Securities analyst Andy Barish of Jefferies Equity Research predicted an oversupply of restaurant locations continuing in 2014, but he also noted that there would be ample opportunities for innovative brands to take market share in the new year.
While Barish noted that the fast-casual segment will continue to be the disruptive force it has been for years to both quick service and casual dining, he identified an opening to steal market share for brands across all three segments.
Conditions are favorable for opportunistic brands in categories awash with independent concepts, such as pizza, coffee and tea, doughnuts, and bakery sandwiches, Barish wrote in one of several research notes published in mid-December.
“In these fragmented categories, we think some of the larger chains can leverage their scale, technology investments and brand awareness to take share from smaller mom-and-pops,” he wrote, indicating Dunkin’ Donuts, Starbucks and Papa John’s. “At the same time, we see opportunities for smaller, more dynamic and nimble chains in mature categories to take share from the dominant leading chains that have let operations slip, underinvested or failed to innovate and evolve the menu.”
He noted that Popeyes Louisana Kitchen parent AFC Enterprises could continue to take share in the chicken category this way, as could Jack in the Box and Sonic in the hamburger category.
Barish also offered the following insights on several restaurant categories. His comments were limited to the restaurant companies in Jefferies’ coverage territory, which did not include some large players such as Brinker International, Burger King, Domino’s Pizza or Wendy’s.
Casual dining: Supply outweighs demand
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Barish views casual dining as the riskiest segment for investing, citing slow growth.
To take market share in a quickly maturing sector like varied-menu casual dining, he wrote, operators would need same-store sales drivers like an innovative menu, successful marketing, remodels or strong brand differentiation.
“We see potential upside for operators like Red Robin Gourmet Burgers and Buffalo Wild Wings, who have seen success from brand upgrades and effective marketing, as well as The Cheesecake Factory and Texas Roadhouse, with very consistent execution,” he wrote. “BJ’s Restaurants could capture a large white space beyond California, but operational and competitive woes may be hampering the company’s ability to execute on the opportunity.”
He noted a particularly strong opportunity for Chuy’s Holdings Inc. to take market share from independent Mexican restaurants and create the first national casual-dining Mexican chain, due to its “strong value proposition, quality food and incredible brand equity in its core market.”
He largely wrote off the Italian subsegment in light of Bravo Brio Restaurant Group’s declining same-store sales and the deceleration in Olive Garden’s growth plans. “We see little opportunity without real momentum from large branded players,” he wrote.
However, Barish noted the historical outperformance in same-store sales for steak chains, meaning Outback Steakhouse, Texas Roadhouse or LongHorn Steakhouse could take market share from independent restaurants.
Limited service: Opportunity beyond McDonald's
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Though limited-service chains have been prolific in menu development and aggressive in promoting value the past few years, especially in the hamburger segment, they operate in a very mature, chain-dominated part of the industry, making it difficult to break through and take share, Barish wrote.
But opportunities might have opened up for some burger chains in light of segment leader McDonald’s decision to focus on the back-of-the-house in 2014 at the cost of a slight deceleration of its remodeling program.
“McDonald’s has taken a breather after a long period of share gains in order to focus on execution and throughput, and we could see some of the chains with strong menu innovation and everyday affordability — like Sonic, Jack in the Box, Burger King and Wendy’s — step in and grow their share,” he wrote.
Barish added that Panera is in a similar situation in the less mature bakery-sandwich segment, having lost some market share to regional competitors after an increasingly complex menu caused some throughput issues. Still, he noted that Panera also could reaccelerate market share gains in 2014 with the launch of a national cable ad campaign.
“If we view the still-growing hamburger category as a model for chain saturation, there could be an opportunity for more nimble brands to step in and attract consumers as Panera focuses on throughput,” he wrote.
In Mexican, Taco Bell and Chipotle Mexican Grill dominate their respective quick-service and fast-casual sectors in terms of unit count, “but we still see opportunity for additional share gains,” Barish added. He cited Taco Bell’s impending launch of breakfast, as well as both brands’ plans to grow beyond their typical markets.
“Qdoba also has an opportunity to take some share from local operators and even Chipotle, especially in its core markets and as its recent changes to management, operations and execution gain traction,” he wrote.
Snack and specialty: Brewing the best opportunities
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Looking further into the limited-service world, Barish called coffee and doughnut concepts the “best choice for growth” for chains in 2014. He cited the continued growth of sales in the breakfast daypart, the habitual nature of consumers’ coffee purchases, and “surprisingly fragmented” markets where there are still lots of independent restaurants from whom to attract customers.
Barish predicted that Starbucks would take share not only from mom-and-pop coffee shops, but also from chain competitors like Caribou Coffee and Peet’s Coffee & Tea, in 2014.
“Starbucks has driven strong same-store sales momentum over the past, has tangible drivers to sustain traffic growth, … strong menu innovation and very effective marketing,” he wrote. “Starbucks may be the big guy, but there’s still upside for category growth.”
A similar focus on coffee has helped the three largest doughnut chains — Dunkin’ Donuts, Tim Hortons and Krispy Kreme Doughnuts — dominate the independent purveyors in their category, and Dunkin’ might be poised to pull away from the pack further, Barish wrote.
“Dunkin’ … has done significant work around franchisee profitability and store execution,” he wrote. “This has led to much more disciplined and thoughtful growth.”
Similarly, the pizza segment is still rather fragmented, with 40 percent of all locations operated by independent restaurateurs, but likely headed for more consolidation, Barish added. The main advantage large players have to take share from independents is their dominance in digital-ordering technology.
“This provides an interesting opportunity for operators like Papa John’s to accelerate their market share gains by leveraging their technology infrastructure investments,” he wrote. “We think this move is already being reflected by the sharp decline in independent restaurants last year, after modest low-single-digit category growth coming out of the recession.”
By contrast, the chicken segment is a much more concentrated category, Barish noted, but the largest chain operator, KFC, continues to struggle and provide market share opportunities to growing brands like Chick-fil-A and Popeyes.
“In general, bone-in chicken consumption in the U.S. has been declining for some time now, and the No. 1 player KFC has struggled to evolve with this trend,” he wrote. “This has contributed to the brand’s underperformance and closures, while Chick-fil-A and Popeyes have acted more adroitly, broadening their platforms and proteins to better suit current tastes and offset declining sales of their core product.”
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