Panera Bread Co (NASDAQ:PNRA) made waves this week by announcing plans to eliminate a list of unwanted ingredients from its products, including artificial sweeteners and preservatives.
The move follows a spate of similar announcements in the last year or so, including Chipotle Mexican Grill, Inc. (NASDAQ:CMG) which phased out genetically modified foods on its menu.
The move may be a head-scratcher for some investors, given the fact that there hasn’t been any major food safety scandal for PNRA stock or CMG stock — nor has there been any intense consumer backlash.
Furthermore, food costs are a huge driver of margins for restaurants like Panera and Chipotle — and fresh, organic ingredients obviously cost more and go bad faster.
But a closer look at restaurant trends — and particularly the success seen by PNRA stock and CMG stock in the last few years — indicates that this is actually a good move right now, and will further tighten the restaurants’ grip on younger customers.
CMG and PNRA Redefine Restaurants
Unlike traditional fast-food restaurants like behemoth McDonald’s Corporation (NYSE:MCD) and its smaller competitors including Wendy’s Co. (NYSE:WEN) and even Taco Bell and KFC under parent Yum! Brands Inc. (NYSE:YUM), so-called “fast casual” chains like Chipotle and Panera have pushed fresh and natural ingredients to differentiate themselves.
And based on recent press releases, it seems that those claims weren’t entirely honest.
But whether it was simply shrewd marketing to bill CMG and PNRA as healthier and fresher alternatives isn’t the point. The fact is younger consumers prefer restaurants where they think there are natural ingredients — and they have been abandoning the big fast food names as a result.
Consider a Brand Keys survey from late 2014, with restaurants like Panera and Chipotle top the list of millennial favorites. Or that the percentage of young Americans who visit McDonald’s regularly has fallen sharply in recent years.
But this isn’t just a generational change — it’s a market-wide evolution. The same Brand Keys survey that found intense loyalty for CMG and PNRA among younger consumers also found an 18% drop in baby boomer visits to traditional “fast food” joints like MCD and YUM franchises.
What’s more, Brand Keys reported that “a third of the [boomers] sample (32%) called ‘quality food’ something that they attribute more to the fast-casual restaurants like Panera and Chipotle than they do to the traditional fast-food brands.”
As an investor, this is a trend you can’t ignore, and it should inform both your attitudes about old megacaps like MCD stock as well as the growth opoprtunities in CMG stock and PNRA stock.
In a nutshell — an organic nut that was locally and sustainably grown, if you’d like — the continued push to brand Panera and Chipotle as healthier and more natural options will cement their position as fast-growing and increasingly dominant names in the space.
Even if it means spending a little more on food, CMG and PNRA will more than make up for it in customer loyalty and expansion.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via@JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
