Despite the fact that it sometimes seems like there is a new diet fad on offer every week, the fact is that fast food is still a multi-billion dollar industry in Australia, and likely to stay that way.
In fact, industry revenue is estimated at a whopping $15 billion annually, and growing. There are several ways to position your investment portfolio to grab a slice of this huge pie (ok, that’s it for the fast food puns).
Collins Foods Ltd (ASX: CKF) is the largest single franchisor of the KFC range of stores in Australia. The brand is owned and developed by the enormous US-based multinational, Yum! Brands, which also owns and manages the Pizza Hut and Taco Bell restaurant systems.
Collins Foods can be characterised as a sub-franchisor, which has the rights to licence the KFC brand in Australia to interested franchisees. As a sub-franchisor, it collects franchise fees as a percentage of revenue, and also provides support to its franchisees, while also benefitting from the almost universal brand awareness that KFC enjoys.
Collins Foods is also the operator of the Sizzler brand, as well as the Snag Stand concept. In 2015, management made the decision to curtail all future investment in the Sizzler brand, which has been struggling for relevance in the face of intense competition.
That means that Collins Foods can now focus on its 197 KFC restaurants in Australia, with plans to take that number above 200 in 2016. There is also an ongoing plan to refresh and refurbish restaurants in the portfolio, as an update to stores has been shown to drive foot traffic and deliver a measurable increase in sales.
The humble pie
Patties Foods Limited (ASX: PFL) is a business that had a horror 2015, with its various ranges of frozen berries being potentially linked with a health scare. While no scientific link between the health issues and the berries was proven, the company took the decision to divest the brands and focus instead on its core frozen meals ranges.
Patties Foods has the benefit of owning iconic Australian brands including Four’N Twenty, Patties and Nanna’s, as well as the Herbert Adams and Chef’s Pride ranges.
It has been actively investing in these core ranges, and has shown an adeptness for harnessing the latest foods trends and incorporating them into its products. For example, the premium Herbert Adams range features product extensions that include pulled pork and slow cooked lamb options.
Patties is also able to occupy more than one space in the market with its range of brands. For example, the Four’N Twenty range will always be a staple at sporting events, while the more upmarket products are increasingly favoured as a family meal option that is quick, simple and relatively affordable.
The company has also flagged that it is actively pursuing merger and acquisition opportunities to grow the footprint of the business, which could spark a re-rating if the right partner or target is identified.
Global pizza delivery
Domino’s Pizza Enterprises Ltd (ASX: DMP) is perhaps the most visible fast food stock on the ASX, and for good reason. CEO Don Meij has taken a seemingly mature pizza delivery business and put initiatives in place that have made Domino’s a market leader in fusing technology and fast food.
Four click online ordering, the brilliant Pizza Mogul campaign and texting to order pizza have all lowered costs, increased efficiency and improved speed. In addition, a focus on ploughing these lowered costs into reduced prices for the customer has reinforced the virtuous cycle of revenue and profit growth for the company.
This success at home has allowed Domino’s to expand internationally, with stores as far afield as Germany, Japan, France and Belgium all set to enjoy the benefits of the successful experimentation done in the Australian market.
The question mark over the Domino’s business in 2016 is how well the overseas acquisitions will be integrated, and just how many of the successful initiatives rolled out in Australia will have traction internationally. The market is already ignoring these risks and adding some extra blue sky potential to the share price, with the company trading at an eye-popping 76x earnings.
At these levels, Patties Foods appears to have the most ability to grow earnings quickly through product line extensions and partnerships, while Collins Foods has leverage to a global brand and a store rollout and refurbishment strategy that could see earnings and dividends grow sustainably for the foreseeable future.
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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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