty returns for investors: Dunkin Brands, Restaurant Brands International, and Yum! Brands. Let’s take a closer look at each to see how they’re using brand diversity to minimize risk.
Best known for its Dunkin’ Donuts chain, Dunkin Brands also has a sizable ice cream and frozen yogurt operation in its Baskin-Robbins chain, though it’s appreciably smaller, accounting for just 21% of total revenue. But where the donut shop generates most of its revenue in the U.S., Baskin-Robbins generates 2.5 times more revenue internationally than here.
Between the two concepts, Dunkin Brands has over 20,000 distribution locations in more than 60 countries worldwide, almost all of which are franchised. That’s the kind of business structure other fast food chains are seeking to emulate, such as burger chain Wendy’s, which has undertaken a significant refranchising operation — or selling company-owned stores to franchisees — and as of the start of the year had achieved about 95% franchisee ownership.
Despite its food component, Dunkin Brands firmly sees itself as a coffee and beverage company, noting it sells over 1.7 billion servings of hot and iced coffee annually. That has brought it into direct competition with rival McDonald’s, which also prides itself on its coffee and has made its McCafe line of specialty drinks a primary focus of future growth. It’s also going up against Starbucks, as Dunkin debuted cold brew coffee earlier this year is an attempt to keep pace with its rival, which introduced the iced beverage last year. It’s also experimenting with delivery service.
The donut shop’s better-than-expected earnings last month show its efforts are working, and it is one chain that has a more upbeat mood than most about the restaurant industry. Over the past year, its stock has risen some 25%, and there’s no reason to expect it won’t continue to rise as its growth plans come to fruition.
Restaurant Brands International
Burger King owner Restaurant Brands International is also enjoying a growth spurt, but says there’s no reason its burger chain can’t continue growing at an accelerated rate in the U.S. With about half the number of restaurants as McDonald’s, there’s at least some validity to the notion there’s more room to expand.
Expansion was behind its 2014 acquisition of Canadian coffeehouse Tim Horton’s, and though it has failed to achieve that goal yet, it’s still on the table. But for the moment, RBI has a bigger target in mind: acquiring fried chicken joint Popeye’s Louisiana Kitchen, which it announced its intention to buy last month. With around 2,600 restaurants under its banner, the purchase will give the restaurant operator instant growth and further diversification.
As the largest competitor to Yum! Brands’ KFC, Popeye’s has used its growing popularity to increase market share in the chicken quick-serve space, which it says widened to 26.5% from 25.5% last year. It gives Restaurant Brands International another avenue for expansion that doesn’t compete with its existing brands and allows it to build on the 40% gains its stock has registered over the past year.
As the global fast food leader with over 43,500 restaurants in more than 135 countries, Yum! Brands has what its rivals crave: an international footprint with a portfolio of top brands that still offer the opportunity for growth.
It’s no secret Yum! has experienced more than its share of doubt and anguish over the last few years, first, as food quality scandals in China caused it several setbacks, and then with its decision to spin off that division into a separately traded company. The China division had accounted for the greater part of Yum! Brands’ revenue and operating profits, and despite the food quality issues, had operated in the country for decades largely without issue. Letting go of that business as it did at the urging of an activist investor left many concerned over how it would fare.
Yet as its fourth-quarter earnings showed, it’s doing quite well in its strategic plan to grow Taco Bell, KFC, and Pizza Hut globally. Earnings from continuing operations jumped 15% for the period, and though its Pizza Hut division is still showing weakness, Taco Bell and KFC are strong. The KFC numbers were particularly gratifying because it wasn’t all too long ago the fried chicken chain was experiencing the same kind of weakness that Pizza Hut is, but it was able to turn it around.
The Pizza Hut chain, though, does have some unique issues it still needs to confront as Yum! sought to change the casual dining restaurant into more of a fast-casual spot, with fresher ingredients and more personalization. The fast-casual craze, however, seems to have peaked.
Taco Bell is the strongest Yum! Brands concept and it continues to leverage the brand into generating greater profits. Core operating profits for the Mexican food chain surged 19% in the fourth quarter, excluding any benefit from the extra selling week in 2016.
Yum! Brands stock hit an all-time high of $69 a share last month, but did give back some of those gains following the earnings report. But with a diversity of choice, strong brand recognition, growth opportunities, and freedom from the volatility that surrounded its China business, the fast-food king should return to its familiar growth patterns soon.