Americans are growing more concerned about their health, which means that quick-service restaurants or fast-food chains, synonymous with greasy burgers and cheese fries, have to think on their feet.
Not only do McDonald's, KFC, Burger King and Wendy's have to compete with one another, now they have to appeal to customers who are flocking in droves to "fast-casual" restaurants such as Shake Shack and Panera and, until its recent food contamination scandal, Chipotle (CMG) .
Fast-casual restaurants exemplify the sort of trend you should tap into for long-term wealth building. "Fast-casual" typically marries the concept of "fast" in fast food and its convenience, with a "casual" dining experience serving freshly prepared and superior-quality food. Not only are these far healthier options over traditional fast-food offerings, but fast-casual restaurants also use sustainable and responsibly sourced ingredients to increase their appeal to customers, especially millennials.
Customers generally have to pay slightly more for meals here, but going by the numbers, they seem willing. According to Technomic, sales of the fast-casual segment grew 13% in 2014 to $39 billion versus the total restaurant industry's growth rate of 3.8%. While fast-casual represents a small slice of the $466 billion restaurant sales pie, the food preferences of today's customers will only propel growth further. That's why the best among these food and beverage stocks belong in your retirement portfolio.
If you're an income investor, you might find appeal in the dividend aristocrat status of fast-food restaurants like McDonald's, which has grown dividends for 39 years. However, with its payout ratio at over 74% and rising pessimism amongst franchisee owners about its turnaround efforts, it wouldn't be prudent to rely on the stock for substantial total returns in the long run.
McDonald's and other fast food giants are increasingly watching their market share being gobbled up by these "fast-casual" restaurants. Let's look at some of the major stocks in this industry, and which ones are good moneymaking bets over the long haul.
So, below are four companies that are challenging Chipotle for dominance in this space that you should consider investing in. First, a look at Chipotle:
CMG data by YCharts
Chipotle Mexican Grill (CMG)
One of the premier names in this industry segment, Chipotle was credited with starting the fast-casual phenomenon and today has over 2,000 stores. Chipotle became synonymous with quality by using locally-sourced fresh ingredients and meat from animals that were humanely raised and naturally fed.
However, in 2015, the company was marred by the outbreak of Norovirus, E. coli, and salmonella found in its food, which caused at least 55 people in 11 states to become sick. As a result, 4Q comparable restaurant sales dipped 15% year over year (YoY) and the stock price plummeted over 30% over the last six months. With a Price/Earnings to Growth ratio at 4.14x, Chipotle is far above the industry average of 1.69x, making it an expensive stock to buy.
While the investigation is closed and the Centers for Disease Control and Prevention say that the outbreak is likely over, Chipotle now has to regain market share and even market cap.
For now, you should avoid this particular stock. Meanwhile, these fast-food restaurants are eating Chipotle's lunch.