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Prospects for the Restaurant Industry: Overseas Expansion and Baby Boomers

June 26, 2013 | About:
Suresh Gupta

Suresh Gupta

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It’s been a good year on Wall Street, despite the last few days. The S&P is still up 11.7% in 2013. And the restaurant industry has performed even better: restaurant stocks are up 13.3% this year by the Dow Jones US Restaurants and Bars Index.

One of the reasons for this increase is that recession hit hard on the restaurant business and the companies are recovering from the decline of previous years. However, a significant shift in eating patterns is under way among the millennials, those 18 to 30. Oddly, at least by historic trends, they are eating out less than the baby boomers did at that age. Many in the restaurant business worry that it may be impossible to reverse the decline, which affects 50 million to 60 million young people.

The statistics alone are stark. Restaurant visits among millennials have fallen 16% over the last four years, according to research by the NPD Group, a consumer marketing firm, and have failed to pick up as the economy has improved.

“The outlook for the restaurant industry over the next 10 years is dismal,” said Bonnie Riggs, a restaurant industry analyst at NPD. Overall, sales are expected to grow less than 4 percent in the next decade, a troublesome projection for not only burger chains like McDonald’s (MCD) but for the newer “fast-casual” dining businesses like Chipotle (CMG). McDonald’s stunned investors last month when it announced that its sales in stores open at least a year had fallen 1.2% after rising every quarter for almost the entire last decade.

Ms. Riggs from NPD said the biggest opportunity for restaurants now is among the baby boomer generation. “They’re holding the industry even at this point.”

In such a situation some companies are trying to compensate the stagnating American market by aggressive expansion overseas. Thus, Krispy Kreme Doughnuts (KKD) has only 146 U.S. stores out of its total 678 locations. It is planning to increase its store count to 1,300 by 2017 with 900 overseas locations. India has the maximum development agreements for new store openings with 114 commitments. Company same-store sales were up 11.4% in the last quarter, which marks the 18th consecutive quarterly increase. As a result its share price of $17.70 increased by more than 88% this year and more that 187% in the last 12 months. Its market capitalization reached $1.19 billion and earnings per share is $0.33. The company has beaten analysts' trailing 12-month earnings estimates by 26%.

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Another company notably going after foreign markets is Chanticleer Holdings (HOTR), a franchisee of international Hooters® restaurants that also put emphasis on expansion overseas. The strategy is to partner with highly experienced and well capitalized restaurant operators in the local international market. Worldwide, Chanticleer believes it can grow to have more than 75 Hooters locations, independent of the company's interest in Hooters of America with its 412 restaurants in 28 countries. Chanticleer’s goal is 10 restaurants opened by year-end 2013, with two in Australia, again with important focus on non-U.S. markets. A recent opening in Budapest has opened the franchiser to the Eastern European market as well, and looking into opening in Brazil.

Chanticleer’s revenue for first quarter 2013 increased 18.4% to $1.7 million, compared with $1.4 million in the first quarter 2012. As of March 31, 2013, the company had six restaurants (five consolidated and one joint venture) compared with five restaurants (four consolidated and one joint venture) in March 31, 2012. Revenues have been heading sharply higher year over year, though cost of revenue has been a continual challenge for the company to minimize. Nonetheless, the stock has been on a significant uptrend since late February when it was sitting at $1.63. It is now trading at $3.00 with market capitalization just crossing $11 million.

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Chanticleer also just acquired franchise rights in Brazil last may. Brazil's economy is the world's seventh biggest. It is clearly one of the world's emerging big players, as it has the privilege of occupying the first letter in the popular BRIC’s acronym, with a major developing consumer base of nearly 200 million. The country will also be hosting the 2014 World Cup and the 2016 Summer Olympics. For Chanticleer, this growing foundation of consumer wealth represents a great opportunity for exploring opportunities to establish a foothold with Hooters. It has partnered with Brazil-based Wings Brasil Ltd. to develop Hooters in exclusive territories in Rio de Janeiro, Minas Gerais and Espirito Santo.

The largest companies obviously have better opportunities for expansion. Thus, Starbucks (SBUX) looks particularly exciting. The company plans to open nearly 13,000 worldwide stores in fiscal 2013, about half of them in China, which is expected to become its second largest market by 2014: Sales in the China/Asia Pacific increased by 22% in the last quarter. Other countries like India and Brazil offer promising growth prospects too. In addition, non-beverage items have reached 25% of sales.

This expansion and diversification helped the company to preserve its leading position. Its stock price reached $64.70 and market cap is $48 billion with P/E ratio exceeding 32.

Rating: 2.3/5 (3 votes)

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