Editor’s Note: This article was updated on May 4, 2021, to correct the spelling of Kathy Holt’s name.
Restaurants had a tough year in 2020 due to the novel coronavirus. Something like 110,000 U.S. restaurants closed, according to the National Restaurant Association. Meanwhile, restaurant stocks managed to generate a median return of 4% in 2020 despite the industry-wide carnage.
Of course, compared to the S&P 500, which gained more than 16% last year, owners of restaurant stocks are hardly giddy. Especially if you didn’t own one of the outliers, such as Chipotle Mexican Grill (NYSE:CMG), which gained 66% in 2020, and is up more than 119% over the past year through March 30.
There’s no question that restaurants post-Covid-19 will look a lot different from what they did before the pandemic. However, how restaurants engage with customers isn’t the only thing that’s going to change.
Environmental, social and governance (ESG) issues are also going to affect the industry. This ought to alter the restaurant stocks investors choose to own over the next few years.
I’ll look at seven trends that ought to be at the center of these changes in 2021 and beyond. I’ll select the restaurant stocks I think can best benefit from each of these trends:
- Streamlined Menus, Darden Restaurants (NYSE:DRI)
- Virtual Brands, Brinker International (NYSE:EAT)
- Drive-Thru, McDonald’s (NYSE:MCD)
- Beverage Subscriptions, BJ’s Restaurants (NASDAQ:BJRI)
- Technology, YUM Brands (NYSE:YUM)
- Plant-Based Meals, Beyond Meat (NASDAQ:BYND)
- Restaurant SPACs, USHG Acquisition Corp., (NYSE:HUGS.UN)
Restaurants Stocks: Streamlined Menus, Darden Restaurants (DRI)
You wouldn’t know by looking at Darden’s stock performance over the past year that a pandemic has been raging around the globe. Up 166% over the past year and 25% year-to-date, the restaurant chain used Covid-19 as a “once-in-a-lifetime opportunity” to streamline some of its menus.
Sure, it’s had its challenges over the past year, but it gave the restaurant operator a chance to simplify its menus at Olive Garden and Longhorn Steakhouse.
As CEO Gene Lee said last June, when only one out of 100 was buying certain items on its menus, it did little for sales but seriously complicated the kitchen processes. The changes it’s been able to make will positively impact the company for years to come.
According to the National Restaurant Association, approximately half the casual and family-dining restaurants and 63% of fine-dining operators shrunk their menus over the past year. Those smaller menus are likely to stay post-Covid-19.
Virtual Brands, Brinker International (EAT)
Last summer, Brinker International, whose brands include Chili’s Grill & Bar and Maggiano’s Little Italy, launched a virtual brand called It’s Just Wings. Brinker expects the brand to generate $150 million in annual sales in its first full year of operation.
Some might call the Brinker operation a ghost kitchen because it only provides pick-up or delivery and no eat-in. Whatever you want to call it, it’s here to stay. Many major chains are figuring out how to implement the virtual brand/ghost kitchen into their operations.
“[Ghost kitchens are] going to become a tool for cultivating more business, but it’s got to be a profitable tool for doing so,” Kathy Holt, the sales and channel lead at consultant JPG Resources told Restaurant Dive in October 2020.
How’s it worked for Brinker?
Well, I’d be lying if I said its business was operating at 100% efficiency. In January, Brinker reported Q2 2021 results. Sales were off by 12.5%, while adjusted profits fell 65.3%, with its Maggiano’s concept suffering far more than Chili’s.
I’d expect Brinker to continue to push ideas like It’s Just Wings in the future.
Restaurants Stocks: Drive-Thru, McDonald’s (MCD)
I think it was safe to say drive-thrus were bound to become an even bigger part of the restaurant industry when Starbucks (NASDAQ:SBUX) started focusing on this format in 2020. I’m a believer in the Starbucks brand. But I digress.
This is about the Golden Arch’s efforts to expand its drive-thru network in the U.S. In late January, McDonald’s announced that its Q4 2020 U.S. same-store sales grew by 5.5% due to strong drive-thru and holiday sales.
In the U.S., it plans to open 500 locations in 2021 while modernizing another 1,200. Many of them with a focus on drive-thru.
“There continues to be a big focus on drive-thru operations, especially because we’ve seen drive-thru continue to be a bigger percentage of our business,” said Ozan. “There’s still opportunity to continue reducing those service times,” said CFO Kevin Ozan in January.
Related to the streamlining of menus, McDonald’s cut 25 seconds off the drive-thru service time in 2020 by simplifying its menu. I continue to see McDonald’s committing to doing what’s necessary to drive sales.
