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Are these the 2 tastiest stocks on the ASX?

In recent years we have seen Australia’s fast food offerings change significantly. The rise of “gourmet fast-food” has taken some investors by surprise, but it appears that consumers and some of Australia’s best companies are embracing the trend.

If you regularly travel to a local shopping centre, you’ll notice just how many positions are now being taken up by specialty fast food stores. Popular names include Pizza Capers, Nandos, the huge array of gourmet burger stores, Crust Pizza, Salsas, Sumo Salad and many, many more.

Established fast food restaurants are on the front foot too; McDonalds’ McCafe menu is really quite upper class, Domino’s Pizza Enterprises Ltd (ASX: DMP) now has an extensive gourmet pizza and dessert range, and Subway is continually rotating options to provide greater choice to customers.

Australian Listed Food Companies

There are two ASX-listed food companies that stand out to me as really embracing this trend. They are the previously mentioned Domino’s Pizza Enterprises and Retail Food Group Limited (ASX: RFG).

As is fairly obvious from its name, Domino’s is in the pizza business and generates 36% of sales in Australia and NZ, 26% in Europe; and the remainder from its newly acquired Japanese arm. The Domino’s offering has changed significantly over the last three to five years. Not that long ago the company was known for its low-quality but super cheap pizzas. Now, its expanded product range includes super gourmet pizzas to decadent desserts, as well as pasta, which means that it appeals to a far broader customer base.

Additionally, Domino’s terrific online and mobile platform has reduced the amount of time staff spend on the phone, which means more pizzas are made and less staff required, boosting margins. The only downside to Domino’s is its reliance on pizza, something that Retail Food Group has managed to avoid.

Retail Food Group owns the Donut King, Michel’s Patisserie, Brumby’s Bakery, bb’s Café, Esquires Coffee Houses, and The Coffee Guy franchises.

In the second half of 2013 (the most recently released results) earnings were quite evenly split between Donut King (21%), Michel’s Patisserie (26%), Brumbies (20%), pizza (25%), and other (7%). This provides Retail with protection against a fall in pizza demand and the 1,400-odd stores around the country give the company the scale to achieve impressive margins.

Time to buy?

Both companies look mildly expensive to me at the moment but represent great long-term investments over time.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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