A Closer Look at Restaurant Stocks
The restaurant industry, hit hard by recession and high unemployment, is seeing less investor appetite for its stocks.
While people must eat, they are increasingly careful about how they spend their money to do so.
As in any severe shakeout, some types of restaurants and individual brands have used the opportunity to re-examine and perfect their businesses. They've shown gains in an industry still offering investment opportunities in 2011.
"The strong growth in demand in restaurants is the 'quick-casual' sector that is positioned between fast food and casual dining," said
Smaller staffs at these restaurants mean lower labor costs, while customers consider them not only convenient but also economical because there isn't any tipping.
The leading companies of quick-casual dining have posted strong results and powerful stock-price gains over the past two years:
"Not only are companies like Chipotle and Panera believed by consumers to have better food quality, but they cater to a more affluent customer," noted
Both Elliott and West recommend shares of Chipotle and Panera.
Some gains are being made at the expense of traditional sit-down casual restaurants, which had grown considerably in the early 2000s by expanding into more moderate-income areas than they had in the past. High unemployment hit those communities especially hard, and the spending power there diminished considerably. Dining out was considered too much of a luxury.
Since 2004, the bar-and-grill segment of casual restaurants has reported negative traffic for every single quarter, West said. He believes the segment has too many stores, doesn't have enough differentiation among competitors, allowed its service quality to slip and trained its customers to only come in when discounts are in effect.
Despite that sector worry, finding a way to be unique that keeps bringing customers back again and again can still provide a road to success.
"Some concepts will continue to weather the storm, do well and take market share away from competitors," said
Each of those three has a distinct personality that differs somewhat from their competitors, as well as a loyal customer base. But it is their growth potential that has investors most interested in them, according to Reudy:
Fast-food chains have had a difficult time lately.
"The only fast-food chains really doing well this year are
The No. 1 issue for restaurants in 2011 and 2012, West believes, is pricing power. Inflation is here and restaurants are going to have to be able to pass those increases on to their menus, he believes. Some will be able to do so, and others won't.
An investor has the opportunity to sample a restaurant's menu before deciding to bite into its stock. Corporate America is loosening its expense accounts and fine restaurants are beginning to benefit from that new largesse, but the American consumer will be the deciding factor in the industry's revival. To eat out or not to eat out, that is the question.
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