In 2021, that’s drive-thru, baby.
Beverage Subscriptions, BJ’s Restaurants (BJRI)
I had intended to discuss the increasing use of meal subscriptions by restaurant chains in 2021, but I couldn’t resist BJ’s Restaurant’s Brewhouse Beer Club subscription service.
It launched March 2 in all of its California locations, with a national rollout throughout 2021. A customer pays $30 upfront and over the next two months gets $75 worth of perks. As part of the service, the customer is also signed up for its frequent-guest program, which provides $10 in points for a $100 spent in-restaurant dining and through takeout.
Like a lot of things in the U.S., it’s state-by-state who allows this. Some allow alcohol subscriptions. Some are in the stone age and frown upon it. My guess is those states will be the last to legalize recreational-use cannabis.
There’s no question we’re becoming a subscription-based economy. Whether it’s your streaming services, purchase of a new car, software, or a restaurant offering a pizza subscription, the writing is on the wall.
Good for BJ’s going all-in on its subscription service. Go big or go home.
Restaurant Stocks: Technology, YUM Brands (YUM)
It doesn’t matter what business you’re in, technology is an important part of the operational game plan. Without the data to make decisions, you’re flying blind.
On March 24, Yum Brands, the parent of Taco Bell, KFC and Pizza Hut, announced that it was buying Tictuk Technologies, an Israeli company that specializes in conversational commerce using social media platforms to bring all the pieces of a restaurant’s engagement with its customer together to provide an enjoyable dining experience.
As Yum highlighted in its announcement, the company’s digital sales hit $17 billion in 2020, 45% higher than in 2019, a sign that digital technologies are only going to become even more vital to a restaurant’s success in 2021 and beyond.
In March, Yum announced that it had acquired Kvantum, a company that uses artificial intelligence to understand better where the consumer’s head is at when it comes to restaurants and dining.
“The right technologies will allow us to better serve customers with the best offer and delicious food in a way that’s most convenient for them,” Yum Brands CFO Chris Turner said in a statement.
One thing restaurants have learned during the pandemic is to make it as easy as possible for the customer to order and get their food. Yum’s investments will pay dividends for years to come.
Plant-Based Meals, Beyond Meat (BYND)
One of the beneficiaries of healthy eating in 2021 will be Beyond Meat. It continues to sign agreements with global restaurant chains to supply its products.
On Feb. 25, Beyond Meat announced that it had signed a three-year strategic agreement with McDonald’s that sees it become the preferred supplier for the McPlant patty, currently being tested at McDonald’s restaurants worldwide.
They will also look at co-developing other plant-based items for the McDonald’s McPlant platform.
“Our new McPlant platform is all about giving customers more choices when they visit McDonald’s,” said Francesca DeBiase, McDonald’s executive vice president and chief supply chain officer. “We’re excited to work with Beyond Meat to drive innovation in this space, and entering into this strategic agreement is an important step on our journey to bring delicious, high quality, plant-based menu items to our customers.”
If you recall, BYND stock dropped last November when there was confusion about the two companies’ working relationship. February’s announcement puts all of those rumors to bed.
Whether we’re talking Beyond Meat, Impossible Foods, and many of the other meatless alternatives, 2021 will be another busy year for this segment of the industry.
Restaurant Stocks: Restaurant SPACs, USHG Acquisition Corp., (HUGS.UN)
When you think of potential targets for special purpose acquisition companies (SPACs), most investors immediately think of electric vehicles, cannabis, fintech and other high-growth areas. Rarely do they think of restaurants.
However, with the Feb. 5 filing by USHG Acquisition and its subsequent pricing on Feb. 24, restaurant veteran Danny Meyer is no in the game. And, I believe more restaurateurs will follow.
Meyer’s Union Square Hospitality Group has been around since 1985 when he opened the Union Square Cafe in New York City. USHG does many things: it runs restaurants, consults on the restaurant business, invests in restaurant businesses and anything related to restaurant hospitality.
Like all SPACs, it won’t limit its search within the restaurant industry. It plans to look at culture-driven businesses that operate in technology, e-commerce, food and beverage, health, retail, and consumer goods.
But given many good restaurants closed in 2020, a few chains that have fallen on hard times could likely be in the mix. Maybe even a private equity situation such as Inspire Brands or some other owner of multiple brands and concepts.
It’s about time a SPAC came along that will actually combine with a business that has real revenues and earnings and not just projections for 2024 or beyond.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.