Four things to consider when investing in dining

EMMA KOEHN
August 22, 2016
The Australian
From self-serve kiosks to pizza delivery robots, the world of fast food is being reshaped by technologies that cut out the middle man between customers and their fodder.
The biggest name brands have been facing headaches in this new landscape. Over the past three months, McDonald’s US shares have lost 6 per cent and experienced sell-offs in the face of weak second-quarter sales numbers, while “fast casual” restaurants with strong tech integration have been busy grabbing headlines.
When it comes to fast food, should investors be looking to tech to predict long-term share-price growth, or are there more important factors? Here are four things to consider when investing in dining on the go:
Fast versus casual battle
Those watching the space recognise two competing forces at play, as traditional fast food businesses face off against the world of “casual dining”.
These operations offer a more intimate and individualised experience, but are still “fast food”.
“You are already seeing small shop fronts promising fast but individualised dining showing up in Sydney and Melbourne,” says University of Melbourne Associate Professor of Management and Marketing, Anish Nagpal.
That’s not stopping the giants from adopting “artisan” menu items across a broader variety of cuisines as they try to win back customers from smaller operators, but this is made difficult for operations with well-honed processes.
“I think the bigger, more traditional fast food brands are waiting to see this trend play out — but these brands (operate) in such a way that it’s hard for them to move downstream to this new kind of dining,” Professor Nagpal says.
There are areas yet to play out
There is more to this sector than the flagship brands.
Not only do investors have access to individual stocks both on the ASX and overseas, there’s also the option of taking up exchange-traded funds and managed funds that track both consumer discretionary and restaurant sectors, like the Nasdaq-listed BITE ETF, tracking the biggest restaurant chains across the US that has returned more than 9 per cent so far this year.
Beyond restaurants, there’s another key area of growth left to play out — food delivery services. These include listed and unlisted operations that allow app-based ordering and delivery of a full range of food products. The past two years has witnessed an explosion of enthusiasm — British operator Deliveroo has so far raised more than $300 million in various funding rounds, while US and European venture capital markets also took off throughout 2015 — but fund inflows are slowing.
Venture capital database CB Insights believes that 2016 is on track for about half the amount of funding to food delivery companies compared with last year, as the global marketplace becomes crowded. It may be some time before investors can see which brands survive.
Tech for tech’s sake
On the local exchange, Domino’s is the market darling when it comes to integration of tech and food — from letting consumers place orders by using emojis to allowing them to track their driver’s delivery route online.
The stock has posted an 86 per cent gain over the past 12 months — as well as recently announcing a 29 per cent profit rise for the latest year — with many calling it a tech company rather than a pizza maker.
The company’s most recent results highlighted an increase in same-store sales growth as punters continued to take up digital ­ordering
“Consumers are a bit more intelligent, and they can tell if changes (to a business) are just being done for the sake of it,” says Professor Nagpal.
Tech for tech’s sake will probably not be enough to guarantee long-term growth, so investors should think about what a brand’s use of these platforms does to keep consumers coming back for the longer term.
The vigilant customer is king
Both the use of tech and artisan products speak to a desire on the part of consumers to have their food matched to their tastes, and delivered with their individual timetables in mind. As such, casual dining companies want to instantly match the consumer to the desired product.
While fast food might not be going anywhere, the challenge will be finding tech-savvy companies that promptly deliver what diners want, just the way they want it.