Without a doubt, the F&B industry is perhaps one of the most challenging industries to operate in.
High fixed costs, low margins, and fickle customers all contribute to the pains and struggles of this industry. Businesses in this space need to apply shrewd business acumen and also possess good operational expertise to excel.
And with issues such as dining-out restrictions, and hiring difficulties affecting the industry, F&B does seem like a sector investors should steer clear of.
However if we look deep enough, there are some companies that buck the trend. These players have been able to not only dominate their respective market segments, but also produce solid profit margins to boot.
With their operational scale, clout, and branding, these companies have reached a point where they play by different rules. No longer held to the pitfalls of smaller businesses, these enterprises utilize economies of scale to drive profits for investors.
Below, we’ll look at 3 counters which have managed to excel in this industry, and could be an intriguing prospect for investors.
Restaurant Brands Intl (NYSE:QSR)
Known as the holding company for the Burger King franchise, Restaurant Brands Intl also owns the Tim Hortons and Popeves Louisiana Kitchen brands. The company mainly operates on a franchise model, providing support in the form of manufacturing and distribution of food products.
Combined, these 3 brands have a total restaurant count of over 27,000 restaurants. Of these outlets, Burger King takes up the most with close to 19,000 outlets. The remainder are split between Tim Hortons (5,000) and Popeyes (3-4,000).
RBI is focused on identifying, developing, and managing Quick-Service concepts using a franchise model. By doing so, they avoid paying high fixed costs, and can focus on developing it’s logistic support network, while deriving income from franchise revenues.
The strength of their business model shows in their earnings, as the company can consistently deliver 11-14% net profit margins Pre-Covid. While the company hit a speed bump during 2020, business is recovering even as the number of franchise outlets continues to grow.
RBI has also recently acquired Firehouse Subs, a US quick-service chain with over 1,200 outlets specializing in submarine sandwiches. Management believes that the new entrant has strong brand positioning and significant growth potential.
With prominent and iconic quick-service brands, and an efficient business model, RBI can likely maintain it’s solid margins and continue to generate cash for it’s investors and operations.
Haidilao Intl (HKG:6862)
Haidilao Intl is a global hotpot chain which originated from China. The company has been in operation for close to 30 years, and has opened more than 1,500 restaurants worldwide.
The company operates an upscale, Full-Service hotpot chain well known for its dedicated and attentive customer service. With the majority of their outlets in operating in China, HDL relies heavily on the chinese market and is the largest hotpot chain domestically.
HDL has also been opening restaurants overseas since 2012, with over 100 restaurants in other countries. Despite the pandemic, the chain opened more than 700 new restaurants since 2020 in anticipation of returning demand.
In the end however, the effects of the pandemic caught up to the chain, with management reporting lower turnover rates and longer break-even periods on newer restaurants. While total revenue has recovered to pre-pandemic levels with further upside, net profits are a shadow of it’s former self.
In a bid to cut overheads and manage costs, management has committed to closing or suspending 300 stores by year end. The company only intends to continue mass expansion after average table turnover rates reach 4.0 times per day (currently 3.0).
Assuming the hotpot chain is able to raise it’s performance to pre-pandemic levels, investors can expect net profit margins of between 8-9% of revenues. Such margins are quite unheard of for F&B businesses and could make the counter a rewarding choice for savvy investors.
Shake Shack Inc (NYSE:SHAK)
One of the fast movers in the F&B space, Shake Shack Inc is an American restaurant chain specializing in hot dogs, burgers, and milkshakes. The company prides itself on offering fresh and high quality food at good value.
Shake Shack has been aggressively increasing it’s store count not just domestically, but internationally as well. The company has a total count of 350 stores, from just 114 stores in 2016. That’s a 200% increase in store count since 2016 with more on the way.
Furthermore, around 30% of their stores are located in foreign countries. Reception has been very much positive with long queues and waiting times, likely due to their youthful brand image and insta-worthy burgers.
With business metrics on the mend after a poor showing in 2020, the company looks set to continue it’s growth trajectory. Total revenues for the 9 months of 2021 are almost on par with full year revenue for 2019 (9M 2021:US$535m, FY 2019:US$594m).
Shack-Level Operating Profit Margin, a metric which excludes certain costs, such as General and administrative expenses and Pre-opening costs, is used by management to assess performance of individual stores and has increased from 13.3% to 16.8% Year-on-year for the 9 months of 2021.
The company intends to look into new store formats such as drive-throughs and also develop it’s digital sales channels to enhance convenience for customers. These moves should boost it’s brand presence and set it up for future expansion.
What The Future Holds
The road to recovery for the F&B industry is undeniably a bumpy one, as new variants of Covid-19 continue to pop up.
With the arrival of the new “Omicron” variant, dining in for restaurants may once again be put on hold, if the variant is as contagious as media makes it out to be.
In fact, most of the above mentioned counters are already seeing sustained sell-offs in their stocks which could get worse, given time.
For those who still believe in a future for the industry however, this could be a great chance to get into these high-performers, with compelling businesses.
Because if there’s one thing we can be sure of; it’s that the world always adapts to the new normal, and subsequently thrives.