Restaurants Invest To Stay Ahead Of Consumer Rebound
22 Aprile 2010 - 9:07PM
Dow Jones News
Restaurants are joining consumers in re-opening their
wallets.
Several chains are showing more of an appetite to invest in new
products, store remodels and more marketing as signs emerge that
restaurants are cementing a recovery.
The willingness to invest comes after restaurants broadly reined
in costs during the downturn by shutting stores, working employees
less amid weak demand and cutting back on wasting ingredients. With
expenses down to survival-mode levels, restaurants are now reaping
healthy profits as consumers begin to emerge from a spending
coma.
Investors have taken notice. Most restaurant stocks are trading
near 52-week--if not all-time--highs, putting pressure on companies
to keep sales momentum going as the year progresses. With high
unemployment and potentially higher ingredient costs later this
year a weight, the companies that can invest will to stay ahead of
the consumer recovery.
"They aren't just riding the rising tide, they're riding the
tide with a faster motor," said Matthew DiFrisco, restaurant
analyst at Oppenheimer & Co.
Some initiatives planned include McDonald's Corp. (MCD) plunging
deeper into beverages with the additions of Frappes and Smoothies
coming soon, and spending more than $1 billion to remodel stores
around the world. Starbucks Corp. (SBUX) is rolling out its instant
coffee, Via, to grocery stores and backing it with advertising
later this year, while also investing more behind its packaged
coffee business. The coffee chain is also adding ovens in stores to
help expand food sales.
Chipotle Mexican Grill Inc. (CMG) and Panera Bread Co. (PNRA),
which both joined McDonald's and Starbucks in posting strong sales
growth this week, are increasing spending on marketing and
developing loyalty programs, while also expanding areas like
catering. Other chains, meanwhile, are upgrading in-store
televisions or reconfiguring dining room layouts.
Some restaurants are running operating margins near record
level, helped by both a leaner structure and low commodities. Thus,
even after rewarding shareholders with buybacks or dividends, they
have money to put toward increasing sales, analysts say.
McDonald's says remodeling stores, including exterior upgrades,
helps those locations post sales growth up to 7% higher than other
stores. Starbucks, meanwhile, sees growing food sales, now at 20%,
as key to increasing the size of the average transaction, which
rose 4% world-wide in the latest quarter.
"It's encouraging to see companies investing in their business
rather than closing stores," said Tom Forte, Telsey Advisory
Group's restaurant analyst. "Long term, it can translate into a
sustained [same-store sales] rebound."
Restaurants that rely more on franchisees may miss out on the
boost a broad investment can bring. Franchise agreements generally
require some level of store upgrades, though some chains, including
Burger King Holdings Inc. (BKC) and Wendy's/Arby's Group Inc.
(WEN), are trying to make the case for more sweeping remodels by
franchisees.
But if sales start to rise due to the improving economy,
operators may balk at the need for a major upgrade to the store.
Franchisees are also weighing tens of thousands in higher costs
down the road from the new U.S. health-care bill.
"The franchisee community is probably going to be a laggard,"
DiFrisco said. McDonald's is an exception, DiFrisco said, as the
company, which is a landlord to many of its franchisees, also
invests a significant amount in makeovers.
Not all investments are paying off just yet. Brinker
International Inc.'s (EAT) Chili's Grill & Bar spent $5 million
on a revamped menu including tacos and new preparation for its
signature ribs in its latest quarter, but sales remained weak as
Chili's struggles to wean customers off discounts.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com
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